Comprehensive Test No. 5

1. Rental income is any payment you receive for the use or occupation of property. Generally, you must include in your gross income all amounts you receive as rent. Which item(s) below, if received in connection with rental property, would be considered rental income?

2. True or False: I buy a rent house and it was "placed in service" on October 1, 2014. I advertise and incur other expenses in an attempt to rent it out in 2014, but to no avail. I will, no doubt, have a loss on the property for 2014 in that my expenses will clearly exceed my income of "0". However, I can show the loss on my 2014 income tax return even though I did not have a tenant during 2014.

3. Some friends of mine in California and I plan vacations at the same time during the year. I live in Florida and plan to go to Las Vegas. They plan to spend two weeks (14 days) in Florida during the same time that I plan to be in Las Vegas. Rather than paying the expense of a hotel, we agree that they will pay me $2,000 to use my home in Florida while they are there. This is the only arrangement of this or a similar nature that I will make during the tax year. How is the $2,000 of rental income treated for tax purposes during tax year 2014?

4. Johnny bought a house specifically to rent it out. The house was in need of some serious repairs when he purchased it. Instead of just repairing the house Johnny decided to improve the home. He added a bathroom, enlarged the kitchen, put new cabinets and countertops in the kitchen. What type of improvements did Johnny make to the house?

5. Sarah owns an old Victorian style house that she wants to use as rental property. The house has been vacant for several years after being  badly damaged by a fire. Sarah hired a contractor to fix the house. The kitchen was completely destroyed by the fire. The contractor completely demolished the kitchen and rebuilt it, put new hardwood floors throughout the entire house, replaced the old windows with new energy efficient windows, replaced the electrical wiring and plumbing throughout the house along with new siding. The finished product looks just like a brand new house. What type of improvement was done to the house?

6. Bartholomew owns an office building that is for rent. Edith wants to rent the building to open a daycare center for children. The building is large enough for a daycare center, but, does not meet some of the specifications necessary to be a daycare center. Bartholomew agrees to do the necessary work for the building to meet the specifications to be a daycare center if Edith agrees to sign a 5 year lease. Edith agrees to the 5 year lease. Bartholomew adds a kitchen with all of the approved appliances, remodels the restrooms, puts a fence around the property that meets certain specifications, as well as painting, changing door knobs and anything else necessary to meet the specifications for a daycare center. What type of improvement did Bartholomew make to the property?

7. Check the item(s) below that, if paid in connection with rental property, could be considered a rental expense.

8. You cannot deduct as rental expenses items to the extent they are for property used personally. If an expense item must be divided because it was paid for both personally used property and property used for rental, what are the tow most common methods of determining the division of residential rental property based on when the use is at the same time?

9. Which factor(s) listed below determine how much depreciation a taxpayer can deduct each year?

10. Choose the statement below that best defines "placed in service" as it relates to rental property.

11. Sections 162 (Trade or Business Expenses) & 263 (Capital Expenditures) of the Internal Revenue Code defines a repair as: "Work don to property to keep it in good order. The term includes current expenditures to restore property to a usable condition or to maintain its current value. An expenditure which increases the value of property or extends its useful life, or adapts it for a new purpose is a capital expenditure and must be capitalized and deducted or amortized over a period of time". With this definition and your under standing of the reading material choose the correct item(s) below that properly describe a repair in connection with rental property.

12. True or False: If you use only one-fifth (1/5) of your home for rental, and you rent that part out all year long, you will have to divide your expenses for repainting that particular area and limit them to one-fifth (1/5) of the cost, if the whole amount otherwise qualifies as a deduction.

13. True or False: I buy a rent house on September 1, 2014. The house is 100% ready and available for rent at the time of purchase. I advertise, but the property is not occupied by a tenant until February 1, 2015. I will, no doubt, have a loss on the property for 2014 in that my expenses will clearly exceed my income of "0". Since the house was "placed in service" on September 15, 2014, I can take a deduction for the loss of rental income on my 2014 income tax return.

14. Define "basis" by choosing the correct statement(s) below.

15. Define "depreciation" by choosing the correct statement(s) below.

16. You should keep accurate records and separate the cost of repairs and improvements. You will need to know the cost of repairs if you sell or depreciate your property.