Question

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

Insurance	$	1,350
Advertising expense		735
Mortgage interest		5,050
Property taxes		1,110
Repairs & maintenance		1,120
Utilities		1,440
Depreciation		12,200

During the year, Natalie rented out the condo for 85 days, receiving $22,750 of gross income. She personally used the condo for 39 days during her vacation.

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 intermediate calculations. Round your final answers 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 $178,000, what is her basis in the condo at the end of the year?

d. Assume that gross rental revenue was $4,550 (rather than $22,750). What amount of for AGI deductions may Natalie deduct in the current year related to the condo?

Answer 1

a)

Gross Rental Income:		$22,750
Tier 1 expenses:
Advertisment Expenses	$735
Mortgage Interest(85/124*$5050)	$3,461.69
Property Taxes(85/124 * $1,110)	$760.89
Less:Total Tier 1 expenses		$4,958
Balance		$17,792
Tier 2 Expenses:
Insurance (85/124 * $1350)	$925.40
Repairs & Maintenance(85/124 *$1,120)	$767.74
Utilities(85/124*$1,440)	$987.10
Less:Tier 2 expenses		$2,680
Balance		$15,112
Less:Tier 3 Expenses
Depriciation(85/124 * $12,200)		$8,363
Net Income from rental of condo		$6,749
Total For"AGI deductions"($4,958+$2,680+$8,363)		$16,001

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	$5,050*39/124	$1,588.31
Property	$1,110*39/124	$349.11
Total From"AGI deductions"		$1,937

c)

Beginning Basis	$178,000
Less:Depriciation Actually dedcuted	$8,363
Adjusted Basis	$169,637

d)$4,958. Even though it creates a loss ($4,550 – $4,958), Natalie is allowed to deduct all of the advertising expense and the portion of the mortgage interest expense and real property taxes allocated to the rental use of the home as for AGI deductions (these deductions are not limited to rental revenue). The loss is not subject to the passive loss rule limitations.