Gregory purchased a vacation house on June 1,2016. During the year he spent 25 d
ID: 2602793 • Letter: G
Question
Gregory purchased a vacation house on June 1,2016. During the year he spent 25 days there, and rented it at a fair rental value for 125 days. The house was vacant for the remainder of the year. Using the tax court method, what is the applicable percentage for expensing that may be deducted on his schedule E?Gregory purchased a vacation house on June 1,2016. During the year he spent 25 days there, and rented it at a fair rental value for 125 days. The house was vacant for the remainder of the year. Using the tax court method, what is the applicable percentage for expensing that may be deducted on his schedule E?
Explanation / Answer
Schedule E
It reports income or loss from royalties, rental real estate, partnerships, estates, trusts, S corporations, and residual interests in REMICs. We can attach our own schedule(s) to report revenue or loss from any of these sources.
Tax treatment of income and expenses of a primarily rental vacation home(Sch E)
Primarily rental use are:
Taxes deductible from AGI,
Mortgage interest non deductible (personal interest)
Personal/Rental Use includes:
Mortgage interest and taxes deductible from AGI
Personal portion of other expenses
If it’s a personal/rental use better method is the tax courtmethod. Because we are able to deduct all of your expenses.
If it’s primarily rental we want to use the IRS method. As we can create a loss.
The proper tax treatment is to allocate the expense among rental and personal expenses. Schedule E would show this property $0 net income and the taxes and interest would be deducted on Schedule A. The taxpayer can use the Tax Court method to allocate expenses. This allows for an overall larger deduction. However, the IRS has maintained it will continue to fight the Tax Court method.
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