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:
?
$$\begin{array} { l r }
\text { Rental income } & \$ 2,000 \
\text { Property taxes } & ( 250 ) \
\text { Mortgage interest } & ( 950 ) \
\text { Repairs and maintenance } & ( 200 ) \
\text { Utilities } & ( 300 ) \
\text { Depreciation } & ( 400 ) \
\text { Rental loss } & \$ ( 100 )
\end{array}$$
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:
?
$$\begin{array} { l r } 
\text { Rental income } & \$ 2,000 \
\text { Property taxes } & ( 250 ) \
\text { Mortgage interest } & ( 950 ) \
\text { Repairs and maintenance } & ( 200 ) \
\text { Utilities } & ( 300 ) \
\text { Depreciation } & ( 400 ) \
\text { Rental loss } & \$ ( 100 )
\end{array}$$
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

Statement II is correct because the IRS rules allow rental expenses to be deducted up to the amount of rental income, preventing a loss on what is considered a personal use property. Since Claire and Harry used the house for personal purposes more than 14 days or 10% of the total days rented (whichever is greater), it is classified as a personal use property. Therefore, they can only deduct expenses up to the amount of rental income received, which is $2,000, and cannot claim a loss.

Claire and Harry Own a House on Hilton Head Island