Question

Bob and April own a house at the beach. The house was rented to unrelated parties for eight weeks during the year. April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows:
Gross rental income $4,000
Less: Mortgage interest and property taxes $3,500
Other allocated expenses 2,000 (5,500)
Net rental loss ($1,500)
1. What is the correct treatment of the rental income and expenses on Bob and April’s joint income tax return for the current year assuming the IRS approach is used if applicable?
A. A $1,500 loss should be reported.
B. Since the house was used less than 50% personally by Bob and April, all expenses allocated to personal use may be deducted.
C. Since the house was used more than 10 days personally by Bob and April, the rental expenses (other than mortgage interest and property taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to the rental use.
D. Only the mortgage interest and property taxes should be deducted.
2. Olaf was injured in an automobile accident and received $25,000 for his physical injury, $50,000 for his loss of income, and $10,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is:
a. $60,000
b. $10,000
c. $50,000
d. $85,000

Answer 1

Answer: The answer is provided below

Explanation:

Gross rental income = 4,000

Less: mortgage interest = (3500)

Less: Allocated Expense = (2000)

= 4000 - 5500

Net loss = (1500)

Since the house has been used for more than 10 days by April and Bob, the rental expense will be limited to the gross rental income that are in excess of deductions for the interest and taxes that are allocated to the rental use.

Therefore, option C is correct

2. Amount of only 10000 should be included in gross total income as the punitive damage recived.

Therefore, option B is correct.