Review the following scenario. Use the information provided to answer questions about the taxpayer’s 2020 return.Liam Hernandez (38) paid $112,000 for a single-family home on July 1, 2020, and immediately placed it in service as a residential rental property. At the time, the land was valued at $10,000. The property generated $6,000 in rental income for the year. Liam’s only expenses consisted of depreciation, $500 in insurance, and $750 in real estate taxes.Liam is not a real estate professional, but he does actively participate in his rental real estate activity. He did not provide any personal services during the year, although he has notified his tenant that he will make minor repairs to the property as needed. Liam has no other passive income or losses. Question 1What amount should Liam report for his total rental real estate and royalty income? His partially completed Schedule E, Supplemental Income and Loss, is shown below. You may use the form to assist you in answering this question. $2,833 $3,050 $4,750 $6,000 #1Supplemental Income and LssOMB No. 1545-0074SCHEDULE E(Form 1040)(From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICS, etc.)Attach to Form 1040, 1040-SR, 1040-NR, or 1041.2020AttachmentSequence No. 13Your social security numberXXX-XX-ххDepartment of the TreasuryInternal Revenue Service (99)Go to www.lrs.gov/ScheduleE for Instructions and the latest Information.Name(s) shown on returnLIAM HERNANDEZPart I Income or Loss From Rental Real Estate and Royalties Note: If you are in the business of renting personal property,use Schedule C. See instructions. If you are an individual, report farm rental income or loss from Form 4835 on page 2. line 40.A Did you make any payments in 2020 that would require you to file Form(s) 1099? See instructionsB I1 "Yes," did you or will you file required Fom(s) 1099?....1a Physical addross of each property (street, city, state, ZIP code)A 108 NORTH ASH STREET YOUR CITY YS XXXXXYesNoYesNoBFor each rental real estate property listedabove, report the number of fair rental andpersonal use days. Check the QJV boxonly if you meet the requirements to file asa qualified joint venture. See instructions.Fair RentalDays1841bТуре of Property(from list below)1.2Personal UseQJVDaysAABBType of Property:1 Single Family Residence2 Multi-Family ResidenceIncome:3 Rents received4 Royalties received -Expenses:5 Advertising ..6 Auto and travel (soo instructions)7 Cleaning and maintenance8 Commissions ..9 Insurance ..3 Vacation/Short-Term Rental5 Land7 Self-RontalCommercialRoyalties8Other (describe)4Properties:A34567910 Legal and other professional fees.1011 Management fees...1112 Mortgage interest paid to banks, etc. (soe instructions)1213 Other interest -13 Properties:Income:3 Rents received4 Royalties roceivedExpenses:5 Advertising6 Auto and travel (soo instructions)7 Cleaning and maintenance8 Commissions9 InsuranceAB3467810 Legal and other professional fees..11 Management fees....12 Mortgage interest paid to banks, etc. (sce instructions)10111213Other interest1314 Repairs..1415 Supplies..1516 Taxes1617 Utilitios1718 Depreciation expense or depletion.1819 Other (list)1920 Total expenses. Add lines 5 through 1921 Subtract line 20 from line 3 (rents) and/or 4 (royalties). If20result is a (loss), see instructions to find out if you mustfile Form 61982122 Deductible rental real estate loss after limitation, if any,on Form 8582 (see instructions)22 (23a Total of all amounts reported on line 3 for all rental propertiesb Total of all amounts reported on line 4 for all royalty propertiesc Total of all amounts reported on line 12 for all properties .....d Total of all amounts reported on line 18 for all properties ..e Total of all amounts reported on line 20 for all properties23a23b23c23d23e24 Income. Add positive amounts shown on line 21. Do not include any losses2425 Losses. Add royalty losses from line 21 and rental real estate losses from line 22. Enter total losses here2526 Total rental real estate and royalty Income or (loss). Combine lines 24 and 25. Enter the resulthere. If Parts II, III, IV, and line 40 on page 2 do not apply to you, also enter this amount onSchedule 1 (Form 1040), line 5. Otherwise, include this amount in the total on line 41 on page 2.For Paperwork Reduction Act Notice, see the separate instructions.26Schedule E (Form 1040) 2020FDA20 E1BWF 1040Form Software Copyright 1996 - 2021 HAB Tax Group, Inc.

It is the amount of reduction in the value of a tangible fixed asset due to tear and wear, maintenance and passage of time. This expense reduces the carrying value of asset on the financial statements and provides the true value of asset. It is charged as an expense on the income statement. Different methods of calculating depreciation expense are straight-line method, double declining method, sum of year’s digits method etc.(1) Calculate the cost of property purchased: Cost of property purchased = Amount paid - Cost of land =$112,000 - $10,000 =$102,000 Hence, the cost of property purchased is $102,000. (2) Calculate the amount of depreciation for the year 2020: The percentage of depreciation for first year as property is 1.667% as the property was used since July (7th month), 1.667%. Therefore, the amount of depreciation expense for the year 2020 is calculated as under: Depreciation expense = Cost of property × Rate of depreciation =$102,000 × 1.667% = $1,700 Hence, the amount of depreciation for the year 2020 is $1,700.The amount that L should report for his total rental real estate and royalty income is determined by deducting the depreciation expense, real estate taxes and insurance from the total rental income as under: Hence, the amount that L should report for his total rental real estate and royalty income is $3,050. Therefore, option (2) is correct.

Answered: Liam Hernandez (38) paid $112,000 for a…

FINANCIAL ACCOUNTING

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Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question 1

What amount should Liam report for his total rental real estate and royalty income? His partially completed Schedule E, Supplemental Income and Loss, is shown below. You may use the form to assist you in answering this question.

$2,833
$3,050
$4,750
$6,000

#1
Supplemental Income and Lss
OMB No. 1545-0074
SCHEDULE E
(Form 1040)
(From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICS, etc.)
Attach to Form 1040, 1040-SR, 1040-NR, or 1041.
2020
Attachment
Sequence No. 13
Your social security number
XXX-XX-хх
Department of the Treasury
Internal Revenue Service (99)
Go to www.lrs.gov/ScheduleE for Instructions and the latest Information.
Name(s) shown on return
LIAM HERNANDEZ
Part I Income or Loss From Rental Real Estate and Royalties Note: If you are in the business of renting personal property,
use Schedule C. See instructions. If you are an individual, report farm rental income or loss from Form 4835 on page 2. line 40.
A Did you make any payments in 2020 that would require you to file Form(s) 1099? See instructions
B I1 "Yes," did you or will you file required Fom(s) 1099?....
1a Physical addross of each property (street, city, state, ZIP code)
A 108 NORTH ASH STREET YOUR CITY YS XXXXX
Yes
No
Yes
No
B
For each rental real estate property listed
above, report the number of fair rental and
personal use days. Check the QJV box
only if you meet the requirements to file as
a qualified joint venture. See instructions.
Fair Rental
Days
184
1b
Туре of Property
(from list below)
1.
2
Personal Use
QJV
Days
A
A
B
B
Type of Property:
1 Single Family Residence
2 Multi-Family Residence
Income:
3 Rents received
4 Royalties received -
Expenses:
5 Advertising ..
6 Auto and travel (soo instructions)
7 Cleaning and maintenance
8 Commissions ..
9 Insurance ..
3 Vacation/Short-Term Rental
5 Land
7 Self-Rontal
Commercial
Royalties
8
Other (describe)
4
Properties:
A
3
4
5
6
7
9
10 Legal and other professional fees.
10
11 Management fees...
11
12 Mortgage interest paid to banks, etc. (soe instructions)
12
13 Other interest -
13

Properties:
Income:
3 Rents received
4 Royalties roceived
Expenses:
5 Advertising
6 Auto and travel (soo instructions)
7 Cleaning and maintenance
8 Commissions
9 Insurance
A
B
3
4
6
7
8
10 Legal and other professional fees..
11 Management fees....
12 Mortgage interest paid to banks, etc. (sce instructions)
10
11
12
13
Other interest
13
14 Repairs..
14
15 Supplies..
15
16 Taxes
16
17 Utilitios
17
18 Depreciation expense or depletion.
18
19 Other (list)
19
20 Total expenses. Add lines 5 through 19
21 Subtract line 20 from line 3 (rents) and/or 4 (royalties). If
20
result is a (loss), see instructions to find out if you must
file Form 6198
21
22 Deductible rental real estate loss after limitation, if any,
on Form 8582 (see instructions)
22 (
23a Total of all amounts reported on line 3 for all rental properties
b Total of all amounts reported on line 4 for all royalty properties
c Total of all amounts reported on line 12 for all properties .....
d Total of all amounts reported on line 18 for all properties ..
e Total of all amounts reported on line 20 for all properties
23a
23b
23c
23d
23e
24 Income. Add positive amounts shown on line 21. Do not include any losses
24
25 Losses. Add royalty losses from line 21 and rental real estate losses from line 22. Enter total losses here
25
26 Total rental real estate and royalty Income or (loss). Combine lines 24 and 25. Enter the result
here. If Parts II, III, IV, and line 40 on page 2 do not apply to you, also enter this amount on
Schedule 1 (Form 1040), line 5. Otherwise, include this amount in the total on line 41 on page 2.
For Paperwork Reduction Act Notice, see the separate instructions.
26
Schedule E (Form 1040) 2020
FDA
20 E1
BWF 1040
Form Software Copyright 1996 - 2021 HAB Tax Group, Inc.

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