Question

A taxpayer rents out a vacation home for 30 days and uses it for personal use 20 days.

Gross rental income was $6,000 and expenses incurred for the year were:

	Mortgage interest	$3,600
	Real estate taxes	1,200
	Utilities	600
	Maintenance	720
	Depreciation	4,800

Depreciation carryover to the next tax year is which of the following?

		$0.
		$552.
		$2,472.
		$2,800.
		$4,800.

Answer 1

This question requires knowledge regarding taxation of properties as per US laws. When you rent a vacation home and your personal use of the property is more than 14 days, or more than 10% of the number of days it is rented at fair market value, whichever is greater, the property is treated as a "dwelling unit used as a home" for income tax purposes. Also, if the owner rents for more than 14 days, it is called "mixed-use dwelling". It is to be noted that all expenses which are 'directly' related to renting the premise i.e. expenses that wouldn't have been incurred if there was no letting out are allowed as deduction (100%) in Schedule E. But those expenses that are general i.e. they would be incurred irrespective of whether the premise is let out or used for personal purposes are allowed are deduction only partially in Schedule E i.e. no pro rata basis. If the owner's itemize, the remaining expense can be claimed as deduction in Schedule A. Deduction for depreciation is allowed on 'rent use' basis i.e. after deducting 'direct' expenses relating to rent to the extent of 100% and then deducting pro-rated general expenses, if there is any rental left to adjust the depreciation, depreciation will be adjusted against that and the remaining will be carried over.

In the given case, the letting out is for 30 days and personal use is for 20 days. The expenses such as Mortgage interest, real estate taxes, utilities and maintenance, being general expenditure in nature, are allowed as deduction only on pro-rata basis. Mortgage and Property Tax are allocated as personal use for the total days of the year minus the rental days of the year (i.e. 365-30=335) and other expenses such as depreciation, utilities and maintenance are allowed to the extent of 60% (i.e. 30/50*100 i.e. based on the number of days the property was rented at fair value) in Schedule E.

Gross rental = $ 6000

Gross rental - direct expenses - pro-rated general expenses= 6000 - 0 - (3600*30/365+1200*30/365+600*60%+720*60%) = $ 4813.48

Out of the total depreciation of $ 4800, only $ 2880 is allowed to be adjusted (i.e. pro rata 60%) against $ 4813.48.

The remaining depreciation shall lapse.

THUS THE DEPRECIATION CARRY OVER TO THE NEXT YEAR IS $ 0.