Natalie owns a condominium near Cocoa Beach in Florida. This year, she incurs th

Question

Natalie owns a condominium near Cocoa Beach in Florida. This year, she incurs the following expenses in connection with her condo:

Insurance $1,410
Advertising expense $590
Mortgage interest $6,100
Property taxes $1,490
Repairs & maintenance $630
Utilities $520
Depreciation $10,000



During the year, Natalie rented out the condo for 95 days, receiving $18,000 of gross income. She personally used the condo for 42 days during her vacation.

Assume Natalie uses the Tax Court method of allocating expenses to rental use of the property.

A. What is the total amount of for AGI (rental) deductions Natalie may deduct in the current year related to the condo?
For AGI deductions $

B. What is the total amount of itemized deductions Natalie may deduct in the current year related to the condo?
Itemized deductions $

C. If Natalie

Explanation / Answer

a.

$11,276, calculated as follows:

Gross rental income

$

18,000

Tier 1 expenses:

Advertising expense = $590

Mortgage interest = (95/365) × $6,100 = $1,588

Property taxes = (95/365) × $1,490 = $388

Less: total Tier 1 expenses

(2,566)

Balance

$

15,434

Tier 2 expenses:

Insurance = (95/137) × $1,410 = $978

Repairs & Maintenance = (95/137) × $630= $437

Utilities= (95/137) × $520 = $361

Less: total Tier 2 expenses

(1,776)

Balance

$

13,658

Tier 3 expenses:

Depreciation (95/137) × $10,000 = $6,934

(6,934)

Balance—net income from rental of condo

$

6,724

Total “For AGI” deductions ($2,566 + $1,776 + $6,934)

$

11,276

b.

Natalie may deduct the personal-use portion of the mortgage interest and property taxes since they are deductible without regard to rental income. Her deductions for these items are computed as follows:

Mortgage interest [(270/365) × $6,100]

$

4,512

Real property taxes [(270/365) × $1,490]

$

1,102

Total “from AGI” deductions

$

5,614

c.

$236,066, calculated as follows:

Beginning basis

$

243,000

Less: depreciation actually deducted

(6,934)

Adjusted basis

$

236,066

d. $2,566. Even though it creates a loss ($1,800 – $2,566), Natalie is allowed to deduct all of the advertising expense and the portion of the mortgage interest expense and real property taxes allocated to the rental use of the home as for AGI deductions (these deductions are not limited to rental revenue). The loss is not subject to the passive loss rule limitations.

$11,276, calculated as follows:

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