Ramone is a tax attorney and he owns an office building that he rents for $8,600/month.
He is responsible for paying all taxes and expenses relating to the building’s operation and maintenance.
Is Ramone engaged in the trade or business of renting real estate?
 
No
 
Explanation
No, the office building would be treated as rental property and not a trade or business.
The general rule is that Ramone must materially participate in the rental activity and provide substantial services to the rental property.
Additionally, Ramone must be considered a real estate professional if the activity is to be treated as a trade or business.
   
Mabel, Loretta, and Margaret are equal partners in a local restaurant. The restaurant reports the following items for the current year:
 

Revenue	$	610,000
Business expenses		315,000
Investment expenses		174,000
Short-term capital gains		184,000
Short-term capital losses		(244,700	)

Each partner receives a Schedule K-1 with one-third of the preceding items reported to her.

How must each individual report these results on her Form 1040?
(Do not round any division. Round your final answer to the nearest whole dollar value.
Negative amounts should be indicated by a minus sign.)
 
Schedule A
 

 
Explanation

Revenues	$	610,000
Expenses		315,000
Ordinary income	$	295,000
	×	1/3
Page 2 of schedule E	$	98,333

 

Investment expense	$	174,000
	×	1/3
Schedule A	$	58,000
(limited to investment income)

 

Net short-term capital loss ($184,000 – $244,700)	$	(60,700	)
	×	1/3
Schedule D	$	(20,233	)

The loss is netted against other short-term and long-term capital gains.
   
Janet owns a home at the lake. She incurs the following expenses:
 

Mortgage interest	$	1,660
Property taxes		980
Insurance		1,770
Utilities		2,070
Repairs		390
Depreciation		4,360

What is the proper treatment of the rental income and expenses in each of the following cases?
Use the Tax Court allocation method, if applicable.
(Round your intermediate computations to 5 decimal places and final answers to nearest whole dollar value).
 

Case		Rental Income			Days Rented		Personal Use Days
A		$	9,900		45		10
B			12,900		55		25
C			6,900		10		30
D			22,900		365		0

 

 
Explanation
Income = $9,900
Mortgage interest = (45/365):($205)
Property taxes = (45/365):($121)
Insurance = (45/55):($1,448)
Utilities = (45/55):($1,694)
Repairs = (45/55):($319)
Depreciation = (45/55):($3,567)
Rental Income = $2,546
For less than 15 days rental, there is no income or rental expense reported. Interest and taxes are deducted on Schedule A.
   
Randolph and Tammy own a second home. They spent 45 days there and rented it for 88 days at $166 per day during the year.
The total costs relating to the home include the following:
(Round your intermediate computations to 5 decimal places and final answers to nearest whole dollar value).
 

Mortgage interest	$	4,820
Property taxes		1,360
Insurance		2,040
Utilities		2,540
Repairs		1,580
Depreciation		6,820

 
What is the tax treatment of these items relating to second home under Tax Court allocation method?
What is the tax treatment of these items relating to second home under IRS allocation method?
Which of the methods is preferred?
 
Required a
What is the tax treatment of these items relating to second home under Tax Court allocation method?
 

 
Required b
What is the tax treatment of these items relating to second home under IRS allocation method?
 

 
Required c
Which of the methods is preferred?
 

 
Explanation
a.

	Tax Court – Schedule E					Personal
Income			$	14,608
Mortgage interest	(88/365) × $4,820 = $1,162			(1,162	)		$	3,658		To Schedule A
Property taxes	(88/365) × $1,360 = $328			(328	)			1,032		To Schedule A
Insurance	(88/133) × $2,040 = $1,350			(1,350	)			690		Non-deductible
Utilities	(88/133) × $2,540 = $1,681			(1,681	)			859		Non-deductible
Repairs	(88/133) × $1,580 = $1,045			(1,045	)			535		Non-deductible
Depreciation	(88/133) × $6,820 = $4,512			(4,512	)			2,308		Non-deductible
Net rental income			$	4,530

 
b.

	IRS Method – Schedule E						Personal
Income			$	14,608
Mortgage interest	(88/133) × $4,820 = $3,189			(3,189	)		$	1,631		To schedule A
Property taxes	(88/133) × $1,360 = $900			(900	)			460		To schedule A
Insurance	(88/133) × $2,040 = $1,350			(1,350	)			690		Non-deductible
Utilities	(88/133) × $2,540 = $1,681			(1,681	)			859		Non-deductible
Repairs	(88/133) × $1,580 = $1,045			(1,045	)			535		Non-deductible
Depreciation	(88/133) × $6,820 = $4,512			(4,512	)			2,308		Non-deductible
Net rental income			$	1,931

 
c.
The IRS method produces the least amount of net rental income for Randolph and Tammy
and would be the preferable allocation of expenses for them.
Net rental income reported using the Tax Court method is $2,599 greater than they are under
the IRS method. Itemized deductions however,
are $2,599 greater under the Tax Court method.
   
Nicole and Mohammad (married taxpayers filing jointly) are equal owners in an S corporation.
The company reported sales revenue of $410,000 and expenses of $287,000.
The corporation also earned $21,000 in taxable interest and dividend income and had $13,650 investment interest expense.

How are these amounts reported for tax purposes in the following schedules?
 

Explanation

Revenue	$	410,000
Expenses		287,000
Ordinary income, reported on schedule E, page 2	$	123,000

Interest and dividends of $21,000 are reported as interest and dividends separately on Schedule B, Form 1040.
The investment interest expense is an itemized deduction on Schedule A.