Jeanette owns a rental property that she used for 20 days and rented for 80 days. The rental income was $10,000 and expenses included the following; mortgage interest $2,500; property tax $1,500; insurance and repairs $1,000 and depreciation $2,000. Calculate net rental income using both the IRS Method and the Tax Court Method.
please i need help with this
To calculate the net rental income using both the IRS Method and the Tax Court Method, we need to follow certain steps.
1. Calculate the total rental days: Jeanette used the property for 20 days and rented it out for 80 days, so the total rental days are 20 + 80 = 100 days.
2. Determine personal use days: In this scenario, Jeanette used the property for 20 days. These are considered personal use days and are not part of the rental activity.
3. Calculate rental income: The rental income, in this case, is $10,000.
4. Calculate rental expenses:
- Mortgage interest: In this case, the mortgage interest expense is $2,500.
- Property tax: The property tax expense is $1,500.
- Insurance and repairs: The expense in this category is $1,000.
- Depreciation: The depreciation expense is $2,000.
Now let's calculate the net rental income using both methods:
1. IRS Method:
a. Determine the rental use percentage: Divide the total rental days by the total days (100/100). The rental use percentage is 100%.
b. Calculate deductible rental expenses: Multiply the rental use percentage by each expense category.
- Mortgage interest deduction: $2,500 x 100% = $2,500
- Property tax deduction: $1,500 x 100% = $1,500
- Insurance and repairs deduction: $1,000 x 100% = $1,000
- Depreciation deduction: $2,000 x 100% = $2,000
c. Calculate net rental income: Subtract the deductible rental expenses from the rental income.
Net rental income = Rental income - Deductible rental expenses
= $10,000 - ($2,500 + $1,500 + $1,000 + $2,000)
= $10,000 - $7,000
= $3,000
2. Tax Court Method:
a. Determine the personal use percentage: Divide the personal use days by the total days. In this case, it is 20/100 = 20%.
b. Calculate deductible rental expenses: Multiply the rental use percentage by each expense category.
- Mortgage interest deduction: $2,500 x 80% = $2,000
- Property tax deduction: $1,500 x 80% = $1,200
- Insurance and repairs deduction: $1,000 x 80% = $800
- Depreciation deduction: $2,000 x 80% = $1,600
c. Calculate net rental income: Subtract the deductible rental expenses from the rental income.
Net rental income = Rental income - Deductible rental expenses
= $10,000 - ($2,000 + $1,200 + $800 + $1,600)
= $10,000 - $5,600
= $4,400
Therefore, using the IRS Method, the net rental income is $3,000, and using the Tax Court Method, the net rental income is $4,400.