Question

Daisy owns a condominium in the Hilton Head Island, South Carolina. During the year, Daisy uses the condo for a total of 25 days. The condo is also rented to vacationers for a total of 100 days and generates a rental income of $38,000. Daisy incurs the following expenses:

Expense	Amount
Mortgage interest	$ 10,000
Property taxes	14,800
Utilities	4,000
Insurance	2,800
Depreciation (Annual)	17,500

Using the IRS method of allocating expenses, the amount of depreciation that Daisy may take with respect to the rental property will be? Show work.

A) $ 3,500.

B) $ 6,780

C) $12,720.

D) $14,000.

Answer 1

Based on the information available in the question, we can answer as follows:-

Under the IRS method of allocating expenses, the Depreciation is allocated to the condominium using the following formula:-

IRS Method of Depreciation expense = Depreciation expense * (No. of days rented out/No.of days occuplied + No.of days rented out)

IRS Method of Depreciation expense =$17,500 * (100/100+25)

IRS Method of Depreciation expense =$17,500 * (100/125)

IRS Method of Depreciation expense =$14,000

Based on the above calculation, the correct answer is Option D - $14,000.

Option A is incorrect. $3,500 is the depreciation expense for 25 days, which is the duration that Petya occupied the property personally. However, the amount of depreciation that Katarina may charge is to be calculated for a period of 100 days, which is the duration for which the property was rented.

Option B & Option C are incorrect based on the above calculations.

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