Question

*Please clearly state what answer goes to each part.*

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

  

Insurance	$	2,000
Mortgage interest		6,500
Property taxes		2,000
Repairs & maintenance		1,400
Utilities		2,500
Depreciation		14,500

During the year, Alexa rented out the condo for 100 days. She did not use the condo at all for personal purposes during the year. Alexa’s AGI from all sources other than the rental property is $200,000. Unless otherwise specified, Alexa has no sources of passive income.

Assuming Alexa receives $20,000 in gross rental receipts, answer the following questions: (Leave no answer blank. Enter zero if applicable.)

a. Assuming that Alexa’s AGI from other sources is $90,000, what effect does the rental activity have on Alexa’s AGI (increase, decrease, or no effect) and state by what amount? Alexa makes all decisions with respect to the property.

b. Assuming that Alexa’s AGI from other sources is $120,000, what effect does the rental activity have on Alexa’s AGI(increase, decrease, or no effect) and state by what amount? Alexa makes all decisions with respect to the property.

c. Assume that Alexa’s AGI from other sources is $200,000. This consists of $150,000 salary, $10,000 of dividends, $25,000 of long-term capital gain, and net rental income from another rental property in the amount of $15,000. What effect does the Cocoa Beach Condo rental activity have on Alexa’s AGI(increase, decrease, or no effect) and state by what amount?

Answer 1

Part a)

Alexa's AGI will decrease by $8,900.

_____

The decrease in income (which is same as loss from rental activity) is calculated as below:

Gross Rental Income		20,000
Less Expenses:
Insurance	2,000
Mortgage Interest	6,500
Property Taxes	2000
Repairs and Maintenance	1,400
Utilities	2,500
Depreciation	14,500
Total Expenses		28,900
Balance (Net Rental Income)		-$8,900

As the amount of net rental income is a loss and Alexa is an active participant in the rental activity (as she owns more 10% of the property and takes all decisions with respect to the property related matters), she will be allowed to claim a maximum deduction of either $25,000 or $8,900 (actual loss) whichever is less as per applicable rules (since Alexa's AGI is less than $100,000).

_____

Part b)

Alexa's AGI will decrease by $8,900.

_____

The reduction in AGI will be less of the following two amounts:

1) Amount of net loss which is $8,900 (as calculated in Part b)

or

2) Exception Amount = Maximum Exception - Phased Out Amount = 25,000 - (120,000 - 100,000)*.50 = $15,000

_____

Explanation for Exception Amount

As Alexa's AGI from other sources exceeds the limit of $100,000, a part of exception amount will get phased out as per the applicable rules. The phaseout is 50 cents for every dollar by which AGI exceeds $100,000. In the given case, the AGI is $20,000 (120,000 - 100,000) more than the limit. Therefore, the exception amount of $25,000 will get phased out by $10,000 (20,000*.50).

_____

Part c)

Alexa's AGI will decrease by $8,900.

_____

Explanation:

As Alexa has passive income (in the form of rental income from anothe property), she will be able to claim a deduction equivalent to her net loss (which is $8,900) from Cocoa Beach Condo rental activity as per applicable rules. Her total AGI after all adjustments is calculated as below:

Salary	150,000
Dividends	10,000
Long Term Capital Gain	25,000
Gross Rental Income (20,000 + 15,000)	35,000
Less Expenses Related to Property	28,900
AGI	$191,100

or

AGI = 200,000 - 8,900 (Amount of Net Loss from Cocoa Beach Condo Rental Activity) = $191,100