Sol and Moira own a second home in Colorado. They have always used it personally for their family, but are considering renting it out to help with their expenses. They will use the house for 10 days per year. Their adjusted gross income is $100,000 and they are in the 22% tax bracket. They have always been able to itemize their deductions vs. using the standard deduction due to their mortgage interest, taxes and charitable contributions. The mortgage payment on the second home (interest and principal) totals $12,000/year.They will be actively involved in decision making in regards to the house.

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Sol and Moira own a second home in Colorado. They have always used it personally for their family, but are considering renting it out to help with their expenses. They will use the house for 10 days per year. Their adjusted gross income is $100,000 and they are in the 22% tax bracket. They have always been able to itemize their deductions vs. using the standard deduction due to their mortgage interest, taxes and charitable contributions. The mortgage payment on the second home (interest and principal) totals $12,000/year. They will be actively involved in decision making in regards to the house. Do not use dollar signs in your answer, but do use appropriate commas, ie. 2,000. If answer is a negative number, use a minus sign to indicate, ie. -200 Their estimated annual income and expenses for the house are as follows: a. Calculate the annual net income/loss on the rental house ONLY without regard to limitations. Do NOT add their AGI to this number. (From the rental income, subtract the expenses, including depreciation -ignore personal portion of expenses for now). 1 point b. Will they be allowed to deduct any losses on their personal return? Explain why or why not. 1 point c. Calculate the tax effect of any losses in their current tax bracket. (Net Income or net loss on the house X their tax rate) 1 point d. What expenses are deductible as itemized deductions even if they choose NOT to rent it out? 1 point e. Calculate their annual net CASH flow from the property...(From the income (including tax savings from question c), deduct the CASH expenses - include the total mortgage payment, but do not include any expenses that don't use cash). 1 point f. Discuss the tax effects of converting this property to rental use, ie will the rental of the property help to cover the mortgage? What advice would you give the client if asked about the conversion. 1 point