South-western Federal Taxation 2018: Individual Income Taxes
South-western Federal Taxation 2018: Individual Income Taxes
41st Edition
ISBN: 9781337385886
Author: William H. Hoffman, James C. Young, William A. Raabe, David M. Maloney, Annette Nellen
Publisher: Cengage Learning
Question
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Chapter 6, Problem 49P
To determine

Explain the manner in which the answer to problem 48 will change if Person A rented the house for 87 days and used it personally for 13 days.

Expert Solution & Answer
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Explanation of Solution

Personal/Rental use: “If the residence is rented for 15 days or more during a year and if it is used for personal purposes for more than the greater of (1) 14 days or (2) 10 % of the total days rented then the residence is considered as a personal/rental use residence”.

Calculate the amount of net income:

  RentalPersonal
Percentage for use 87%13%
Gross income $7,000$0
Expenses:   
Interest and taxes (1)$10,005(4)$1,495
Utilities and repairs (2)$2,958(5)$442
Depreciation (3)$6,525(6)$975
Total expenses $19,488$2,914
Net income (loss) ($12,488)$0

Table (1)

Person A used it for fewer than 15 days; therefore it is categorized as rental property Person A can deduct $325 ($2,500×13%) of property taxes as itemized deductions and allowed a rental loss deduction for AGI of $12,488. The mortgage interest of $1,170 ($9,000×13%) is not qualified residence interest as it is not deductible as an itemized deduction.

“The roof replacement of $12,000 is a capital expenditure and the related depreciation is comprised in the depreciation of $7,500”.

Working notes:

(1) Calculate the amount of interest and taxes allocated for rental:

Amountofinterestandtaxesforrental}=Totalinterestandtaxes×Percentageofuse=[($9,000+$2,500)×87%]=$11,500×87%=$10,005

(2) Calculate the amount of utilities and expenses allocated for rental:

Amountofutilitiesandexpensesforrental}=Totalutilitiesandexpense×Percentageofuse=[($2,400+$1,000)×87%]=$3,400×87%=$2,958

(3) Calculate depreciation expense for rental:

Depreciationexpense=Depreciation×Percentageofuse=$7,500×87%=$6,525

(4) Calculate the amount of interest and taxes allocated for personal:

Amountofinterestandtaxesforrental}=Totalinterestandtaxes×Percentageofuse=[($9,000+$2,500)×13%]=$11,500×13%=$1,495

(5) Calculate the amount of utilities and expenses allocated for personal

Amountofutilitiesandexpensesforrental}=Totalutilitiesandexpense×Percentageofuse=[($2,400+$1,000)×13%]=$3,400×87%=$442

(6) Calculate depreciation expense for personal:

Depreciationexpense=Depreciation×Percentageofuse=$7,500×13%=$975

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Chapter 6 Solutions

South-western Federal Taxation 2018: Individual Income Taxes

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