Final answer:
Depreciation expense for a vacation home with significant rental use is allocated based on the ratio of rental days to total days of use. This percentage is then applied to the total depreciation expense, determining the amount that can be deducted for rental activity.
Step-by-step explanation:
The depreciation expense on a residence that is used for both personal and rental purposes must be allocated based on the amount of time the property is used for rental activities. To determine the appropriate amount of depreciation expense that can be allocated to rental use, you generally need to divide the number of days of rental use by the total number of days used for both rental and personal purposes. The resulting percentage is then applied to the total depreciation expense calculated for the property.
For example, if a vacation home is used for rental purposes for 120 days in a year and for personal use for 60 days, then 120 (rental days) / 180 (total days of use) equals approximately 66.67%. This percentage is then multiplied by the total depreciation expense to obtain the portion that can be allocated to the rental use of the property.
Key Points to Remember:
- Depreciation expense must be prorated based on use.
- Rental days divided by total days of use gives the percentage for allocation.
- The calculated percentage is then applied to the total depreciation expense.