Client Letter

Client Letter

10/03/2013

Dear Amy,

Thanks for requesting my advice concerning your tax treatment of the vacation cottage on the current year tax report. A portion of the expenses related to the cottage can be deducted from the gross income.

The tax treatment of how much of the expenses can be deducted depends on how many days the property rented and your level of personal use. Personal use includes vacation use by your relatives, even if you charge them at fair value, and use by nonrelatives if a fair value rent is not charged.

First of all, we should determine the attribute the cottage. Not only the 12 days used counted as personal use, also the 8 days used by your sister and 2 days used by your friend should be counted as personal use. 120 days rented by three families as well as 4 days rented by your cousin should be counted as rental use. Here is an important point should be highlighted. Amy spent two days repairing the cottage, ten hours per day and vacationing the rest of the days. According to §280(d)(2), the two days are not qualified as personal use, because you are not engaged in repair and maintenance on a substantially full time basis. The total personal use is 22 days and total rental use is 124 days. If the residence is rented for 15 days or more in a year and is used for personal purposes for more than the greater of (1) 14 days or (2) 10 percent of the total days rented, it is treated as a personal/rental use residence. Therefore, your cottage qualifies as a personal/rental use residence of 2013.

After determine the cottage qualified as a personal/rental property, we should examine how much expenses can be deducted. First, you must allocate your expenses between the rental days and the total days used. Then you must use the deductions allocated to the rental portion in the following order: (1) property taxes and mortgage interests, (2) utilities and maintenance, (3) depreciation. Because you do not “pass” the personal use test mentioned...