Halle just acquired a vacation home. She plans on spending several months each year vacationing in the home and renting out the property for the rest of the year. She is projecting tax losses on the rental portion of the property for the year. She is not too concerned about the losses because she is confident, she will be able to use the losses to offset her income from other sources. Is her confidence misplaced? Explain.

First from the explanation in the problem, I think Halles residence would be considered a residence with significant rental use (renting for more than 15 days). Halles revenue from the rental will be included in gross income. Expenses to acquire tenants will be fully deductible as rental expenses. Home expenses (mortgage interest, property tax, etc.) will need to be split between personal and rental use, by determining the ratio of personal use days and rental days and then allocating accordingly. When rental income for the year exceeds rental expenses allocated, rental expenses may be deducted in full. When rental expense exceeds rental income, deductibility depends on the classification of the expense and the taxpayers situation. If the taxpayer takes the standard deduction, mortgage interest and property tax are considered tier 3 expenses. Rental activity is reported on Schedule E of IRS for 1040.

Tier 1	Expenses to acquire tenants and potentially mortgage interest and property tax
Tier 2	All expenses that are not tier 1 or 3
Tier 3	Depreciation expense

Rental activity is considered a passive activity for tax purposes and losses are generally not allowed to offset other types of income such as wages or investment income. However, if Halle is an active participant in the rental activity, she may be able to deduct up to $25,000 of rental loss against nonpassive income. This benefit is phased out as the taxpayers AGI exceeds $100,000 by fifty cents on the dollar. The entire deduction would be phased out at an AGI of $150,000. Halle needs to consider her whole tax situation before deciding to use her vacation home as a rental. It may be more beneficial to just have a second residence for personal use only.

PLEASE RESPOND TO THIS IN A DISCUSSION LIKE MANNER ON WHY YOU FOUND IT INFORMATIVE