Income Tax Soultions Chapter 9

# Income Tax Soultions Chapter 9 - 149 Chapter 9 Rental...

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149 Chapter 9 Rental Activities Teaching Suggestions Many students will find the vacation home rules to be the most difficult concept covered in the chapter. To help them in understanding these rules, it might be useful for them to realize that these rules only affect dwelling units that the taxpayer rents out part of the year and personally uses during other parts of the year. Once it has been determined that the vacation rules may apply, it is necessary to determine whether the rental income is taxable. If the property was rented less than 15 days during the year, then the rental income is not taxable to the taxpayer. If the property is rented more than 14 days during the year, then the rental income is taxable and the taxpayer must allocate expenses between personal and rental use. This allocation is based on the ratio of the number of rental days to total days used during the year. Finally, students need to determine whether rental expenses are limited to rental income. This occurs if the dwelling unit meets the definition of a “residence,Ä which is property that the taxpayer personally uses for the greater of (i) 14 days or (ii) 10% of the days rented during the year. Solutions to Questions and Problems 1. ¶901.01. Taxpayer Amount Description A \$6,000 The taxpayer recognizes \$6,000 as rental income. Both cash-method and accrual- method taxpayers recognize rent received in advance at the time of receipt. A security deposit is not treated as income until the tenant forfeits it (for example, used as a final payment of rent). B 3,600 The taxpayer reports 10 months’ rent at \$300 per month, plus \$600 of improvements paid by the tenant. C 0 If a personal residence is rented for less than 15 days during the year, none of the rent received is included in gross income. 2. ¶901.02. Taxpayer Amount Description A \$1,025 1 Expenses on property rented to a friend at \$100 per month and to an unrelated party at \$275 per month. B0 2 Expenses on personal dwelling rented 12 days. 1 When property is rented to a friend for less than fair rental value, the days count as personal days. Thus, the property qualifies as a residence. The taxpayer can deduct expenses only to the extent of the rental income. 2 If a dwelling is rented for less than 15 days during a taxable year, the rental income is not taxable and no rental expenses are deductible (other than interest and taxes on Schedule A). Chapter 9

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150 Essentials of Federal Income Taxation 3. ¶901.03. a. Depreciation . ........................................................ \$4,000 Taxes . .............................................................. 2,000 Interest . ............................................................ 1,600 Utilities . 1,200 Total . ............................................................... \$8,800 Rental portion . ....................................................... × 50% \$4,400 Repairs . ............................................................. 500 Deductible rental expenses . ............................................. \$4,900 b. Quinn deducts one-half of the taxes and interest as itemized deductions. Taxes ( 1 / 2 × \$2,000) . \$1,000 Interest ( 1 / 2 × \$1,600) . ...................................................... 800 Deductible on Schedule A . .................................................. \$1,800 4. Being a cash-method taxpayer, Scott recognizes December’s rent in 2007 when she collects it. ¶901.
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## This note was uploaded on 04/28/2008 for the course ACCT 210 taught by Professor Lloyd during the Spring '08 term at Lock Haven.

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Income Tax Soultions Chapter 9 - 149 Chapter 9 Rental...

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