Question

Federal Income Tax Accounting

Under Sec.​ 280A, how are expenses allocated to the rental use of a vacation​ home? In what order must the expenses be deducted against the gross income of the​ property?

Under Sec.​ 280A, how are expenses allocated to the rental use of a vacation​ home?

O A. The following formula is used to allocate all expenses except for qualified residential interest and taxes expenses: number of rental days rental use expenses = total number of days used x total expense for year For qualified residential interest and taxes expenses the allocation formula may be based on a fraction in which the denominator takes into account all the days in the year. Thus, the denominator in the allocation fraction for interest and taxes would be 365 if this approach is used. OB. The following formula is used to allocate all expenses except for qualified residential interest and taxes expenses: number of rental days rental use expenses = - x total expense for year 365 For qualified residential interest and taxes expenses the allocation formula is modified by using the total number of days used as the denominator instead of the total number of days in the year. OC. The following formula is used to allocate all expenses: number of rental days rental use expenses = 365 x total expense for year O D. The following formula is used to allocate all expenses except for qualified residential interest and taxes expenses: number of rental days rental use expenses = = number of personal days x total expense for year For qualified residential interest and taxes expenses the allocation formula is modified by using the total number of days in the year as the denominator instead of the number of personal days.

In what order must the expenses be deducted against the gross income of the​ property?

Answer 1

The vacation home rules are always been confusing. In order to properly report the tax implications of renting your home, you must determine if it is a "rental" or a "residence" or both. The first step towards accomplishing that, however is to identify when the home is used for rental purposes versus when it is used for personal purposes. In general, a home is treated as being used for rental purposes for any day it is rented for fair market value. However, if you rent your home to a family member, those days will only be treated as rental days if the family member pays fair market value for the use of the property and the home is used by the family member as his or her primary residence. If these two requirements are not met, the days the home is rented by the family member are considered "personal use" days to the owner.In addition, you are generally considered to have used a house for personal purposes for a day if, for any part of the day, the home is used for purposes reasons by:

• the owner of the home;
• the brothers and sisters, spouses, ancestors or lineal descendants of the owner of the home
• any individual who uses the home under a reciprocal arrangement
• any other individual who uses the home during the day unless for that day the unit is rented for a fair rental.

Keep in mind, if multiple people co-own a property, each owner is treated as having used the home for personal purposes for any day any owner uses the home for personal purposes.You are not treated as using a home for personal purposes, however, for any day you spend a normal workday cleaning, painting, repairing, or otherwise maintaining the home. In fact, these days are not counted as either rental or personal use; rather, the home is treated as not being used at all for those days.In general, the home office must be used exclusively and regularly as the principal place of business or to meet and deal with customers in the normal course of the business.

If the taxpayer is an employee, the home office must be maintained as a convenience to the employer.

Whatever the area of the home office, it must not be used for any personal purposes.

To qualify under the trade or business test, the area of the home must be used in connection with a trade or business, not merely a profit-seeking activity.

The deduction is limited to income from home office activities, but any allowable excess deduction may be carried forward to future tax years, where it will again be subject to the income limitation.

Expenses must be deducted in a specific order: mortgage interest, real estate taxes and qualifying casualty losses; direct expenses such as repairs to business equipment and supplies; insurance utilities and general repairs; and depreciation. Depreciation allowed or allowable may be subject to recapture when the home is sold or otherwise disposed of. The deductability of a casualty loss depends on the property affected. If the loss is on the business portion, only it is a direct expense and the entire loss is includable.