Question

Ben owns a cozy vacation cabin in the Black Hills. During 2018, Ben rented his cabin for three months and spent one month there with her own family. Gross rental income from the property was $5,000. Ben incurred the following expenses: mortgage interest, $3,000; real estate taxes, $1,500; utilities, $800; maintenance, $500; and depreciation, $4,000.

A) Is Ben’s home primarily personal, primarily rental, or personal/rental? Explain fully.

B) Compute Ben’s allowable deductions for the vacation home. Use the court approach.

C) Compute Ben’s allowable deductions for the vacation home. Use the IRS approach.

Answer 1

A) Personal use of property [30days] exceeds greater of (1)14 days (2)10% of rental days [90 *10%] 9 days.

Also Ben rented the vacation home for 15 days or more.

So the property would be classified as Personal/Rental.

B) Court approach

	in $
Gross income	5000
Deductions :
Taxes and Interest [3000+1500] [4500*3/12]	(1125)
Remaining Income	3875
Utilities and maintenance [800+500] [1300*3 rental months/4months of use]	(975)
Remaining Income	2900
Depreciation [4000*3/4][3000 but deduction limited to available balance of income]	(2900)
Net Income	0

Total ben's allowable deduction is (1125+975+2900) against Rental income of 5000$. Remaining portion of taxes and interest [4500-1125 = 3375] is be allowed as Itemized deduction.

c)

IRS Approach

Gross Income	5000
Deductions
Taxes and Interest [4500*3/4]	(3375)
Remaining Income	1625
Utility and Maintenance [1300*3/4]	(975)
Balance Income	650
Depreciation [4000*3/4] 3000 but limited to above balance income	(650)
Net Income	0

Total deductions available to Ben is [3375 taxes and interest+975 utility and maintainence+650depreciation] against gross income of 5000$.The remaining portion of taxes and interest [4500- 3375] = 1125$ is available for deduction as itemized deduction.