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 the IRS Method and the Tax Court Method, we need to follow specific formulas and rules provided by the Internal Revenue Service (IRS) and the Tax Court. Let's break down the process for each method:
1. IRS Method:
a. Calculate the percentage of rental use: Divide the number of days used for rental purposes by the total number of days the property was used (20/100).
b. Calculate the rental expenses: Multiply each expense (mortgage interest, property tax, insurance and repairs, depreciation) by the percentage of rental use calculated in step a.
- Mortgage Interest expense: $2,500 * (20/100) = $500
- Property Tax expense: $1,500 * (20/100) = $300
- Insurance and Repairs expense: $1,000 * (20/100) = $200
- Depreciation expense: $2,000 * (20/100) = $400
c. Calculate the net rental income: Subtract the total rental expenses calculated in step b from the rental income.
- Net Rental Income = Rental Income - Total Rental Expenses
= $10,000 - ($500 + $300 + $200 + $400)
= $10,000 - $1,400
= $8,600
2. Tax Court Method:
a. Calculate the rental expenses: Multiply each expense (mortgage interest, property tax, insurance and repairs, depreciation) by the ratio of rental days to total days (80/100).
- Mortgage Interest expense: $2,500 * (80/100) = $2,000
- Property Tax expense: $1,500 * (80/100) = $1,200
- Insurance and Repairs expense: $1,000 * (80/100) = $800
- Depreciation expense: $2,000 * (80/100) = $1,600
b. Calculate the net rental income: Subtract the total rental expenses calculated in step a from the rental income.
- Net Rental Income = Rental Income - Total Rental Expenses
= $10,000 - ($2,000 + $1,200 + $800 + $1,600)
= $10,000 - $5,600
= $4,400
Therefore, the net rental income using the IRS Method is $8,600, and using the Tax Court Method, it is $4,400.