Question

3. Mitch and Carol own a beach house in Galveston. The house was rented to unrelated parties for 60 days during the current year. Mitch and Carol used the house 40 days for their personal vacations. The rest of the time it lay idle. After properly dividing the expenses between rental and personal use, it was determined that a loss ental and personal use, it was determined that a loss was sustained as follows: Gross Rental Income (60 x $200/day) $12,000 Rental Mortgage Interest & Property Taxes ( 7,000) Rental Operating Expenses (4,000) Rental Depreciation Expense (3.000) Net Rental Loss ($2,000) Which of the following statements is true regarding this situation? a. A $2,000 loss should be reported, assuming they qualify for the $25,000 rental real estate exception. b. Only the mortgage interest and property taxes can be deducted. c. None of the income or expenses from the beach house should be included in their current-year return. d. The rental expenses are deductible to the extent of the gross rental income, for a net amount of zero. e. The gross rental income is excludable, and the mortgage interest and taxes is fully deductible on Schedule A. 4. Which of the following is not true of the earned income credit? a. If the credit is $300 and the taxpayer has $180 in income taxes, a refund of $120 will be received b. Earned income usually refers to income such as wages. The maximum credit possible can only be received if the taxpayer has three or more qualifying children. d. The credit is not allowed if the taxpayer has no qualifying children.

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Answer is highlighted in yellow: Solution: Answer: 3) Explanation: d. The rental expenses are deductible to the extend of the gross rental income, for a net amount to zero. It is standardized, rental expenses can be deducted upto rental income. Because, couple are not active participant in the rental business, therefore, $25000 limit doesn't apply Answer: 4) d. The credit is not allowed if the taxpayer has no qualifying child. Explanation: The above statement is false. Because, an EITC is allowed to taxpayer even if it has no qualifying children. But age of taxpayer must be at least 25 but younger than 65.