Question 1

Mackensie owns a condominium in the Rocky Mountains.During the year,Mackensie uses the condo a total of 23 days.The condo is also rented to tourists for a total of 77 days and generates rental income of $10,900.Mackensie incurs the following expenses in the condo:

Using the court's method of allocating expenses,the amount of depreciation that Mackensie may take with respect to the rental property will be

Accepted Answer

C)
 11ea7e84_1f0f_4aa9_9a0a_cb57039fd56c_TB1260_00 The taxpayer's use exceeds 10% of the rental days so the property is limited by the vacation home rules. Note that the potential depreciation deduction is 77/100 × $11,000 = $8,470, but it is limited to the remaining income after taking all other deductions into account.

Question 2

Explain the rules for determining whether a home is considered a rental property or a vacation home and the tax consequences of this classification.

Accepted Answer

The answer of Explain the rules for determining whether a...

Question 3

Nikki is a single taxpayer who owns a vacation cottage on the lake.During the year,she rented it for $2,000 for 14 days,lived in it for 56 days,and left it vacant the remainder of the year.The year's expenses amounted to $5,000 interest expense,$800 property taxes,$1,500 utilities and maintenance,and $2,400 depreciation.Using the IRS method of allocating expenses,how much of the property-related expenses will be deductible for AGI?

Accepted Answer

A) When property is rented for 14 days or less, the property is treated as 100% personal. None of the expenses are deductible for AGI, but none of the rental income has to be reported.

Question 4

Lindsey Forbes,a detective who is single,operates a small pottery activity on a part-time basis.This year she reported the following income and expenses from this activity:
  
In addition,she had salary of $70,000 and itemized deductions,not including expenses listed above,of $6,800.
a. What is the amount of Lindsey's taxable income assuming the activity is classified as a hobby?
b. What is the amount of Lindsey's taxable income assuming the activity is classified as a trade or business?

Accepted Answer

The answer of Lindsey Forbes,a detective who is single,operates a...

Question 5

Kelsey enjoys making cupcakes as a hobby and occasionally sells them for parties.Kelsey receives $1,000 in revenues from cupcake sales this year and pays $1,300 for supplies.Kelsey takes the standard deduction each year.The net effect of the cupcake activity on Kelsey's taxable income is

Accepted Answer

B) Hobby expenses, limited to hobby revenue, are itemized deductions. Kelsey takes the standard deduction so her taxable income will include the full $1,000 revenue, but the hobby expenses will not be deducted at all.

Question 6

During the current year,Paul,a single taxpayer,reported the following items:
  
Compute Paul's taxable income for the year.

Accepted Answer

The answer of During the current year,Paul,a single taxpayer,reported the...

Question 7

Anita has decided to sell a parcel of land she had been holding for investment purposes.She purchased the land 5 years ago for $10,000.The current fair market value is $6,000.Anita's sister,Kathy,is interested in buying the land as is Anita's friend,Marcia.What tax issues should Anita consider when deciding to whom the land should be sold?

Accepted Answer

The answer of Anita has decided to sell a parcel...

Question 8

Abigail's hobby is sculpting.During the current year,Abigail sold three of her sculptures for a total of $3,200.Her related expenses include $1,500 in utilities,$1,200 in supplies and $900 in depreciation.Of the total expenses incurred,Abigail may deduct

Accepted Answer

C) Since the activity is classified as a hobby, hobby expenses are deductible to the extent of hobby income of $3,200. Further, they are deducted in a specific order-those that are otherwise allowable such as property taxes and interest; those related to the activity other than those that decrease basis; and those that reduce basis (depreciation).

Question 9

Ola owns a cottage at the beach.She and her family use the property for 30 days during the summer season and rent it to unrelated parties for 60 days.The rental receipts amount to $8,000.Total costs of operating the property are as follows:
  
In addition,potential depreciation expense is $9,000.
a.Is the cottage subject to the vacation home rental limitations of IRC Sec.280A?
b.How much of expenses can Ola deduct?

Accepted Answer

The answer of Ola owns a cottage at the beach.She...

Question 10

Diane,a successful accountant with an annual income of $150,000,also enjoys raising and training race horses,an activity in which she spends about 10 hours per week.Over the past five years her winnings from races have amounted to $20,000.She employs neighborhood children to feed the horses but has a professional trainer who works with the horses about 5 hours per week.Discuss some of the factors that might enter into the determination of whether or not this activity is a hobby or a trade/business.

Accepted Answer

The answer of Diane,a successful accountant with an annual income...

Question 11

Lloyd purchased 100 shares of Gold Corporation common stock for $20 per share for a total basis of $2,000.Several years later,on May 1 of the current year,Lloyd sells all 100 shares for $500.On May 29 of the current year,Lloyd purchases 30 shares of Gold Corporation common stock for $180.
a.How much loss is Lloyd allowed to recognize?
b.What is Lloyd's basis in the 30 new shares?

Accepted Answer

The answer of Lloyd purchased 100 shares of Gold Corporation...

Question 12

Kyle drives a race car in his spare time and on weekends.His records regarding this activity reflect the following information for the year.

What is the allowable deduction (before any AGI limitation) for depreciation assuming that this activity is not engaged in for profit and Kyle can itemize his deductions?

Accepted Answer

C)
 11ea7e84_1f0f_2397_9a0a_d3fcefea373e_TB1260_00

Question 13

The Super Bowl is played in Tasha's home town.Tasha moves out of her house for 10 days and stays with her parents.She rents her house for a very high fee to a crew from ESPN.With respect to this rental activity,Tasha will

Accepted Answer

D) The 10 days of rental qualifies under the exception for rental for a nominal number of rental days . She will not be required to report the income, but she will not take any deductions other than her normal mortgage interest and property taxes.

Question 14

For the years 2013 through 2017 (inclusive) Max,a surgeon,has been involved in bowling competitions.Only in 2016 and 2017 did his revenue exceed the expenses from the activity.Which statement is correct?

Accepted Answer

D) Under the presumption rule, if an activity results in a loss for 3 of 5 years, the burden of proof falls to the taxpayer to prove that the activity is a business rather than a hobby.

Question 15

Juanita knits blankets as a hobby and sells them.In the current year,she earns $5,000 from her blanket sales and incurs expenses of $600.Juanita does not itemize deductions.On her tax return,she should

Accepted Answer

C) A deduction for hobby expenses is only available to taxpayers itemizing deductions.

Question 16

For the years 2013 through 2017 (inclusive) Mary,a best-selling author,has been involved in operating an antique store.In 2013,2014 and 2015 her revenue exceeded the expenses from the activity.In 2016 and 2017,the antique store generated a loss.Which statement is correct?

Accepted Answer

C) Under the presumption rule, if an activity results in income in 3 of 5 years, the burden of proof falls to the IRS to prove that the activity is a hobby rather than a trade or business.

Question 17

Margaret,a single taxpayer,operates a small pottery activity in her spare time.During the current year,she reported the following income and expenses from this activity which is classified as a hobby:
  
In addition,she had salary of $75,000 and itemized deductions,not including those listed above,of $2,200.
What is the amount of her taxable income?

Accepted Answer

The answer of Margaret,a single taxpayer,operates a small pottery activity...

Question 18

Vanessa owns a houseboat on Lake Las Vegas that she personally uses for 25 days out of the year and rents for 280 days.For tax purposes,the houseboat is classified as

Accepted Answer

B) Since Vanessa's personal use of 25 days does not exceed 10% of the rental days (280 × .10 = 28 days), then the houseboat is not considered a residence under Section 280A. Neither is the use considered nominal since rental days exceed 14. Therefore, the houseboat is classified as rental property.

Question 19

During the current year,Jack personally uses his summer home for 25 days.He also rented his summer home to a group of vacationers for 12 days for $600 per day.How much income does Jack report from the rental of his summer home?

Accepted Answer

The answer of During the current year,Jack personally uses his...

Question 20

Abby owns a condominium in the Great Smokey Mountains.During the year,Abby uses the condo a total of 21 days.The condo is also rented to tourists for a total of 79 days and generates rental income of $12,500.Abby incurs the following expenses:

Using the IRS method of allocating expenses,the amount of depreciation that Abby may take with respect to the rental property will be

Accepted Answer

A)
 11ea7e84_1f0f_71bb_9a0a_1752864d2a59_TB1260_00 The taxpayer's use exceeds 10% of the rental days so the property is limited by the vacation home rules.

Quiz 6: Deductions and Losses