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:
?
$$\begin{array} { l r }
\text { Property taxes } & \$ 2,000 \
\text { Utilities } & 800 \
\text { Depreciation } & 4,200
\end{array}$$
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:
?
$$\begin{array} { l r } 
\text { Property taxes } & \$ 2,000 \
\text { Utilities } & 800 \
\text { Depreciation } & 4,200
\end{array}$$
What is James' income or loss from the rental property?

Quizplus · Accepted Answer

First, we need to calculate James' total expenses for the rental property: $8,000 + $2,000 + $2,000 = $12,000. 
Next, we need to allocate these expenses based on the number of days the property was rented and the number of days James lived in it personally. 
Expenses allocated to rental use = $12,000 x (30 days / 40 total days) = $9,000. 
Expenses allocated to personal use = $12,000 x (10 days / 40 total days) = $3,000. 
Now we can calculate James' net rental income: 
Rents received = $4,000 
Minus rental expenses = $9,000 
Equals net rental loss = -$5,000. 
Since James' income is below the IRS limits for active participation in rental activities, he can deduct the full rental loss of $5,000 against his other income, resulting in a total loss of $1,250 ($5,000 x 25% tax rate). Therefore, the correct choice is C, $1,250 loss.

James Rents His Vacation Home for 30 Days During the Year