Claire and Harry own a house on Hilton Head Island.During the year,Claire and Harry rent the house for 30 days to friends from Texas for $2,000.Claire and Harry use the house a total of 60 days during the year.After making the appropriate allocation of expenses between personal and rental use,the following rental loss was determined:
How should Claire and Harry report the rental income and expenses for the forthcoming year?
I.Report the $100 loss for AGI.II.Only expenses up to the amount of $2,000 rental income may be deducted for the year.
III.Include the $2,000 in gross income,but no deductions are allowed.
IV.Nothing needs to be reported.

A)Only statement I is correct.
B)Only statement II is correct.
C)Statements II and III are correct.
D)Statements III and IV are correct.
E)Statements I and III are correct.

Question

Claire and Harry own a house on Hilton Head Island.During the year,Claire and Harry rent the house for 30 days to friends from Texas for $2,000.Claire and Harry use the house a total of 60 days during the year.After making the appropriate allocation of expenses between personal and rental use,the following rental loss was determined:  ​
How should Claire and Harry report the rental income and expenses for the forthcoming year?
I.Report the $100 loss for AGI.II.Only expenses up to the amount of $2,000 rental income may be deducted for the year.
III.Include the $2,000 in gross income,but no deductions are allowed.
IV.Nothing needs to be reported.
​
A)Only statement I is correct. 
B)Only statement II is correct. 
C)Statements II and III are correct. 
D)Statements III and IV are correct. 
E)Statements I and III are correct.

Quizplus · Accepted Answer

Claire and Harry can report the $100 loss for AGI because it is deductible against ordinary income. However, they can only deduct rental expenses up to the amount of their rental income, which is $2,000 in this case. Therefore, statement II is correct while statement III is not. Statement I is also correct, but it is not the best choice because it does not address the limitation on rental expense deductions. Statement IV is not correct as rental income and expenses must be reported on the tax return.

Claire and Harry Own a House on Hilton Head Island