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 home and purchase 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. Excel would be an excellent format to answer all three parts of this Project. No Memorandum to File or Client Letters are required for this project.

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.

Frank & Irma have the following sources of income before considering the apartment income:

Pensions $ 80,000

Dividend Income 30,000

Interest Income 15,000

Required:

1. Compute the potential tax consequences for renting out their personal residence for 16 days next spring (i.e., Schedule A items and Schedule E items).
2. 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.

Part 2

Frank & Irma have a condo on the beach in Malibu which they use during July & August (i.e., 60 days) and rent out for 90 days at its fair rental value. Round to the nearest percentage (i.e., 29.65% = 30%). A summary of the rental activity is listed below:

Income (i.e., 90 days @ $400/night) $ 24,000

Expenses:

HOA Dues (monthly) $ 2,500

Insurance (monthly) 2,000

Interest Expense (monthly) 10,000

R & M 1,500

Real Estate Taxes (annual) 4,000

Utilities 3,000

Depreciation (annual) 8,500

Total <31,500>

Net Income $ <7,500>

Required:

1. Calculate the Schedule E net rental income and the Schedule A - Itemized Deductions using the IRS Method.
2. Calculate the Schedule E net rental income and the Schedule A - Itemized Deductions using the Court method.
3. Which method should Frank and Irma use to report the rental income and itemized deductions on their Federal Income Tax return? Why?

Partial List of Resources:

IRC 280A

IRC 469

Reg. 1.469-4

Temp. Reg. 1,469-57

Bolton (694 F 2d 556, 51 AFTR 2d 83-305 (9^th 1982))