During 2015, Martin rented his vacation home for three months and spent one mont

Question

During 2015, Martin rented his vacation home for three months and spent one month there. (Assume that each month has 30 days.) Gross rental income from the property was $5,000. Martin incurred the following expenses

               Mortgage interest                              $3,000

               Property taxes                                   1,500

               Utilities                                                   800

               Maintenance                                           500

               Depreciation                                      4,000

Determine the effect of these income and expense items on Martin’s 2015 tax return. If the vacation home is personal/rental use, perform the calculations twice, first using the court’s approach and second using the IRS’s approach. [When calculating percentages, round to the nearest tenth of a percent.]

Explanation / Answer

Since the vacation home is rented for 15 or more days and is used for personal purposes for more than the greater of (1) 14 days or (2) 10% of the rental days, the deductions are scaled down, using the court’s approach, as follows

Gross income $ 5,000
Deduct: Taxes and interest (3/12 × $4,500)                                                 (1,125)
Remainder applicable to other rental expenses                                     $ 3,875
Deduct:

Allocable share of utilities and maintenance [3/4 × ($800 + $500)]          (975)
Balance applicable to depreciation    $ 2,900
Deduct:

Depreciation (3/4 × $4,000 = $3,000) but limited to above balance (2,900)
Net income $ –0–

Thus, Martin may deduct $1,125 taxes and interest, $975 utilities and maintenance, and $2,900 depreciation against the gross income of $5,000. The personal portion of taxes and interest ($3,375) is deductible as an itemized deduction

Using the IRS’s approach, though, the deductions are as follows:

Gross income                                                                                                  $ 5,000
Deduct: Taxes and interest (3/4 × $4,500) (3,375)
Remainder applicable to other rental expenses                                    $ 1,625
Deduct:

Allocable share of utilities and maintenance [3/4 × ($800 + $500)]    (975)
Balance applicable to depreciation                                                               $ 650
Deduct:

Depreciation (3/4 × $4,000 = $3,000) but limited to above balance           (650)
Net income $ –0–

Thus, Martin may deduct $3,375 taxes and interest, $975 utilities and maintenance, and $650 depreciation against the gross income of $5,000. The personal portion of taxes and interest ($1,125) is deductible as an itemized deduction.

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