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, mortage
interest 2500,property tax $1500,
insurance and repairs $1000 and
depreciation $2000. Calculate net
remtal income using both the Irs method and the tax court method
To calculate the net rental income using both the IRS method and the Tax Court method, we need to first calculate the total expenses and then subtract them from the rental income.
1. Total Expenses:
To find the total expenses, add up all the expenses listed:
Mortgage interest: $2,500
Property tax: $1,500
Insurance and repairs: $1,000
Depreciation: $2,000
Total Expenses = $2,500 + $1,500 + $1,000 + $2,000 = $7,000
2. Net Rental Income - IRS Method:
The IRS requires you to divide the total rental period into two categories - personal use and rental use.
a. Personal Use: In this case, Jeanette used the property for 20 days.
b. Rental Use: The property was rented out for 80 days.
To calculate the net rental income using the IRS method, you need to prorate the expenses based on the ratio of rental use to the total use.
Rental Use Ratio = Rental Use Days / (Personal Use Days + Rental Use Days)
Rental Use Ratio = 80 / (20 + 80) = 0.8
Net Rental Income - IRS Method = Rental Income - (Total Expenses * Rental Use Ratio)
Net Rental Income - IRS Method = $10,000 - ($7,000 * 0.8)
Net Rental Income - IRS Method = $10,000 - $5,600
Net Rental Income - IRS Method = $4,400
3. Net Rental Income - Tax Court Method:
Under the Tax Court Method, the rental activity is treated as a trade or business. The expenses related to the rental property are fully deductible against the rental income.
Net Rental Income - Tax Court Method = Rental Income - Total Expenses
Net Rental Income - Tax Court Method = $10,000 - $7,000
Net Rental Income - Tax Court Method = $3,000
Therefore, the net rental income using the IRS method is $4,400, while using the Tax Court method it is $3,000.