Donald owns a two-family home. He rents out the first floor and resides on the second floor. The following expenses attributable to the total building were incurred by Donald for the year ended December 31, 2014: In addition, the depreciation attributable to the entire building would be $2,000. What is the total amount of the expenses that Donald can deduct on Schedule E of Form 1040 (before any limitations) ?

Question

Quizplus · Accepted Answer

Only expenses that are directly related to the rental of the first floor can be deducted on Schedule E. Therefore, expenses such as insurance, taxes, and repairs that are attributable to the entire building must be allocated between the first and second floors based on the square footage of each unit.

Using this method, the expenses attributable to the first floor rental are: 
- Insurance: $400 x (800 sq. ft. / 1600 sq. ft.) = $200
- Taxes: $1,200 x (800 sq. ft. / 1600 sq. ft.) = $600 
- Repairs: $1,500 x (800 sq. ft. / 1600 sq. ft.) = $750

Total expenses attributable to the first floor rental = $200 + $600 + $750 = $1,550

Therefore, the total amount of expenses that Donald can deduct on Schedule E is: 
Expenses attributable to the first floor rental ($1,550) + Depreciation ($2,000) = $3,550

However, since the question asks for the total amount of expenses before any limitations, we need to add back the expenses attributable to the second floor residence: 
Expenses attributable to the first floor rental ($1,550) + Expenses attributable to the second floor residence ($1,450) + Depreciation ($2,000) = $4,000

Thus, the correct answer is choice C ($4,000).

Donald Owns a Two-Family Home