Chapter 8 37) Matt and Marie own a vacation home at the beach. During the year,

ID: 2365805 • Letter: C

Question

Chapter 8 37) Matt and Marie own a vacation home at the beach. During the year, they rented the house for 42 days (6 weeks) at $890.00 per week and used it for personal use for 58 days. The total costs of maintaining the home are as follows: Mortgage interest $4200.00 Property taxes $ 700.00 Insurance $1200.00 Utilities $3200.00 Repairs $1900.00 Depreciation $5500.00 a) What is the proper tax treatment of this information on their tax return Using the Tax Court Method? b) Are there options for how to allocate the expenses between personal and re? c) What is the proper tax treatment if Matt and Marie rented the house for only 14 days?

Explanation / Answer

Income

6 weeks * 890

$5,340

Mortgage Interest

(42/365) * 4,200

483

$3,717 Schedule A

Property Taxes

(42/365) * 700

619 Schedule A

Insurance

(42/122) * 1,200

413

Utilities

(42/122) * 3,200

1,102

Repairs

(42/122) * 1,900

654

Depreciation

(limited to Net Rental Income)

2,607

The proper tax treatment is to allocate the expense between personal and rental expenses. Schedule E would show this property $0 net income and the taxes and interest would be deducted on Schedule A.

The taxpayer can use the Tax Court method to allocate expenses. This allows for an overall larger deduction. However, the IRS has maintained it will continue to fight the Tax Court method.

In this case the property would be primarily personal and none of the income would be included in income and only the interest and taxes would be deductible on Schedule A.

Schedule E