Final answer:
Karen will need to report the revenue from the rental activity on her tax return and prorate the expenses based on the number of weeks the property was rented out. After deducting the prorated expenses, she will have a net profit that she will need to report and pay taxes on.
Step-by-step explanation:
Karen will need to report the revenue from the rental activity on her tax return. However, as she rented out the property for only two weeks and used it personally for three weeks, she will need to prorate the expenses. To do this, she can divide the expenses by the number of weeks the property was available for rent and multiply the result by the number of weeks it was rented out.
In this case, the total expenses directly related to renting out the property were $450 (utilities: $300 + maid service: $150). Assuming the property was available for rent for 52 weeks in a year, Karen can prorate the expenses as follows:
Prorated expenses = (Total expenses / Total weeks available) * Weeks rented out
Prorated expenses = ($450 / 52) * 2 = $8.65
Therefore, Karen can deduct $8.65 from the revenue she earned from renting out the property, leaving her with a net profit of $991.35 ($1,000 - $8.65). She will need to report this income on her tax return and pay taxes on it accordingly.