CMPS Mortgage and Tax Strategies 5 — Questions and Answers
Question 1: A taxpayer uses a 1031 exchange to defer gain on a rental property. Which of the following would disqualify the exchange?
- Acquiring like-kind property within 180 days
- Receiving cash boot as part of the exchange (Correct answer)
- Using a qualified intermediary to hold proceeds
- Identifying replacement property within 45 days
Correct answer: Receiving cash boot as part of the exchange
Receiving cash or non-like-kind property (boot) in a 1031 exchange makes the boot amount taxable, though any remaining deferred gain on property exchanged is still deferred.
Question 2: A couple files married filing separately (MFS). What is their mortgage interest deduction limit for acquisition debt on a home originated after December 15, 2017?
- $750,000 each
- $500,000 each
- $375,000 each (Correct answer)
- $250,000 each
Correct answer: $375,000 each
Married filing separately taxpayers must split the $750,000 acquisition debt limit equally, so each spouse may only claim interest on up to $375,000 of acquisition debt.
Question 3: A CMPS recommends an interest-only mortgage to a client who wants to maximize cash flow. What is the primary tax implication compared to a fully amortizing loan in year one?
- Higher deductible interest since no principal is paid (Correct answer)
- Lower deductible interest because IO loans carry higher rates
- The IO loan generates more taxable phantom income
- No difference; both loans produce the same deductible interest
Correct answer: Higher deductible interest since no principal is paid
With an interest-only loan, 100% of the payment is interest in early years, maximizing the deductible interest amount compared to an amortizing loan where a growing portion is non-deductible principal.
Question 4: A client wants to gift their home to their child to remove it from their estate. If the home has a basis of $100,000 and FMV of $600,000, what is the child's carryover basis?
- $600,000 (stepped-up to FMV)
- $500,000 (gain amount only)
- $100,000 (donor's original basis) (Correct answer)
- $350,000 (average of basis and FMV)
Correct answer: $100,000 (donor's original basis)
A gift carries over the donor's original basis to the recipient, meaning the child inherits the $100,000 basis and would owe capital gains tax on $500,000 of appreciation if they sell.
Question 5: A client pays $3,000 in points on a $300,000 purchase mortgage for their primary home in December. How should points be treated for that tax year?
- Amortized over the 30-year loan term
- Deducted in full in the year of payment if IRS requirements are met (Correct answer)
- Added to the adjusted basis of the property
- Reported as income to the lender on Form 1099
Correct answer: Deducted in full in the year of payment if IRS requirements are met
Points paid on a purchase mortgage for a primary residence are generally fully deductible in the year paid, provided they meet IRS criteria including being a normal business practice in the area and computed as a percentage of the loan.
Question 6: Under the Net Investment Income Tax (NIIT), which taxpayers are subject to the 3.8% surtax on net investment income?
- All homeowners with mortgage interest deductions
- Single filers with MAGI above $200,000 and joint filers above $250,000 (Correct answer)
- Taxpayers with more than $10,000 in SALT deductions
- Rental property owners regardless of income level
Correct answer: Single filers with MAGI above $200,000 and joint filers above $250,000
The 3.8% NIIT applies to the lesser of net investment income or the excess of MAGI over the thresholds: $200,000 (single) and $250,000 (married filing jointly).
Question 7: A CMPS client asks about the tax treatment of private mortgage insurance (PMI) premiums. What is the current status of the PMI deduction?
- Permanently codified as a Schedule A deduction with no income limits
- Extended annually by Congress; check current-year law for availability and AGI phase-outs (Correct answer)
- Eliminated permanently by the Tax Cuts and Jobs Act of 2017
- Only deductible for FHA loans, not conventional PMI
Correct answer: Extended annually by Congress; check current-year law for availability and AGI phase-outs
The PMI deduction has historically been a temporary provision that Congress must extend each year, and it phases out for higher-income taxpayers, so its availability depends on current-year legislation.
CMPS Mortgage and Tax Strategies 5
A taxpayer uses a 1031 exchange to defer gain on a rental property.
Which of the following would disqualify the exchange?