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 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.

Answer 1

Answer is D.

As per the rules for renting personal property, a property is considered "a rented property" under following conditions

(1) Owner should not use the house for more than 14 days in a year, or

(2) Owner should not use more than 10% of the time it is rented out to a tenant at a fair rental place.

then, it is considered a personal residence and not a rented one

In this scenario, Personal use is 40 days which is greater than 6 days (10% of 60 days). So this is a personal residence. For this condition, we can deduct expenses upto the rental income and not deduct losses. So Answer D is true.