James rents his vacation home for 30 days during the year and lives in it personally for 10 days.He receives rents of $4,000 and incurs the following expenses before allocation:
Property taxes
$2,000
Utilities
800
Depreciation
4,200
What is James' income or loss from the rental property?

Question

Quizplus · Accepted Answer

To calculate James' income or loss from the rental property, we need to allocate the expenses between the days it was rented and the days it was used personally.

Expenses allocated to rental use:
Property taxes: $2,000 x (30/40) = $1,500
Utilities: $800 x (30/40) = $600
Depreciation: $4,200 x (30/365) = $345.21

Expenses allocated to personal use:
Property taxes: $2,000 x (10/40) = $500
Utilities: $800 x (10/40) = $200
Depreciation: $4,200 x (10/365) = $114.79

Total rental income: $4,000
Total rental expenses: $1,500 + $600 + $345.21 = $2,445.21
Rental income - rental expenses = $4,000 - $2,445.21 = $1,554.79

Since James has a net loss, we need to compare it to his at-risk amount. Assuming he has no other income or losses from rental or passive activities, his at-risk amount is the amount of money he has invested in the property, which is the cost of the property plus any capital improvements, reduced by any prior-year depreciation claimed.

We don't have any information about the cost of the property, capital improvements, or prior-year depreciation, so we can't determine James' at-risk amount. However, we can say that his deductible loss for the year is limited to his at-risk amount, and any excess loss can be carried forward to future years.

The correct answer is therefore C, $1,250 loss.

James Rents His Vacation Home for 30 Days During the Year