Individual Income Taxes
Individual Income Taxes
43rd Edition
ISBN: 9780357109731
Author: Hoffman
Publisher: CENGAGE LEARNING - CONSIGNMENT
Question
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Chapter 6, Problem 48P

a.

To determine

Calculate Person A’s net rent income or loss and the amounts that Person A can itemize on tax return by using courts approach to allocate property taxes and interest.

a.

Expert Solution
Check Mark

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 net rental income by using courts approach:

Gross income$7,000
Deduct: Taxes and interest (1)($945)

Remainder to apply to rental

operating expenses and depreciation

$6,055
Utilities and repairs (2)($2,040)
Remainder$4,015
Depreciation (limited to remainder)($4,015)
Net rental income$0

Table (1)

Note: If a residence is categorized as personal/rental use property, the real estate taxes and mortgage interest should be deducted first and if a positive net income arrives, then expenses, other than depreciation ( like, maintenance, insurance and utilities), that are deductible for rental property are allowed after that. Lastly, if there is a positive result balance, depreciation is allowed.

Working notes:

(1)Calculate the amount of taxes and interest that are deductible:

Taxesandinterestdeductible}=[(Realestatetaxes+Interestonmortgage)×Timeperiod]=[($2,500+$9,000)×30days365days]=$11,500×30days365days=$945

Note: The courts have allocated real estate taxes and mortgage interest on the basis of 365 days (366 days in a leap year).

(2)Calculate the amount of utilities and repairs:

Utilitiesandrepairs=[(Utilitiesexpense+Repairsexpense)×Timeperiod]=$2,400+$1,000×30days50days=$3,400×30days50days=$2,040

Note: Other expenses like utilities and maintenance and depreciation are allocated on the basis of total number of days used. In this case vacation home is used for 50 days (30days+20days).

(3)Calculate the amount of depreciation expense:

Depreciationexpense=[Depreciationexpense×Timeperiod]=$7,500×30days50days=$4,500

Note: Other expenses like utilities and maintenance and depreciation are allocated on the basis of total number of days used. In this case vacation home is used for 50 days (30days+20days). Here, the remaining balance is $4,015 therefore, $4,015 is a deducted as depreciation expense instead of $4,500.

b.

To determine

Explain the manner in which the answer in requirement a will change by using IRS method of allocating property taxes and interest.

b.

Expert Solution
Check Mark

Explanation of Solution

Calculate net rental income by using IRS approach:

Gross income$7,000
Deduct: Taxes and interest (4)($6,900)

Remainder to apply to rental

operating expenses and depreciation

$100
Utilities and repairs (limited to remainder)($100)
Net rental income$0

Table (2)

Person A is allowed to deduct the remaining taxes and interest of $4,600 ($11,500$6,900) as itemized deductions. Person A is having no net rental income and having an itemized deduction of $4,600 under the IRS approach.

Note: If a residence is categorized as personal/rental use property, the real estate taxes and mortgage interest should be deducted first and if a positive net income arrives, then expenses, other than depreciation ( like, maintenance, insurance and utilities), that are deductible for rental property are allowed after that. Lastly, if there is a positive result balance, depreciation is allowed.

Working notes:

(4)Calculate the amount of taxes and interest that are deductible:

Taxesandinterestdeductible}=[(Realestatetaxes+Interestonmortgage)×Timeperiod]=[($2,500+$9,000)×30days50days]=$11,500×30days50days=$6,900

Note: According to IFRS real estate taxes and mortgage interest are allocated on the basis of total days used.

(5)Calculate the amount of utilities and repairs:

Utilitiesandrepairs=[(Utilitiesexpense+Repairsexpense)×Timeperiod]=$2,400+$1,000×30days50days=$3,400×30days50days=$2,040

Note: Other expenses like utilities and maintenance and depreciation are allocated on the basis of total number of days used. In this case vacation home is used for 50 days. Here, the remaining balance is $100 therefore, $100 is a deducted as utilities and repairs instead of $2,040.

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Chapter 6 Solutions

Individual Income Taxes

Ch. 6 - Prob. 11DQCh. 6 - Prob. 12DQCh. 6 - Prob. 13DQCh. 6 - Prob. 14DQCh. 6 - Linda operates an illegal gambling operation....Ch. 6 - Prob. 16DQCh. 6 - Melissa, the owner of a sole proprietorship, does...Ch. 6 - Prob. 18DQCh. 6 - Blaze operates a restaurant in Cleveland. He...Ch. 6 - Prob. 20DQCh. 6 - Prob. 21DQCh. 6 - Ray loses his job as a result of a corporate...Ch. 6 - Lavinia incurs various legal fees in obtaining a...Ch. 6 - Prob. 24DQCh. 6 - Prob. 25DQCh. 6 - Shanna, a calendar year and cash basis taxpayer,...Ch. 6 - Prob. 27CECh. 6 - Maud, a calendar year taxpayer, is the owner of a...Ch. 6 - Vella owns and operates an illegal gambling...Ch. 6 - Printer Company pays a 25,000 annual membership...Ch. 6 - Stanford owns and operates two dry cleaning...Ch. 6 - Tobias has a brokerage account and buys on the...Ch. 6 - Prob. 33PCh. 6 - Prob. 34PCh. 6 - Janice, age 32, earns 50,000 working in 2019. She...Ch. 6 - Prob. 36PCh. 6 - Prob. 37PCh. 6 - Duck, an accrual basis corporation, sponsored a...Ch. 6 - Prob. 39PCh. 6 - Prob. 40PCh. 6 - Prob. 41PCh. 6 - Prob. 42PCh. 6 - Terry traveled to a neighboring state to...Ch. 6 - Prob. 44PCh. 6 - Prob. 45PCh. 6 - Prob. 46PCh. 6 - Prob. 47PCh. 6 - Prob. 48PCh. 6 - Prob. 49PCh. 6 - Prob. 50PCh. 6 - Prob. 51PCh. 6 - Brittany Callihan sold stock (basis of 184,000) to...Ch. 6 - Prob. 53PCh. 6 - Prob. 54PCh. 6 - Prob. 55PCh. 6 - Prob. 56PCh. 6 - Prob. 57CPCh. 6 - Prob. 58CPCh. 6 - Prob. 1RPCh. 6 - Prob. 2RPCh. 6 - Prob. 3RPCh. 6 - Which of the following is a deduction for AGI? a....Ch. 6 - Which of the following is not a deduction for AGI?...Ch. 6 - David is a CPA and enjoys playing the lottery....Ch. 6 - Prob. 4CPACh. 6 - Prob. 5CPACh. 6 - Prob. 6CPA
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