Rex and Agnes Harrell purchased a beach house at Duck, North Carolina, in early 2020. Although they intended to use the beach house occasionally for recreational purposes, to help pay the mortgage payments, property taxes, and maintenance costs, they also planned to rent it through the realty agency that had handled the purchase. Rex is a surgeon, and Agnes is a counselor.

The beach house needed substantial repairs. Rather than hiring a contractor, Rex and Agnes decided they would make the repairs themselves. During both high school and college, Rex had worked summers in construction. In addition, he had taken an advanced course in woodworking and related subjects from a local community college several years ago.

During 2020, according to a log maintained by the Harrells, they occupied the beach house 38 days and rented it 49 days for $200 per day. The log also indicated that on 24 of the 38 days they occupied the beach house, one or both of them were engaged in work on the beach house. Their two teenage children were with them all of these days but did not help with the work being done. They incurred the following expenses for the beach house during 2020.

Expenses:	Amount
Mortgage Interest Payments	8,000
Property taxes	5,000
Repairs and maintenance costs - materials	3,500
FMV of labor costs incurred by Rex and Agnes to repair the house	2,000
Total:	18,500

In your memo, please answer the following questions and explain your answers with the support of treasury regulations and court cases.

1. Should Harrells beach house be treated as a rental property for tax purposes? State your reasoning clearly. (10 points) ---- Hint: The key issue is whether the allowable 14 days of personal use was exceeded. More specifically, whether the days they were working on the repair of the beach house will count toward personal use days. Search "Do days spent making improvements and repairs to a vacation home count as personal use days?" in RIA checkpoint to find your answer and cite relevant resources.
2. Given the answer provided in Q1., list the deductible expenses on the couples 2020 tax returns. Show the detail of the calculation and cite the relevant source to support your reasoning of deductibility for each item. (10 points) --- Hint: The key issue is how to properly allocate vacation home expenses between personal use and rental use. Search "How are expenses allocated between rental and personal use?" in RIA checkpoint to find your answer and cite relevant resources. Regarding the deductibility of FMV of their own labor costs, search "Can landlord deduct their own labor" in RIA checkpoint to find your answer and cite relevant resources.

Expenses:	Deductible Amount
Mortgage Interest Payments	?
Property taxes	?
Repairs and maintenance costs - materials	?
FMV of labor costs incurred by Rex and Agnes to repair the house	?
Total:	?

3. Calculate the total losses for the beach house and explain whether the couple can use the losses to offset their ordinary income from their regular jobs. Focus your discussions around passive activity losses limitation rule and state your assumptions clearly. (5 points) --- Hint: The key issue is whether rental losses are subjective to passive activity loss limitation rules and whether the taxpayer could qualify for any special allowances. Search "Are rental loss from vacation home subject to passive activity loss limitation rules?" in RIA checkpoint to find your answer and cite relevant resources.