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REG CPA Practice Questions: The Mortgage Expense Deduction
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on deducting mortgage interest as an itemized deduction. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-the-mortgage-interest-deduction/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:44 Question 1: Mortgage Interest on a Primary Residence 03:00 Question 2: Mortgage Interest Including a Secondary Residence 05:30 Question 3: How to Treat Amounts Over the Deduction Limit 08:32 Question 4: A Nonqualifying Secondary Residence 10:34 Question 5: Putting It All Together 13:02 Pillar Topics
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Welcome to another reg walkthrough video. I'm Logan, and in today's video, we're going to be going
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over the mortgage interest deduction when it comes to itemized deductions. And we're going to be doing
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that by diving straight into questions, which is the Superfast CPA method. Now, if you don't know much
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about our strategies, and if you want to learn more, make sure you go to superfastcpa.com and watch
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our free one-hour webinar training, where we teach the six key ingredients to passing the CPA exam
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Again, it's only one hour long, it's free, and it will save you months and months of struggling
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with the process. The link will be in the description and it will look like this. Also be sure to check
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out our Super Fast CPA app where we have five question mini quizzes, audio notes and review notes that
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you can easily access on your phone to be continually learning throughout the day. With that said
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let's go straight into the questions. All right, here's the first question. Martin and Louisa
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purchased a new home in January of the current tax year for $500,000, taking out a mortgage of
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$400,000 and paying interest of $16,000 in the year. They also have an older home equity
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loan on their fully paid off second home, with a balance of $150,000 where they paid $7,500 of interest
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The proceeds of the home equity loan were used exclusively for medical expenses and consolidating
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credit card debts. Assuming they file adjointly, and no other interests or deductions apply, what is the maximum
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amount of qualified residence interest that they can claim as an itemized deduction for the
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current tax year? All right, so if you don't know much about the mortgage interest deduction, you're in the right place
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Take a second, read through the question one more time. and since this is the first question, when you're ready, come back and we will go straight into the answer to start learning how this works
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All right, here is the answer. $16,000. So, Martin and Luisa can deduct the interest from the mortgage of their new home, $16,000
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However, the interest on the home equity loan is not deductible. Interest is fully deductible on mortgage debt up to $750,000, or $1 million if the debt was incurred on or before December 15, 2017
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that was changed with the Tax Cuts and Jobs Act. So let's restart that
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Interest is fully deductible on mortgage debt up to $750,000 used to buy, build
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or substantially improve the taxpayer's home or second home. The interest on home equity loans is only deductible if the loan was used to buy
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build, or substantially improve the taxpayer's home that secures the loan. Interest on home equity loans used for personal expenses
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such as paying off credit card debts or medical expenses, is not deductible
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Okay, so we learned the basics of it there. Basically, if you have a mortgage or mortgages up to two mortgages that add up to $750,000 or less
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and again, that's the mortgage, not the interest paid on the mortgage. If the mortgages add up to $750,000 or less, you can take the interest paid on those mortgages
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as an itemized deduction. We're going to learn a few more limitations on that and a few more rules, but that's
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the general idea. And then for home equity loans, they are included in this, but they have to be specifically
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for building, buying, or improving the home that they are secured through. So now that we've learned
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those basics, let's go ahead and go through to the next question to learn a little bit more
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All right, here's question two. Rachel and Sam own a primary residence with a mortgage balance of
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$450,000 on which they paid $18,000 in mortgage interest this year. They also have a vacation
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home that they stayed in for a total of 20 days during the year with a mortgage balance of $200,000
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and they paid $8,000 in interest on this mortgage. Additionally, they took a home
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home equity loan of $50,000 and their primary residents to remodel their kitchen, which incurred
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$2,000 in interest. All debts were incurred after December 15, 2017. Assuming that Rachel and Sam
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itemized their deductions, what is the maximum amount of mortgage and home equity loan interest
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they can claim as an itemized deduction for the current tax year? Okay, so we learned how this
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basically works in the previous question. Now it's including another home and it's still including
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a home equity loan, but it looks like it was used to remodel the kitchen. So it looks like that
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might be included So take a second read through the question You could probably honestly figure out this question even just with the first question So when you ready come back and we will look at the answer Okay here the answer Since the combined balance of Rachel and Sam mortgages and home equity loan is
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which is under the $750,000 limit, they can deduct all of the interest paid on these loans
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if the loans were used to buy, build, or substantially improve the qualified residences
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The interest paid on the primary and second home mortgages, plus the interest on the home equity loan that was used for a kitchen remodel
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which is considered a substantial improvement to their primary residence, totals $28,000
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This is the maximum amount they can claim as an itemized deduction for mortgage interest on their tax return for the current year
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Now, here's one rule that has to do with secondary homes. Taxpayers can deduct interest on a secondary residence as long as they stay there for at least 14 days out of the year
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Since Rachel and Sam stayed there for a total 20 days, then they can include, a little typo there
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the vacation home interest in the deduction calculation. So for a secondary residence to be included in this calculation, they have to live there at least 14 days out of the year
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There's actually one more part of this that will learn in another question. But that's the general idea
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As long as they stay there for at least 14 days out of the year, they can count that secondary residence in this calculation
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One more thing I want to clarify, it is not $750,000 for the primary residence and $750,000 for the secondary
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It's $750,000 total. So for both of them added together. Okay, so pretty straightforward
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Let's go ahead and go to the next question to learn a little bit more. All right, here's question three
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Jack and Jill own two homes with combined mortgages that exceed the deduction limit set by the TCJA
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Okay. Their primary home has a mortgage balance of $600,000, and they paid $28,000 in mortgage interest this year
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Their second home has a mortgage balance of $400,000 with $12,000 paid in interest
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They also took out a home equity loan of $150,000 on their second home to upgrade
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to energy-efficient windows and paid $6,000 in interest on this loan. All debts were incurred after
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December 15, 2017. What is the maximum deductible amount of mortgage and home equity loan
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interest Jack and Jill can claim on their itemized deductions? Okay. So, again, you've already
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learned all about this, but now they are exceeding the deduction limit. So how does that work? Let's go
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ahead and go to the answer to learn how you treat the mortgage being over the deduction limit
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So the answer would be $30,000. So let's look at this. jail can only deduct the interest on up to $750,000 of their combined mortgage and home equity loan
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balances, as all debts were incurred after December 15, 2017. They paid a total of $46,000 in interest
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$28,000 plus $12,000 is $40,000 plus the $6,000 on a combined mortgage balance of $1,150,000
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and that's the $600,000, the $400,000, and the $150,000. Since this exceeds the $750,000
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limit, they can only deduct the interest on a proportional basis, basically pro rata. The deductor
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portion is calculated as follows. $750,000 divided by the full $1,150,000, and that approximately
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equals 65.217%. And then you apply this percentage to the total interest paid of $46,000, and that
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gives you $30,000. And we can even do that calculation really quickly over here. So $750,000 divided by
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$1 million, and that gives you that interest percentage. And then you take $40,000
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$6,000 and multiply that by this and that gives you $30,000. So basically for any amount that is over the deduction limit of $750,000, or technically
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it could also be over $1 million if the mortgages were from homes purchased before December
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15th, 2017. However, just letting you know in reg, for the most part, the focus is on the current rule
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which is $750,000. But it is good to know that homes before
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December 15th 2017 would be million as the limit Anyway what you do is you take the deduction limit divide that by the total eligible mortgages And again that all that the primary home the secondary residence or even the home equity loans And then you take that percentage and multiply the interest by that And that
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how much interest you can use as a deduction in the current year. So nothing too complicated here
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We've pretty much learned what you need to know about this. Of course, there's other nuances
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but this is the basics that you need to know for the CPA exam. So let's go ahead and do a couple more
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questions, you could probably do them at this point. So let's go ahead and go to them and see if you
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can apply what you've learned. All right, here's question four. Morgan and Taylor own a primary
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residence with a mortgage balance of $500,000, on which they paid $25,000 in mortgage interest this year. They also own a
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of mortgage interest, Morgan and Taylor can claim as an itemized deduction for the current tax year
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All right. Take what you've learned, read through this question, pause the video, and see if you
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can get the correct calculation. And when you're ready, come back, unpause the video, and we will
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look at the answer. Okay, so they can only deduct the $25,000 from the primary residence
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So let's learn why, but you should probably know why by this point. Morgan and Taylor can claim the mortgage interest from their primary residence, which is $25,000
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The interest on the lakehouse mortgage is not deductible because the property is used exclusively as a rental
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and does not qualify as a second home for personal use under the IRS guidelines for mortgage interest deduction
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Now, it probably could be used on like a Schedule E or something like that
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but right now we're focusing on the home interest deduction. A second home must be used by the taxpayer for personal use for more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental
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which is whichever is longer. to qualify for the mortgage interest deduction. So it's either more than 14 days, or let's say
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they rented the house for 200 days out of the year. They would have had to stay in the house for
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10% of that 200 days, being 20 days, for it to count as a secondary residence. And it's the greater
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of the two. So it's either 14 days or if the 10% of fair rental days is bigger, then you take that
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Since the lakehouse does not meet that requirement, the mortgage interest associated with it isn't
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deductible. And since it's not deductible, you don't include it in this $750,000 limit
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So that makes it so that you just take the full interest from the primary residence mortgage
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and that's it. All right, let's go to the last question. And again, you should be able to do it
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based off what we've learned so far. Okay, here's question five. Kevin and Robin purchased
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their primary residence for $750,000, securing an initial mortgage of $600,000. This year
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they paid $21,000 in interest on this mortgage. They also took out a home equity line of
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credit or HELOC on their primary residence for $100,000 from which they paid $5,000 in interest
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The proceeds were used to consolidate debts and finance a child's college tuition
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Additionally, they own a vacation home for which they secured a mortgage of $100,000 at purchase
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That's awesome. This year, they paid $4,000 in interest on this mortgage
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The vacation home is used for personal use more than 14 days a year, and all debts were incurred
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after December 15, 2017. What is the maximum amount of mortgage and HELOC interest, Kevin and Robbins
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Robin can claim as an itemized deduction for the current tax year. Okay, again, we've gone through
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everything that you need to know to be able to do this. So pause the video, calculate it
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see if you can get the correct answer. And when you're ready, unpause the video and come back, we will look at the correct answer. Okay, here's the answer. $25,000. So they can deduct the $21,000
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of interest on their primary residence and the $4,000 of interest from their vacation home
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totaling $25,000. The interest from the HELOC is not deductible in this scenario because it was not
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used to buy, build, or substantially improve the taxpayers' home, which is a requirement for
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deductibility under the Tax Cuts and Jobs Act for debts incurred after December 15th, 2017
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Interestingly before that before December 15th 2017 you could deduct the money from a he lock no matter what whether it was used for medical expenses college tuition whatever it was But after that date in 2017 now it has to be
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used specifically for improving your home or buying your home or things like that to be counted for
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this deduction. The total mortgages, $600,000 for the primary residence and $100,000 for the vacation home
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do not exceed the $750,000 limit set for mortgages post December 15, 2017. Okay. So
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So one thing that could have caught you up in this is the home was worth $750,000
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but the mortgage was $600,000. So essentially they were able to somehow put down a down payment or something like that
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to get it down from $750,000 as the purchase price down to $600,000 that they needed for the mortgage
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So again, pay attention to the mortgage, not necessarily the sales price
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But it's pretty simple other than that. You've learned a lot in this video. So to finish the video, we're going to do one more part of the super fast
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CPA strategy, which is something called pillar topics. Okay, pillar topics is essentially you taking a
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second, either during or after your study session, you think about the questions that you went through
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and you pull out the important things that you learned from doing the questions, the things
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the concepts that you obviously were supposed to learn according to your review course for the CPA exam
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So let's go ahead and write down a few of the pillar topics. Interest on a home mortgage is generally
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deductible as long as it is for a as long as it is for mortgages under
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$750,000 and we'll add $1 million if for December 15 2017 a
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a secondary residence can be included in this calculation as long as a
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it is used for personal use more than 14 days or 10% of fair rental days, which ever is larger
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So if you don't use it for personal use enough, you won't be able to include it in the calculation
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The $750,000 limit is cumulative, so it includes the primary and secondary residence
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And then home equity loans are also included in this calculation as long as they were for buying, improving, or building a home
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Lastly, if the total mortgage amounts are greater than $750,000, then you divide the $750,000
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by the total mortgage amount, then you take this percentage and multiply it by the total mortgage amount
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then you take this percentage and multiply it by the total qualified interest
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Okay, those are the pillar topics that we pulled out from this. Maybe you thought of some different pillar topics on your own
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That's great. But that's the basic idea. You go through the questions as your main learning material
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and then you take a second and make these pillar topics so that you know, okay, this is what I learned
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This is what was obviously important according to my review course. With that said, that's the end of the video
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Thank you for watching. Be sure to go to superfast cpa.com and again sign up for our free one-hour
15:42
webinar training where we teach the six key ingredients to passing the CPA exam. It will save you so much
15:47
time and so much struggling with the CPA exam. Definitely go check it out. Also check out our super
15:52
fast CPA app where we have five-question mini quizzes, audio notes, review notes that you can
15:57
easily access on your phone throughout the day so that you can continually be studying and learning
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I hope this was helpful. Thanks for watching and I'll see you in the next video
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