Question

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Natalie owns a condominium near Cocoa Beach in Florida. This year, she incurs the following expenses in connection with her condo:

Insurance	$	2,700
Advertising expense		965
Mortgage interest		5,200
Property taxes		1,750
Repairs and maintenance		1,500
Utilities		1,800
Depreciation		11,050

During the year, Natalie rented out the condo for 90 days, receiving $18,500 of gross income. She personally used the condo for 50 days during her vacation. Assume there are 365 days in the year.

Assume Natalie uses the Tax Court method of allocating expenses to rental use of the property. (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)

a. What is the total amount of for AGI (rental) deductions Natalie may deduct in the current year related to the condo?

b. What is the total amount of itemized deductions Natalie may deduct in the current year related to the condo?

c. If Natalie’s basis in the condo at the beginning of the year was $210,000, what is her basis in the condo at the end of the year?

d. Assume that gross rental revenue was $3,700 (rather than $18,500). What amount of for AGI deductions may Natalie deduct in the current year related to the condo?

Answer 1

Note that the home falls into the residence with significant rental use category.

a. $13,633, calculated as follows:

Gross rental income	$18,500
Tier 1 expenses: Advertising expense = $965 Mortgage interest = (90/365) × $5,200=$1,282.19 Property taxes= (90/365) × $1,750=$431.51 Less: total Tier 1 expenses	(2,678.7)
Balance	$15,821.3
Tier 2 expenses: Insurance = (90/140) × $2,700=$1,735.71 Repairs & Maintenance = (90/140) × $1,500=$964.29 Utilities= (90/140) × $1,800=$1,157.14 Less: total Tier 2 expenses	(3,851.14)
Balance	$11,970.16
Tier 3 expenses: Depreciation (90/140) × $11,050= $7,103.57	(7,103.57)
Balance—net income from rental of condo	$4,866.59 or $4,867
Total “For AGI” deductions ($2,678.7 + $3,851.14 + $7,103.57)	$13,633.41 or $13,633

b. Natalie may deduct the personal-use portion of the mortgage interest and property taxes since they are deductible without regard to rental income. Her deductions for these items are computed as follows:

Mortgage interest [(275/365) × $5,200]       $3,917.81

Property taxes [(275/365) × $1,750]         $1,318.49

Total "from AGI" deductions                         $5.836.3 or $5,836

c. $202,896, calculated as follows:

Beginning basis                                              $210,000

Less: depreciation deducted    (7,103.57)

Adjusted basis $202,896.43 or $202,896

d. $3,700. Natalie is allowed to deduct all of the Tier 1 expenses and the portion of the Insurance allocated to the rental use of the home as for AGI deductions.