Final answer:
The IRS formula for allocating mortgage interest and property taxes for significant rental activities is Expense x (total rental days/365). This apportions expenses based on the rental period within a year.
Step-by-step explanation:
The correct formula used by the IRS for allocating mortgage interest and property taxes for residences with significant rental activities is represented by Option B: Expense x (total rental days/365). This formula allows taxpayers to apportion their mortgage interest and property taxes between personal use and rental use based on the number of days the property was rented out over the course of the year.
To apply this, you would take your total amount of mortgage interest or property taxes for the year and multiply it by the fraction of the year the property was rented out. So, if your annual mortgage interest was $10,000 and you rented out your property for 90 days, you would calculate your deductible rental expense as follows: $10,000 x (90/365) = $2,465.75. This amount would be what you could deduct for rental use, and the remaining portion would be personal use and not deductible against rental income.