Question 2

Donna Beall, a caterer from Lewisburg, VA, is considering buying a vacation condominium apartment for $265,000 in Park City, Utah. Donna hopes to rent the condo to others to keep her costs down. Respond to the following questions to help Donna with her decisions.

(a) Donna's $210,000 30-year mortgage loan costs $16,766 annually (see table 9.2). She figures that $1020 of her $1397 monthly mortgage payment will go for interest. On top of that are monthly expenses for property taxes ($140), home-owner's insurance ($80), and homeowner's associatin fee ($100). These amounts total $1717 a month. Which of these costs is tax deductable?


(b) If Donna is in the 30 percent marginal tax bracket, how much less in taxes will she pay if she buys this condo?


(c) Given that she would like to personally use the condo for vacations amounting to 10 to 12 days per year, how many days will Donna have to rent it out before she would become eligible to deduct rental losses from her taxes?


(d) Because Park City is mostly a winter ski resort and few condo renters can be found in the off season, Donna is concerned about qualifying to deduct rental losses. Assuming she could rent the condo for $400 per day, describe the IRS-approved rental alternative she could use to generate income. Calculate the maximum amount of money Donna could obtain using that plan.


(e) Figure Donna's annual net out-of-pocket cost to buy the condominium and rent it out minimally for tax-free income. List the costs and total on an annualized basis. Next, deduct the savings on income taxes as well as the presumed rental for the number of IRS-allowed days..


(f) Using the figure derived in part (e), what would Donna's out-of-pocket cost per day be to use the condo herself if she stayed there 10 days each year? Fifteen days each year?


   

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