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.
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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.
To calculate the net rental income using both the IRS Method and the Tax Court Method, we need to understand the differences between these two methods.
The IRS Method: According to the IRS, if a taxpayer uses a rental property for personal purposes and rents it for less than 15 days in a year, the rental income is not taxable, and no deductions for expenses are allowed.
The Tax Court Method: This method is used when a taxpayer uses a rental property for personal purposes and rents it for more than 14 days in a year. In this case, the expenses are allocated between personal and rental use based on the number of days the property was used for each purpose.
Using the information provided, Jeanette used the rental property for personal purposes for 20 days and rented it out for 80 days. Now let's calculate the net rental income using both methods:
1. IRS Method:
Since Jeanette rented the property for 80 days, which is more than 15 days, the rental income will be taxable.
Net rental income (IRS Method) = Rental Income - Deductible Expenses
Rental Income = $10,000
Deductible Expenses = Mortgage Interest ($2,500) + Property Tax ($1,500) + Insurance and Repairs ($1,000) + Depreciation ($2,000) = $7,000
Net rental income (IRS Method) = $10,000 - $7,000 = $3,000
2. Tax Court Method:
Since Jeanette used the property for personal purposes for 20 days, we need to allocate the expenses based on the ratio of rental use versus personal use.
Rental Expense = Total Expense x (Rental Days / Total Days) = $7,000 x (80 / 100) = $5,600
Personal Expense = Total Expense x (Personal Days / Total Days) = $7,000 x (20 / 100) = $1,400
Net rental income (Tax Court Method) = Rental Income - Deductible Rental Expenses
Net rental income (Tax Court Method) = $10,000 - $5,600 = $4,400
Therefore, the net rental income using the IRS Method is $3,000, and using the Tax Court Method is $4,400.