Question

Matt and Marie own a vacation home at the beach. During the year, they rented the house for 42 days (6 weeks) at $890 per week and used it for personal use for 58 days. The total costs of maintaining the home are as follows:

Mortgage interest	$4,200
Property taxes	700
Insurance	1,200
Utilities	3,200
Repairs	1,900
Depreciation	5,500

1. What is the proper tax treatment of this information on their tax return using the Tax Court method?

2. Are there options available for how to allocate the expenses between personal and rental use? Explain.

3. What is the proper tax treatment of the rental income and expenses if Matt and Marie rented the house for only 14 days?

Answer 1

ANSWER

	Schedule E
Income	6 weeks * 890	$5,340
Mortgage Interest	(42/365) * 4,200	483	$3,717 Schedule A
Property Taxes	(42/365) * 700	81	619 Schedule A
Insurance	(42/122) * 1,200	413
Utilities	(42/122) * 3,200	1,102
Repairs	(42/122) * 1,900	654
Depreciation	(limited to Net Rental Income)	2,607
		$0

• The proper tax treatment is to allocate the expense between personal and rental expenses. Schedule E would show this property $0 net income and the taxes and interest would be deducted on Schedule A.
• The taxpayer can use the Tax Court method to allocate expenses. This allows for an overall larger deduction. However, the IRS has maintained it will continue to fight the Tax Court method.
• In this case the property would be primarily personal and none of the income would be included in income and only the interest and taxes would be deductible on Schedule A.

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