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:

What is James' income or loss from the rental property?

Question

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:
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What is James' income or loss from the rental property?

Quizplus · Accepted Answer

To calculate James' income or loss from the rental property, we need to first determine his total expenses and then subtract his rental income.

Total expenses before allocation:

- Mortgage interest: $2,500
- Property taxes: $900
- Insurance: $400
- Repairs: $250
- Utilities: $300
- Total: $4,350

Since James rented the property for 30 days and used it personally for 10 days, we can allocate his expenses based on the amount of time the property was rented out versus used personally:

Expenses allocated to rental use:

- Mortgage interest: $2,500 x (30/40) = $1,875
- Property taxes: $900 x (30/40) = $675
- Insurance: $400 x (30/40) = $300
- Repairs: $250 x (30/40) = $187.50
- Utilities: $300 x (30/40) = $225
- Total: $3,262.50

Expenses allocated to personal use:

- Mortgage interest: $2,500 x (10/40) = $625
- Property taxes: $900 x (10/40) = $225
- Insurance: $400 x (10/40) = $100
- Repairs: $250 x (10/40) = $62.50
- Utilities: $300 x (10/40) = $75
- Total: $1,087.50

Now we can calculate James' income or loss:

Rental income: $4,000

Expenses allocated to rental use: $3,262.50

Net rental income: $737.50

Since James' expenses allocated to rental use exceed his rental income, he incurs a loss. Therefore, the answer is choice C: $1,250 loss.

James Rents His Vacation Home for 30 Days During the Year