Question

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

Insurance	$	990
Advertising expense		615
Mortgage interest		6,500
Property taxes		1,000
Repairs & maintenance		930
Utilities		710
Depreciation		11,050

During the year, Natalie rented out the condo for 79 days, receiving $26,000 of gross income. She personally used the condo for 43 days during her vacation. Natalie's itemized deduction for nonrental taxes is less than $10,000 by more than the property taxes allocated to the rental use of the property.

Assume Natalie uses the Tax Court method of allocating expenses to rental use of the property. Assume 366 days in the current year. (Do not round apportionment ratio. Round all other dollar values 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 (assuming she itemizes deductions before considering deductions associated with 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 $192,000, what is her basis in the condo at the end of the year?

d. Assume that gross rental revenue was $3,200 (rather than $26,000). What amount of for AGI deductions may Natalie deduct in the current year related to the condo?

Answer 1

a.

Gross Rental Income		$ 26,000
Tier 1 expenses
Advertising Expense	$ 615
Mortgage Interest(= $ 6,500*79/365)	$ 1,407
Property Tax ( = $ 1,000*79/365)	$ 216
Total Tier-1 expenses		$ (2,238)
Balance		$ 23,762
Tier-2 Expenses
Insurance Expense (= $ 990 * 79/122)	$ 641
Repairs and Maintenance (= $ 930 * 79/122)	$ 602
Utilities (= $ 710 * 79/122)	$ 460
Less: Total Tier-2 Expenses		($ 1,703)
Balance		$ 22,059
Tier-3 Expenses
Depreciations ( $ 11,050 * 79/122)	$ 7,155
Less: Tier-3 expenses		($ 7,155)
Balance Net Income from Rental		$ 14,904
Total AGI Deduction ( $2,238 + $1,703 + $7,155)		$ 11,096

b. Mortgage Interest ( $ 6,500 * 286/365) = $ 5,093
Property Tax ( $ 1,000 * 286/365) = $ 786
Total Itemized Deduction = $ 5,879

c. Beginning Basis = $ 192,000
Less: Depreciation actually deducted = ($ 7,155)
Adjusted basis in the condo = $ 184,845

d. ($ 3,200 - $ 2,238) = $ 962