Final answer:
The correct formula for allocating mortgage interest and property taxes in residences with significant rental activity is 'Expense × (total rental days/365)'.
Step-by-step explanation:
The formula used by the Tax Court when allocating mortgage interest and property taxes for residences with significant rental activities is:
This formula implies that you can allocate the expenses based on the portion of the year that the property was actually rented out. To use this formula, you would take your total expense for the year for either mortgage interest or property taxes and multiply it by a fraction, where the numerator is the total number of days the property was rented, and the denominator is 365 days.
Here's an example to illustrate: If you have an annual property tax of $3,650, and the property was rented out for 120 days during the year, the allocated expense would be:
$3,650 (Expense) × (120 rental days / 365 total days) = $1,200
This allocated amount would be the deduction you could take for the rental use of your property.