Hamid owns and lives in a duplex. He rents the other unit to an unrelated married couple for $850 per month. During the current year, he incurs the following expenses related to the duplex:
Mortgage interest $ 7,500
Property taxes 1,100
Utilities 1,450
Repairs
Paint exterior of duplex $2,200
Fix plumbing in rental unit 320
Shampoo carpet in both units 290
Fix dishwasher in Hamid’s unit 120 2,930
Homeowner’s association fee 480
Insurance 800
Special property tax assessment to pave sidewalks 3,100
Depreciation (both units) 4,200
How should Hamid treat the expenditures related to the duplex? Explain.
Because the duplex is used for both a business purpose and a personal purpose, the costs must be allocated between the two units. Assuming that the two units are of equal size, 1/2 of each of the common costs are allocated to each unit. The repair to the dishwasher is not deductible because it involved Hamid’s unit. The amounts expended for personal purposes are generally not deductible. However, Hamid can deduct the personal portion of the mortgage interest and property taxes as an itemized deduction. Painting the exterior of the duplex is a maintenance expense because it does not extend the useful life of the duplex. As with the other joint expenses. only the portion attributable to the duplex is deductible. The special property tax assessment is not a deductible tax and must be added to the basis of the land.
Rent income ($850 x 12) $ 10,200
Deductions for adjusted gross income:
Mortgage interest ($7,500 x 1/2) $ 3,750
Property taxes ($1,100 x 1/2) 550
Utilities ($1,450 x 1/2) 725
Shampoo carpeting ($290 x 1/2) 145
Repair plumbing 320
Homeowner’s association fee ($480 x 1/2) 240
Insurance ($800 x 1/2) 400
Painting exterior ($2,200 x 1/2) 1,100
Depreciation ($4,200 x 1/2) 2,100 (9,330)
Net rental income $ 870
Itemized Deductions:
Mortgage interest $ 3,750
Property tax 550
