Question 1

Taxpayers who use a vacation home for both personal and rental use generally must allocate expenses associated with the home to the personal use and the rental use.

Accepted Answer

According to the IRS, taxpayers must allocate expenses associated with a vacation home between personal and rental use based on the number of days the home is used for each purpose. This allocation determines the amount of rental income that can be offset by rental expenses, and any deductions for personal use of the home are limited.

Question 2

Generally, losses from rental activities are considered to be active losses.

Accepted Answer

Rental activities are generally considered passive.

Question 3

Compared to the Tax Court method of allocating expenses between rental use and personal use, the IRS method tends to allocate more expenses to personal use than does the Tax Court method.

Accepted Answer

The IRS method often allocates more expenses to rental use, as it typically allows for deductions based on the percentage of time the property is rented, whereas the Tax Court method may consider other factors that could result in a different allocation, potentially favoring personal use.

Question 4

The profit motive distinguishes "business" activities from "personal" activities.

Accepted Answer

The profit motive, or the desire to earn money, is a fundamental characteristic of business activities, which distinguish them from personal activities that are not necessarily driven by financial gain.

Question 5

Jennifer owns a home that she rents for 364 days and uses for personal purposes for one day. Jennifer is required to allocate expenses associated with the home between rental and personal use.

Accepted Answer

Jennifer is required to allocate expenses between rental and personal use based on the number of days each use occurs.

Question 6

To qualify under the passive activity rental real estate exception, the taxpayer must (1) own at least 15 percent of the property and (2) participate in the process of making management decisions.

Accepted Answer

Ownership must be at least 10 percent.

Question 7

When allocating expenses of a vacation home between personal use and rental use, the amount of depreciation expense allocated to the rental use is always the ratio of rental days over rental days plus personal use days.

Accepted Answer

This is correct. The depreciation expense allocated to rental use is based on the percentage of time the property is rented out compared to the total time it is used (rental days divided by rental days plus personal use days).

Question 8

A loss from a passive activity is fully deductible as long as the taxpayer has sufficient tax basis in the activity.

Accepted Answer

Three hurdles must be cleared to be currently deductible: tax basis, at-risk, and passive loss limits.

Question 9

Jorge owns a home that he rents for 360 days and uses for personal purposes for five days. Jorge is not required to allocate expenses associated with the home between rental and personal use.

Accepted Answer

When nonresidence property is used for even a day for personal purposes, the expenses must be allocated between the rental usage and the personal usage.

Question 10

Expenses of a vacation home allocated to rental use are deductible for AGI.

Accepted Answer

Expenses of a vacation home allocated to rental use can be deductible for AGI as long as the home is rented out for at least 15 days a year and the owner does not use it for personal use for more than 14 days or 10% of the total rental days, whichever is greater. The deductions are subject to certain limitations and restrictions, so it is important to consult with a tax professional for specific guidance.

Question 11

A tax loss from a rental home is generally a passive activity loss.

Accepted Answer

Rental property is typically considered a passive activity for tax purposes, meaning that losses from the property can generally only be used to offset passive activity income. Any excess losses may be carried forward to future years, subject to certain limitations.

Question 12

Rental or royalty expenses are deductible "for" AGI.

Accepted Answer

Rental or royalty expenses are considered "above-the-line" deductions, meaning they can be deducted from gross income to arrive at adjusted gross income (AGI), also known as deductions "for" AGI.

Question 13

All business expense deductions are claimed as "above the line" deductions.

Accepted Answer

Employee business expenses are itemized subject to a 2% of AGI floor.

Question 14

Taxpayers renting a home would generally report the rental income and expenses on Schedule
E.

Accepted Answer

This is correct. Schedule E is specifically designed for reporting rental income and expenses, including those related to renting a home.

Question 15

A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate.

Accepted Answer

A passive activity is defined as any activity in which the taxpayer does not materially participate, which may include a trade or business or rental activity. This means that the taxpayer does not have an active role in the operation or management of the activity.

Question 16

In certain circumstances, a taxpayer could rent her personal residence at a profit and not pay any tax on the income.

Accepted Answer

According to the IRS, if a taxpayer rents out her personal residence for fewer than 15 days during the year, she does not need to report the rental income on her tax return and is not required to pay tax on the income. This is commonly referred to as the "Masters Rule."

Question 17

All investment expenses are itemized deductions.

Accepted Answer

Rental/royalty deductions are "above the line" deductions.

Question 18

To be deductible, business expenses must be directly related to a business activity.

Accepted Answer

This is a basic requirement for a business expense to be deductible on the tax return. The expense must have a clear connection to the operation of the business and must be incurred for a business purpose. Personal or non-business expenses are generally not deductible.

Question 19

Passive losses that exceed passive income are deferred until the taxpayer generates passive income to offset these passive losses.

Accepted Answer

This is known as the passive activity loss (PAL) rule, which states that passive losses can only offset passive income. If the passive losses exceed the passive income, they are suspended and carried forward to future tax years until the taxpayer generates enough passive income to offset them.

Question 20

The phrase "ordinary and necessary" means that an expense must be appropriate in and helpful for generating a profit.

Accepted Answer

The IRS defines an ordinary and necessary expense as one that is commonly accepted in the taxpayer's trade or business and is helpful and appropriate for generating income or profit.

Quiz 6: Individual for Agi Deductions