CMPS Mortgage and Tax Strategies 2 — Questions and Answers
Question 1: A borrower pays $18,000 in mortgage interest and $4,500 in property taxes in 2024. What is the maximum combined SALT deduction they can claim?
- $22,500 combined
- $10,000 combined (Correct answer)
- $18,000 interest only
- $4,500 taxes only
Correct answer: $10,000 combined
The Tax Cuts and Jobs Act caps the state and local tax (SALT) deduction at $10,000 per year for all filing statuses except married filing separately.
Question 2: Which IRS form does a lender use to report mortgage interest paid by a borrower exceeding $600 in a tax year?
- Form 1099-INT
- Form 1098 (Correct answer)
- Form 1099-MISC
- Form 1040 Schedule A
Correct answer: Form 1098
Lenders issue IRS Form 1098 (Mortgage Interest Statement) to report mortgage interest of $600 or more paid by a borrower during the year.
Question 3: A married couple files jointly and has $850,000 in acquisition debt on their primary home originated in 2018. How much of the mortgage interest is deductible?
- All interest on $850,000
- Interest only on $750,000 (Correct answer)
- Interest only on $500,000
- No deduction is available
Correct answer: Interest only on $750,000
For loans originated after December 15, 2017, the mortgage interest deduction is limited to the first $750,000 of acquisition debt for joint filers.
Question 4: A homeowner takes a $50,000 HELOC to fund a vacation. Under current tax law, how is the interest treated?
- Fully deductible as home equity interest
- Deductible only if the home is a primary residence
- Not deductible because proceeds were not used to buy, build, or improve the home (Correct answer)
- Deductible up to $50,000 in loan principal
Correct answer: Not deductible because proceeds were not used to buy, build, or improve the home
Post-TCJA, HELOC interest is only deductible if the funds are used to buy, build, or substantially improve the taxpayer's qualified residence.
Question 5: What is the primary tax advantage of a mortgage on a rental property compared to a primary residence mortgage?
- Interest is subject to the SALT cap
- Interest is deducted on Schedule A as itemized
- Interest is fully deductible as a business expense on Schedule E (Correct answer)
- Interest is exempt from alternative minimum tax
Correct answer: Interest is fully deductible as a business expense on Schedule E
Mortgage interest on a rental property is a business expense reported on Schedule E and is not subject to the $750,000 acquisition debt cap that applies to personal residences.
Question 6: Under the Section 121 exclusion, what is the maximum gain a single taxpayer can exclude from the sale of a primary residence?
- $125,000
- $250,000 (Correct answer)
- $500,000
- $1,000,000
Correct answer: $250,000
A single taxpayer who has owned and used the home as a primary residence for at least 2 of the last 5 years can exclude up to $250,000 of capital gain.
Question 7: A client wants to reduce their taxable income by accelerating mortgage points paid on a refinance. How must the points be treated for tax purposes?
- Deducted in full in the year of refinance
- Amortized over the life of the new loan (Correct answer)
- Deducted only if the loan is under $750,000
- Added to the home's cost basis
Correct answer: Amortized over the life of the new loan
Points paid on a refinance must generally be amortized (deducted ratably) over the life of the loan rather than deducted in full in the year paid.
CMPS Mortgage and Tax Strategies 2
A borrower pays $18,000 in mortgage interest and $4,500 in property taxes in 2024.
What is the maximum combined SALT deduction they can claim?