Question

Randolph and Tammy own a second home. They spent 45 days there and rented it for 88 days at $159 per day during the year. The total costs relating to the home include the following: (Round your intermediate computations to 5 decimal places and final answers to nearest whole dollar value).

Mortgage interest $ 4,680

Property taxes 1,290

Insurance 1,935

Utilities 2,435

Repairs 1,545

Depreciation 6,680

a)What is the tax treatment of these items relating to second home under Tax Court allocation method?

b) What is the tax treatment of these items relating to second home under IRS allocation method?

c) Which of the methods is preferred?

Complete this question by entering your answers in the tabs below.

• Required a
• Required b
• Required c

What is the tax treatment of these items relating to second home under Tax Court allocation method?

	Required a Tax Court Method –Schedule E Personal Income Mortgage interest Property taxes Insurance Utilities Repairs Depreciation Net rental income

What is the tax treatment of these items relating to second home under IRS allocation method?

	Required b IRS Method –Schedule E Personal Income Mortgage interest Property taxes Insurance Utilities Repairs Depreciation Net rental income

Complete this question by entering your answers in the tabs below.

• Required a
• Required b
• Required c

Which of the methods is preferred?

	Preferred method

Answer 1

The property should be categorized as personal/rental property as it is rented for 15 days (88 days) and the personal use of property is more than 14 days (45 days).

Requirement a: Compute the net rental income under tax court allocation as follows

Expense	Total	Rental Ratio	Deductible on Schedule E		Allocated To Personal
	(a)	(b)	(c) = (a) × (b)		(a) − (c)
Rental Income				$13,992
Mortgage Interest	$4,680	88 ÷ 365	$1,128		$3,552
Property Taxes	$1,290	88 ÷ 365	$311		$979
Insurance	$1,935	88 ÷ 133	$1,280		$655
Utilities	$2,435	88 ÷ 133	$1,611		$824
Repairs	$1,545	88 ÷ 133	$1,022		$523
Depreciation	$6,680	88 ÷ 133	$4,420		$0
Total deductions				$9,773	$6,532
Net rental income				$4,219

Note: Total days = 133 days ( 88 rental days + 45 personal use days)

Requirement a: Compute the net rental income under IRS allocation as follows

Expense	Total	Rental Ratio	Deductible on Schedule E		Allocated To Personal
	(a)	(b)	(c) = (a) × (b)		(a) − (c)
Rental Income				$13,992
Mortgage Interest	$4,680	88 ÷ 133	$3,097		$1,583
Property Taxes	$1,290	88 ÷ 133	$854		$436
Insurance	$1,935	88 ÷ 133	$1,280		$655
Utilities	$2,435	88 ÷ 133	$1,611		$824
Repairs	$1,545	88 ÷ 133	$1,022		$523
Depreciation	$6,680	88 ÷ 133	$4,420		$0
Total deductions				$12,284	$4,021
Net rental income				$1,708

Requirement C: In this case IRS allocation method is preferable as this results in lower taxable rental income.