Taxes_Chapter_03_PPT - Income Tax Fundamentals 2010 edition...

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Income Tax Fundamentals 2010 edition Gerald E. Whittenburg Martha Altus-Buller 2010 Cengage Learning
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Net Rental Income/Loss is part of gross income Report on Schedule E - Part I Vacation Homes If both personal and rental use of residence, must allocate expenses Deductions limited based on period of time residence used for personal vs. rental 2010 Cengage Learning
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Three Categories – different tax treatment for each Category I: Primarily personal use 0 Rented for less than 15 days Category II: Primarily rental use 0 Rented more than or equal to 15 days and personal use does not exceed greater of 14 days or 10% of rental days Category III: Rental/personal (dual use) of property 0 Rented more than or equal to 15 days and personal use exceeds greater of 14 days or 10% of rental days See following screens for tax treatment for each scenario 2010 Cengage Learning
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Treated as a personal residence Rental period is disregarded Rental income is not taxable Mortgage interest/taxes reported on Schedule A (itemized deductions) Other expenses are personal and nondeductible 2010 Cengage Learning
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Must allocate expenses between rental and personal use – calculated as follows: Rental days / Total days used = Rental % Expenses x Rental % = Rental deductions Personal days / Total days used = Personal % If rental deductions exceed rental income, can deduct against other income, subject to passive loss rules Personal % of mortgage interest & real estate taxes reported on Schedule A 2010 Cengage Learning
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Allocate expenses between rental and personal based on same allocation formulas as prior screen Rental deductions can be taken up to amount of rental income only , in order , as follows Taxes and interest ( can take into loss situation) Utilities/maintenance (only up to remaining rental income) Depreciation (only up to remaining rental income) Personal % of mortgage interest & real estate taxes reported on Schedule A 2010 Cengage Learning
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Example The Prebena family owns a ski condo in Alta, UT; in the current year personal use = 25 days and rental use = 50 days. Data pertaining to the rental follows; what amounts will be reported on Schedules E and A for the current year? Rental income $10,000 Taxes $ 1,500 Interest $ 3,000 Utilities $ 2,000 Insurance $ 1,500 Snow removal $ 2,500 Depreciation $12,000 2010 Cengage Learning
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2010 Cengage Learning Example The Prebena family owns a ski condo in Alta, UT; in the current year personal use = 25 days and rental use = 50 days. Data pertaining to the rental follows; what amounts will be reported on Schedules E and A for the current year? Rental income $10,000 Taxes $ 1,500 Interest $ 3,000 Utilities $ 2,000 Insurance $ 1,500 Snow removal $ 2,500 Depreciation $12,000 Solution Step 1: Personal use is > 14 days or 10% of rental (5 days); therefore, does exceed the greater number and this is dual use property Step 2: Taxes/interest = $4,500 x 50/75 = $3,000 deduction on E Step 3: Other expenses = $6,000 x 50/75 = $4,000 deduction on E Step 4: Depreciation = $12,000 x 50/75 = $8,000 but limited to $3,000 (remaining income)
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