Question

Charles and Sarah own a home in Palm Springs, CA. During the year, they rented the house for 40 days for $5,000 and used it for personal use for 18 days. The house remained vacant for the remainder of the year. The expenses for the house included $16,000 in mortgage interest, $4,500 in property taxes, $1,000 in utilities, $1,200 in maintenance, and $9,800 in depreciation. What is the deductible loss for the rental of their home (without considering the passive loss limitation)? Use the Tax Court method for allocation of expenses.

A.$0
B. $5,000 net income
C. $17,414 net loss
D. $27,500 net loss

Answer 1

Option (c) is correct.

Step-by-step explanation:

Total expenses:

= mortgage interest + property tax + utilities and maintenance + Depreciation expense

= $16,000 + $4,500 + ($1,000 + $1,200) + $9,800

= $32,500

Proportionate rental expenses = $32,500 × 40 days ÷ (40 days + 18 days)

= $22,414

Rental Loss = Rental income - Proportionate rental expenses

= $5,000 - $22,414

= -$17,414