Question

During 2021, Sleepy rented his vacation home for 75 days and stayed in his vacation home for 25 days. Gross rental income from the property was $10,850. Sleepy incurred the following expenses: mortgage interest, $6,180; real estate taxes, $2,200; utilities, $1,950; maintenance, $750; and depreciation, $4,000. You might find Chapter 6, Example 38 in the textbook helpful in completing this problem!

Using the IRS’s approach, compute:
(1) Sleepy’s net rent income or loss, showing all calculations (his realized amount).
(2) The amount(s), if any, that Sleepy will report on his Schedule A as an itemized deduction.
(3) Any carryover amounts.

Answer 1

(1) Sleepy's net rental income or loss can be computed as follows:

Gross Rental Income = $10,850

Expenses:

Mortgage Interest = $6,180

Real Estate Taxes = $2,200

Utilities = $1,950

Maintenance = $750

Depreciation = $4,000

Total Expenses = $15,080

Net Rental Income/Loss = Gross Rental Income - Total Expenses

= $10,850 - $15,080

= -$4,230

Since the net rental income is negative, Sleepy incurred a loss from renting his vacation home during 2021.

(2) Sleepy can report the following expenses as itemized deductions on his Schedule A:

Mortgage Interest = $6,180

Real Estate Taxes = $2,200

(3) Sleepy cannot carry over the rental loss of $4,230 to the next year because he does not meet the income and participation requirements for real estate professionals.