Question

Petya owns a condominium in the Hilton Head Island, South Carolina. During the year, Petya uses the condo a total of 25 days. The condo is also rented to vacationers for a total of 100 days and generates rental income of $38,000. Petya incurs the following expenses: Expense Amount Mortgage interest $ 10,000 Property taxes 14,800 Utilities 4,000 Insurance 2,800 Depreciation (Annual) 17,500 Using the IRS method of allocating expenses, the amount of depreciation that Katarina may take with respect to the rental property will be A) $ 3,500. B) $ 6,780 C) $12,720. D) $14,000.

Answer 1

Under the IRS method of allocating expenses, the Depreciation is allocated to the condominium using the following formula:-

= Depreciation expense * (No. of days rented out/No.of days occuplied + No.of days rented out)

=$17,500 * (100/100+25)

=$17,500 * (100/125)

=$14,000

Based on the above calculation, the correct answer is Option D - $14,000.

Option A is incorrect. $3,500 is the depreciation expense for 25 days, which is the duration that Petya occupied the property. However, the amount of depreciation that Katarina may charge is to be calculated for a period of 100 days.

Option B & Option C are incorrect based on the above calculations.

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