Question

Lynn and Bruce own a vacation cottage on the lakeside. They rented the cottage last year for 60 days, and used it for themselves and their family for 30 days. They had the following income and expenses for the cottage.

Rental Income $22,000

Real Estate Taxes $6,000

Mortgage Interest Paid $9,000

Mortgage Principal Repaid $5,000

Electric, Phone, gas $4,000

Repairs $1,000

Insurance $1,000

Depreciation $8,000

Homeowners Assn. Fees $1,000

For real estate taxes and mortgage interest, there are two alternative approaches on how to allocate these, the "tax court approach" and the "IRS approach." Using the "IRS approach," what are the total expenses that they can deduct related to the lakeside cottage rental? Show your calculations.

Answer 1

Answer :

Under the IRS method, the ratio is Number of days rented by total no of days (Rented days + Personal days)

Calculation of expenses under IRS method

Particulars	Workings	Amount ($)
Real Estate Taxes	6,000 *60/90	4,000
Mortgage interest paid	9,000 *60/90	6000
Electric, phone, gas	4,000 *60/90	2667
Repairs	1,000 *60/90	667
Insurance	1,000 *60/90	667
Depreciation	8,000 * 60/90	5333
Homeowners Ass, fees	1,000 *60/90	666
Total Expenses		20,000