CMPS Mortgage and Tax Strategies 4 — Questions and Answers
Question 1: A physician earns $400,000 AGI and has $10,000 in rental losses from a leveraged rental property. Under passive activity rules, how much can they deduct?
- $10,000 fully deductible
- $25,000 under the rental real estate allowance
- $0 because their AGI exceeds $150,000 (Correct answer)
- $5,000 using phase-out calculation
Correct answer: $0 because their AGI exceeds $150,000
The $25,000 rental real estate special allowance phases out completely once AGI exceeds $150,000, so a taxpayer with $400,000 AGI cannot use the allowance and losses are suspended.
Question 2: Which strategy allows a homeowner to effectively time tax deductions by prepaying January's mortgage payment in December of the current tax year?
- Accelerated depreciation
- Bunching itemized deductions (Correct answer)
- Tax-loss harvesting
- Capital gains deferral
Correct answer: Bunching itemized deductions
Bunching involves timing deductible payments—such as prepaying mortgage interest—into a single tax year to exceed the standard deduction threshold and maximize itemized deductions.
Question 3: A client owns a home with a $300,000 mortgage and wants to use equity to invest in the stock market. From a tax planning perspective, why is this strategy risky?
- HELOC interest is always deductible, creating unfair advantage
- Investment interest deduction is limited to net investment income (Correct answer)
- Mortgage interest offsets capital gains dollar-for-dollar
- Home equity loans have lower rates making tax savings irrelevant
Correct answer: Investment interest deduction is limited to net investment income
Home equity proceeds used for investments generate interest that may only be deductible as investment interest under IRC §163(d), limited to net investment income for the year.
Question 4: A client in a high-tax state uses a mortgage credit certificate (MCC). How does an MCC differ from the mortgage interest deduction?
- MCC reduces taxable income; deduction reduces tax liability
- MCC is a dollar-for-dollar tax credit; deduction reduces income before tax calculation (Correct answer)
- MCC applies to refinances; deduction applies only to purchases
- MCC has no income limits; deduction phases out above $150,000 AGI
Correct answer: MCC is a dollar-for-dollar tax credit; deduction reduces income before tax calculation
An MCC provides a direct federal income tax credit (reducing tax owed dollar-for-dollar) equal to a percentage of annual mortgage interest, making it more valuable than a deduction for most borrowers.
Question 5: Under the alternative minimum tax (AMT), which housing-related deduction is specifically disallowed for AMT calculation purposes?
- Points paid on a purchase loan
- Mortgage interest on a primary residence acquisition loan
- Property tax deduction (Correct answer)
- Home equity loan interest not used to buy or improve the home
Correct answer: Property tax deduction
State and local property taxes are deductible for regular tax purposes but are entirely disallowed as an AMT preference item, which can expose high-property-tax homeowners to AMT.
Question 6: A borrower's mortgage was originated in 2015 when rates were 4%. Current rates are 7%. From a tax-planning perspective, what is the 'embedded tax value' of the below-market mortgage?
- The difference in monthly payment creates a taxable imputed interest benefit
- The lower rate means less interest to deduct, reducing any itemized deduction tax shield (Correct answer)
- The old mortgage has no tax implications compared to a new one
- Refinancing eliminates all prior accumulated points amortization immediately
Correct answer: The lower rate means less interest to deduct, reducing any itemized deduction tax shield
A below-market-rate mortgage generates less mortgage interest, which reduces the tax deduction benefit for itemizing borrowers, effectively increasing the after-tax cost of holding the old loan.
Question 7: A client sells a rental property for a $100,000 gain and has $30,000 of accumulated depreciation. How is the depreciation recapture taxed?
- At the long-term capital gains rate of 0%, 15%, or 20%
- At ordinary income rates up to 25% under Section 1250 rules (Correct answer)
- Exempt from tax if reinvested in a primary residence
- Treated as a Section 1231 loss to offset other gains
Correct answer: At ordinary income rates up to 25% under Section 1250 rules
Unrecaptured Section 1250 depreciation on real property is taxed at a maximum rate of 25%, which is higher than the preferential long-term capital gains rates.
CMPS Mortgage and Tax Strategies 4
A physician earns $400,000 AGI and has $10,000 in rental losses from a leveraged rental property.
Under passive activity rules, how much can they deduct?