Question

7. During the year, Martin rented his vacation home for three months and spent one month there (You may assume all month are 30 days and the year is 365 days). Gross rental income from the property was $5,000. Martin incurred the following expenses: mortgage interest, $3,000; real estate taxes, $1,500; utilities, $800; maintenance, $500; and depreciation, $4,000. Compute Martin’s allowable deductions for the vacation home under the IRS's approach.  

How would the court's approach differ?

8. Agnes operates a Christmas shop in Atlantic City, NJ. She makes a weekend trip to Vero Beach, FL, for the purpose of determining the feasibility of opening another shop. Her travel expenses are $2,000 (includes $500 for meals). In addition, she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study. Determine the amount of the expenses that Agnes can deduct if:

a. She opens a new shop in Vero Beach.

b. She decides not to open a new shop in Vero Beach.

Answer 1

7. 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

Deduct: Taxes and Interest (3/12 * $4,500)

Remainder applicable to other rental expenses

Deduct: Allocable share of utilities and maintenance = 3/4 of ($800 + $500)

Balance applicable to depreciation

Deduct: Depreciation (3/4 * $4,000 = $3,000) but limited to above balance

Net Income

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.

8. a. Because Agnes is already in the Christmas Shop business, $6,750 of the investigation expenses ($1,500 + ($500*0.50) + $5,000 = $6,750) are deductible regardless of whether or not she opens a shop in Vero Beach. Only 50% of the cost of the meals is deductible.

b. Same response as in a.