Amy owns a vacation cottage in Maine. She predicts that the time during which the cottage will be used in the current year is as follows:
By Amy, solely for vacation and vacationing the rest of the day …………… 12 days
By Amy, making repairs ten hours per day …………………………………. 2 days
By her sister, who paid fair rental value …………………………………….. 8 days
By her cousin, who paid fair rental value …………………………………... 4 days
By her friend, who paid a token amount of rent
fair rental value for 40 days each …………………………........................... 2 days
By three families from the Northeast, who paid …………........................... 120 days
Not used …………........................................................................................ 217 days
Calculate the ratio for allocating the following expenses to the rental income expected to be received from the cottage: interest, taxes, repairs, insurance, and depreciation. The ratio will be used to determine the amount of expenses that are deductible and, thus, Amy’s taxable income for the year.
For the tax manager to whom you report, prepare work papers in which you discuss the calculation method. Also, draft a memo to the file dealing with the results of your research.