Question

When a taxpayer has a house that is used as rental property and the taxpayer stays in the house for less than 15 days during the year, how are the revenues and expenses treated for tax purposes? (Check all that apply.)

A. The owner includes the rental income and deducts the rental expenses to the extent of the rental income. Losses are disallowed for tax purposes.
B. The owner includes the rental income, but is NOT allowed to deduct the rental expenses.
C. Owner includes rental income and deducts allocated expenses. If a loss results, it offsets ordinary income subject to passive activity limitations.
D. The nonrental percentage of property tax is deductible as an itemized deduction, but the nonrental percentage of mortgage interest is NOT deductible.
E. The personal percentage of real property taxes and mortgage interest are deductible as itemized deductions.
F. The owner does NOT include the rental income and is not allowed to deduct any expenses related to the rental.

Answer 1

For tax purposes, a taxpayer with rental property used personally for less than 15 days must include rental income and deduct expenses against it, subject to passive activity limitations. Personal use percentages of property taxes and mortgage interest can be deductible as itemized deductions.

Step-by-step explanation:

When a taxpayer has a house that is used as rental property and stays in it for less than 15 days during the year, the revenues and expenses are treated in specific ways for tax purposes. The correct answer, in this case, would be selection C: The owner includes rental income and deducts allocated expenses. If a loss results, it may offset ordinary income subject to passive activity limitations. Moreover, per selection E, the personal percentage of real property taxes and mortgage interest are deductible as itemized deductions.

Thus, the owner must include the rental income received from the property on their tax return. The expenses related to rental activities, which could include mortgage interest, property taxes, maintenance, utilities, and depreciation, can be deducted against this rental income. However, losses that exceed rental income may be subject to limits under passive activity loss rules.

The nonrental (personal use) portion of property taxes and mortgage interest is still potentially deductible as itemized deductions, which suggests that the property remains partly a personal residence even while it is rented out.