During the 1984 Olympics, Frank and Irma rented their home in Hollywood, California and enjoyed a three-week vacation at their condo in Malibu, California. By 2000, they decided to retire to the Palm Springs area. They sold their Hollywood home and purchased a 4,000 square foot home in La Quinta, California as well as an apartment building in Palm Desert, California for $4,500,000 (i.e., land - $500,000 & Building - $4,000,000). They knew summers would be very warm in La Quinta, so they kept their condo in Malibu for personal use in July & August. They are in the 22% Federal Income Tax bracket.

Frank & Irma have the following sources of income before considering the apartment income. In the prior tax year, Frank & Irma claimed the standard deduction on their tax return and did not itemize:

Pensions $ 80,000

Dividend Income 30,000

Interest Income 15,000

Part 1

Frank & Irma can rent their personal residence for 16 days during the Stagecoach and Coachella Valley Music Festival. They can rent their home for $3,000/day. They want to maximize their Schedule A deductions (i.e., Mortgage Interest & Real Property taxes) and minimize any potential taxable income resulting from renting the property. They remember during the 1984 Olympics that they didnt have to report any income. They incurred $15,000 of interest expense and paid $6,000 of real estate taxes on the property during the year.

Required:

1. What advise would you give them regarding the renting of their personal residence for Stagecoach & the Coachella Valley Music Festival? Prepare calculations to support your advice.

State Tax Refund 8,000