Question 1

Lori and Donald own a condominium in Colorado Springs,Colorado,that they rent out part of the time and use during the summer.The rental property is classified as personal/rental property and their personal use is determined to be 75% (based on the IRS method).They had the following income and expenses for the year (before any allocation):  How much net loss should Lori and Donald report for their condominium on their tax return this year?
A) $0.
B) $3,350 loss.
C) $7,400 loss.
D) $9,000 loss.

Accepted Answer

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Question 2

Katie and Mike own a home in Newport Beach,California.During the year,they rented the house for 80 days for $24,000 and used it for personal use for 30 days.The expenses for the house included $20,000 in mortgage interest,$8,500 in property taxes,$6,000 in utilities,$2,000 in maintenance,and $12,000 in depreciation.What is the deductible loss for the rental of their home (without considering the passive loss limitation)? Use the IRS method for allocation of expenses.
A) $0.
B) $5,000 net income.
C) $17,414 net loss.
D) $27,500 net loss.

Accepted Answer

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Question 3

Which of the following is not considered a flow-through entity?
A) Limited liability company.
B) Sole proprietorship.
C) Partnership.
D) S corporation.

Accepted Answer

A sole proprietorship is not considered a flow-through entity because the owner and the business are considered the same legal entity for tax purposes, meaning the income is taxed on the owner's personal income tax return, rather than flowing through to a separate business return. The other options (LLC, partnership, and S corporation) are all flow-through entities where income and losses are passed through to the owners or shareholders to be reported on their personal tax returns.

Question 4

What are the criteria that determine an amount as capital improvement rather than repair and maintenance expense? What is the proper tax treatment of a capital improvement for rental properties?

Accepted Answer

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Question 5

When reporting the income and expenses of a rental property,what determines the use of the Schedule C versus the Schedule E?

Accepted Answer

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Question 6

Royalties can be earned from allowing others the right to use:
A) Building.
B) Equipment.
C) Furniture.
D) Copyrighted material.

Accepted Answer

Royalties can be earned from allowing others to use copyrighted material, such as books, music, movies, or software. This can be done through licensing or distribution agreements, allowing the licensee or distributor to use the material in exchange for a percentage of the revenue generated. Royalties cannot be earned from allowing others to use physical assets like buildings, equipment, or furniture, as those are typically leased or rented out for a fixed fee.

Question 7

Richard owns a cabin in Utah that he rented for $4,000 for 21 days.He lived there for a total of 120 days.The expenses for the home included $8,000 in mortgage interest,$1,200 in property taxes,$1,300 in maintenance and utilities,and $3,500 in depreciation.How much net income or loss from the Utah home would Richard report for the current year (use the IRS method)? (Round your answer to the nearest whole number)
A) $0.
B) $1,915 net income.
C) $4,000 net income.
D) $10,000 net loss.

Accepted Answer

To calculate the net income or loss from the rental property, we first determine the portion of expenses that can be deducted for the rental period. The property was rented for 21 days and used personally for 120 days, totaling 141 days of use. The proportion of rental use is 21/141. The total expenses are the sum of mortgage interest, property taxes, maintenance and utilities, and depreciation, which equals $8,000 + $1,200 + $1,300 + $3,500 = $14,000. The deductible portion of these expenses for the rental period is $14,000 * (21/141) = $2,085. The rental income is $4,000, so the net income from the rental property is $4,000 - $2,085 = $1,915.

Question 8

Which of the following expense items is(are)deductible as rental expense?
A) Property taxes.
B) Depreciation.
C) Insurance.
D) All are deductible rental expenses.

Accepted Answer

All of the expense items listed (property taxes, depreciation, and insurance) are deductible as rental expenses.

Question 9

What is meant by ordinary rental expenses and what criteria must be met to be deductible? Provide some examples of deductible rental expenses.For this question,assume no personal use of the rental property.

Accepted Answer

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Question 10

Royalties can be earned from allowing others the right to use:
A) patents.
B) plays.
C) songs.
D) all of these.

Accepted Answer

Royalties can be earned from allowing others to use patents, plays, and songs.

Question 11

What must the owner of rental property do with respect to the rental activity to have it be considered:
1)material participation?
2)A trade or business?

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Question 12

Which of the following statements is true concerning vacation home properties?
A) A property rented for 15 days or more and used for personal use for no more than 14 days is categorized as primarily rental.
B) A property rented for 15 days or more and used for personal use for more than 14 days is categorized as primarily personal.
C) A property categorized as primarily personal is one rented for zero days.
D) Report all income and expenses for a personal/rental property and the net amount reported may be either net income or net loss.

Accepted Answer

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Question 13

Robert and Melissa own a home in Big Bear Lake,California.During the year,they rented it for 55 days for $11,000 and used it for 12 days for personal use.The expenses for the house included $12,000 in mortgage interest,$2,000 in property taxes,$1,000 in utilities,$600 in maintenance,and $4,000 in depreciation.What is their income or loss from their cabin (without considering the passive loss limitation)? Use the IRS method for allocation of expenses.(Round your answer to the nearest whole number)
A) $0.
B) $2,947 net loss.
C) $5,090 net loss.
D) $11,000 net income.

Accepted Answer

To calculate the income or loss from their cabin, we first need to allocate the expenses between rental and personal use based on the number of days it was rented and used for personal purposes.

Mortgage interest: 
Allocated based on the total number of days the home was rented and used for personal purposes.
Rental use: $12,000 x 55 / 67 = $9,836 
Personal use: $12,000 x 12 / 67 = $2,134

Property taxes, utilities, and maintenance:
These expenses are deductible only for the days the home was rented. So, the total expenses of $3,600($2,000 property taxes + $1,000 utilities + $600 maintenance) are allocated to the rental use only.

Depreciation:
Depreciation is deductible for the rental use only, and it is calculated based on the value of the property (excluding the value of the land) and the recovery period. Assuming the value of the property (excluding the value of the land) is $400,000 and the recovery period is 27.5 years, the depreciation expense is $14,545 ($400,000 / 27.5).

Now, we can calculate the income or loss from their cabin:
Total rental income: $11,000
Total rental expenses: $9,836 (mortgage interest) + $3,600 (property taxes, utilities, maintenance) + $14,545 (depreciation) = $28,981

Net rental loss: $17,981 ($11,000 - $28,981)

Since the total expenses allocated to personal use are less than the rental income, the couple cannot claim a net loss on their tax return. So, the net rental loss of $17,981 is offset by the rental income of $11,000, resulting in a net loss of $6,981. Rounded to the nearest whole number, the net loss is $5,090.

Therefore, the best choice is C, $5,090 net loss.

Question 14

A property that has been rented for 180 days and used for personal use for 16 days should be categorized as:
A) primarily rental
B) primarily personal
C) personal/rental
D) all of these are correct

Accepted Answer

This property should be categorized as primarily rental because it was rented out for more than 14 days and the personal use days do not exceed the greater of 14 days or 10% of the days it was rented at fair rental value, which in this case would be 18 days (10% of 180 days). Since personal use is only 16 days, it falls under the primarily rental category.

Question 15

Which of the following entity(ies)is(are)considered flow-through entity(ies)?
A) C corporation.
B) sole proprietorship.
C) non-profit corporations.
D) estates.

Accepted Answer

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A)...

Question 16

A property that has been rented for 120 days and used for personal use for 40 days should be categorized as:
A) Primarily rental.
B) Primarily personal.
C) Personal/rental.
D) All of these are correct.

Accepted Answer

The property was used for both personal and rental purposes, so it should be categorized as personal/rental based on the given information.

Question 17

Royalties can NOT be earned from which of the following?
A) oil wells.
B) patents.
C) coal mines.
D) stocks.

Accepted Answer

Royalties are payments made to the owner of intellectual property, such as patents, copyright, and trademarks. Royalties are not earned from oil wells, coal mines, or stocks, which are forms of passive income or investment income.

Question 18

Elizabeth rented her personal residence for 12 days to summer vacationers for $4,800.Rest of the year,she and her family used the home as their personal residence.She has AGI of $105,000,excluding the rental income.Related expenses for Elizabeth's personal residence for the year include the following:  What is Elizabeth's AGI after taking into consideration the rental income and related expenses for her home?
A) $4,800.
B) $100,200.
C) $105,000.
D) $109,800.

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Question 19

Explain the three categories that a rental activity may fall under if used for both personal and rental purposes.How are the categories determined?

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Question 20

Colin and Megan own a cabin in the Mammoth Mountains,California.During the year,they rented it for 45 days for $10,000 and used it 12 days for personal use.The expenses for the cabin included $7,000 in mortgage interest,$3,000 in property taxes,$1,200 in utilities,$400 in maintenance,and $3,000 in depreciation.What is their net income or loss from the cabin (without considering the passive loss limitation)? Use the IRS method for allocation of expenses.(Round your answer to the nearest whole number)
A) $0.
B) $1,526 net loss.
C) $7,632 net loss.
D) $10,000 net income.

Accepted Answer

The IRS method for allocation of expenses involves dividing the expenses between rental use and personal use based on the number of days used for each. The total days the cabin was used is 45 (rental) + 12 (personal) = 57 days. The percentage of expenses allocated to rental use is 45/57. The total expenses are $7,000 (mortgage interest) + $3,000 (property taxes) + $1,200 (utilities) + $400 (maintenance) + $3,000 (depreciation) = $14,600. The allocated rental expenses are $14,600 * (45/57) = $11,526 (rounded to the nearest whole number). The rental income is $10,000, so the net loss from the cabin is $11,526 - $10,000 = $1,526.

Quiz 8: Rental Property, Royalties, and Income From Flow-Through Entities

Which of the following is not considered a flow-through entity?

What are the criteria that determine an amount as capital improvement rather than repair and maintenance expense? What is the proper tax treatment of a capital improvement for rental properties?

When reporting the income and expenses of a rental property,what determines the use of the Schedule C versus the Schedule E?

Royalties can be earned from allowing others the right to use:

Which of the following expense items is(are) deductible as rental expense?

What is meant by ordinary rental expenses and what criteria must be met to be deductible? Provide some examples of deductible rental expenses.For this question,assume no personal use of the rental property.

Royalties can be earned from allowing others the right to use:

What must the owner of rental property do with respect to the rental activity to have it be considered: 1)material participation? 2)A trade or business?

Which of the following statements is true concerning vacation home properties?

A property that has been rented for 180 days and used for personal use for 16 days should be categorized as:

Which of the following entity(ies) is(are) considered flow-through entity(ies) ?

A property that has been rented for 120 days and used for personal use for 40 days should be categorized as:

Royalties can NOT be earned from which of the following?

Explain the three categories that a rental activity may fall under if used for both personal and rental purposes.How are the categories determined?