Question

Last year, Harvey purchased a condominium in St Augustine, Florida. In the current year, Harvey and his family used the condominium for a total of 36 days. The condominium was rented out a total of 90 days during the year, generating $17,400 of rental income. Harvey incurred the following expenses in the current year:

           Property taxes                               $6,835

                      Mortgage interest                            16,960

                      Insurance                                       1,640

                        Utilities                                         5,410

                      Depreciation                                12,150

a. Determine all of Harvey's deductible expenses using the Tax Court approach (including those on Schedule A).

b. How much depreciation can be deducted in the current year if the rental income was $22,420?

Answer 1

In the above situation, personal property use exceeds the greater of :-

i.) 14 days

or

ii.) 10% of Rented days(9 days = 90 days * 10%)

As such, this property would be considered Personal/rental.

A.) Tax Court Method:-

The tax court method allows taxpayers to calculate the deductions based on the following formula:-

(Expense * No.of days used for rental purposes)/ Total No.of days in a year.

The Deductions under the Tax court method can be calculated as follows :-

	Particulars	Amount
	Rental Income	17,400
	Tax Court Method
Less:-	Property Taxes
	($6,835 * 90/365)	1,685.34
	Mortgage Interest
	(16,960 * 90/365)	4,181.92
	Insurance
	(1640*90/365)	404.38
	Utilities
	(5410*90/365)	1,333.97
	Depreciation
	(12150*90/365)	2,995.89
	Total Deductions	10,601.51

B.) The amount of Depreciation that can be deducted in the current year for :-

	Particulars	Amount
	Rental Income	22,420
	Tax Court Method
Less:-	Property Taxes
	($6,835 * 90/365)	1,685.34
	Mortgage Interest
	(16,960 * 90/365)	4,181.92
	Insurance
	(1640*90/365)	404.38
	Utilities
	(5410*90/365)	1,333.97
	Depreciation
	(12150*90/365)	2,995.89
	Total Deductions	10,601.51

The total Depreciation expenses under Tax Court method that can be deducted $2,995.89

IRS Method:- This method calculates the deductions based on the following formula :-

(Expense * No.of days used for rental purposes)/ No.of days used for personal purpose + No.of days used for rental purpose

	Particulars	Amount
	Rental Income	22,420
	IRS method
Less:-	Property Taxes
	($6,835 * 90/120)	5,126.25
	Mortgage Interest
	(16,960 * 90/120)	12,720.00
	Insurance
	(1640*90/120)	1,230.00
	Utilities
	(5410*90/120)	3,343.75
	Depreciation
	(12150*90/120)	0
	Total Deductions	$22,420

Under the IRS method , we can see that the after deducting the necessary expenses like interest, property taxes, the expenses are then allocated to insurance and utilities. However, we do not have any income left and as such, there wouldnt be any window for deduction of depreciation. As such, the depreciation deduction is 0.