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.

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:

		Rental	Personal
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 $\left(\text{\$2,500}\text{×}\text{13}\text{\%}\right)$ of property taxes as itemized deductions and allowed a rental loss deduction for AGI of $12,488. The mortgage interest of $1,170 $\left(\$9,000\times 13\%\right)$ 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:

$\begin{array}{c}\begin{array}{l}\text{Amount}\text{of}\text{interest}\\ \text{and}\text{taxes}\text{for}\text{rental}\end{array}\}\text{=}\text{Total}\text{interest}\text{and}\text{taxes}\text{×}\text{Percentage}\text{of}\text{use}\\ \text{=}\left[\left(\begin{array}{l}\text{\$9,000}\text{+}\\ \text{\$2,500}\end{array}\right)\text{×}\text{87\%}\right]\\ \text{=}\text{\$11,500}\text{×}\text{87\%}\\ \text{=}\text{\$10,005}\end{array}$

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

$\begin{array}{c}\begin{array}{l}\text{Amount}\text{of}\text{utilities}\\ \text{and}\text{expenses}\text{for}\text{rental}\end{array}\}\text{=}\text{Total}\text{utilities}\text{and}\text{expense}\text{×}\text{Percentage}\text{of}\text{use}\\ \text{=}\left[\left(\begin{array}{l}\text{\$2,400}\text{+}\\ \text{\$1,000}\end{array}\right)\text{×}\text{87\%}\right]\\ \text{=}\text{\$3,400}\text{×}\text{87\%}\\ \text{=}\text{\$2,958}\end{array}$

(3) Calculate depreciation expense for rental:

$\begin{array}{c}\text{Depreciation}\text{expense}\text{=}\text{Depreciation}\text{×}\text{Percentage}\text{of}\text{use}\\ \text{=}\text{\$}\text{7,500}\text{×}\text{87\%}\\ \text{=}\text{\$}\text{6,525}\end{array}$

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

$\begin{array}{c}\begin{array}{l}\text{Amount}\text{of}\text{interest}\\ \text{and}\text{taxes}\text{for}\text{rental}\end{array}\}\text{=}\text{Total}\text{interest}\text{and}\text{taxes}\text{×}\text{Percentage}\text{of}\text{use}\\ \text{=}\left[\left(\begin{array}{l}\text{\$9,000}\text{+}\\ \text{\$2,500}\end{array}\right)\text{×}13\text{\%}\right]\\ \text{=}\text{\$11,500}\text{×}13\text{\%}\\ \text{=}\text{\$1,495}\end{array}$

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

$\begin{array}{c}\begin{array}{l}\text{Amount}\text{of}\text{utilities}\\ \text{and}\text{expenses}\text{for}\text{rental}\end{array}\}\text{=}\text{Total}\text{utilities}\text{and}\text{expense}\text{×}\text{Percentage}\text{of}\text{use}\\ \text{=}\left[\left(\begin{array}{l}\text{\$2,400}\text{+}\\ \text{\$1,000}\end{array}\right)\text{×}13\text{\%}\right]\\ \text{=}\text{\$3,400}\text{×}\text{87\%}\\ \text{=}\text{\$442}\end{array}$

(6) Calculate depreciation expense for personal:

$\begin{array}{c}\text{Depreciation}\text{expense}\text{=}\text{Depreciation}\text{×}\text{Percentage}\text{of}\text{use}\\ \text{=}\text{\$}\text{7,500}\text{×}13\text{\%}\\ \text{=}\text{\$}975\end{array}$