CONCEPTS IN
FEDERAL TAXATION
CHAPTER 7:
LOSSES—DEDUCTIONS
AND LIMITATIONS
October 19,
2012
ADMINISTRATIVE
 Attendance
Not required
Factor for final grade
Can help, won’t hurt
 Midterm 1
Pass out exams today
Professor has kept some exams
 Midterm 2
Unique questions
 Research project
HOMEWORK PROBLEMS
1 . HW Problems
Assignment #8
Chapter 7
P#44, 49, 52, 66, 69
2. Midterm 1 Overview
LOSSES
Annual (Activity) Losses
 Result when an entity’s deductions for the period exceed its
income
Transaction Losses
 Result from the disposition of an asset
#44
Claudio owns a passive activity that has a basis of $ 28,000 and
a fair market value of $ 38,000. The activity has suspended
losses of $16,000. To reduce their estate, every year Claudio
and his wife give their son Anthony and his wife a gift of
approximately $40,000. During the year, Anthony sells stock
that results in a $10,000 short-term capital loss. A friend of
Claudio’s suggests that he give his passive activity to Anthony.
The friend says that this will allow Claudio to avoid tax on the
$10,000 capital gain and let his son of fset his
short-term capital loss with the $ 10,000 ($38,000 - $28,000)
gain from the sale of the passive activity. In addition, Claudio
can use the suspended loss from the passive activity to of fset
his other ordinary income. Write a letter to Claudio explaining
the tax consequences of making the passive activity a gift to
his son.
#44
 Related party sales
Losses on sales of property to a related part is disallowed as a
deduction
If property is later sold to an unrelated party at a gain, the gain
realized on the sale may be reduced by the amount of lost previously
disallowed
 Disposition by gift
Carryover basis
#44
 Not accurate!
 If Claudio gifts the passive activity to his son, Anthony’s basis
in the passive activity is $ 44,000
Claudio’s $28,000 basis + $16,000 suspended losses
 Although Anthony’s basis is increased by the $ 16,000
suspended loss, neither Claudio nor Anthony receives a
deduction for the suspended loss
This treatment prevents Anthony from using the suspended loss
deduction against other passive income
 if Anthony sells the passive activity in an arm’s length
transaction for $ 38,000 (fair value), he will not recognize a
$10,000 gain ($38,000 - $28,000), but rather a $6,000
($38,000 - $44,000) long-term capital loss
#49
Stella owns a taxicab company. During the year, two of her
cabs are involved in accidents. One is totally destroyed; the
other is heavily damaged. Stella is able to replace the
destroyed cab with an identical model for $ 5,500. Her adjusted
basis in the destroyed cab is $ 3,750, and the insurance
company pays her $2,800. The adjusted basis of the damaged
cab is $3,800. The insurance adjuster estimates that the
damaged cab is worth $ 3,600. Although a comparable cab sells
for $7,800, the insurance company gives Stella only $ 2,900.
Write a letter to Stella explaining the amount of her deductible
casualty loss.
#49
 The loss on business property totally destroyed is the
property’s basis
 The loss on partially destroyed business property is measured
as the lesser of:
1.
2.
the decline in the value of the property
the property’s basis
 Whether the property is totally destroyed or partially
destroyed, the loss is reduced by any insurance
reimbursement
#49
Totally destroyed cab:
 Basis: $3,750
 The $3,750 basis is reduced by the insurance reimbursement
of $2,800 for a deductible loss of $ 950:
Destroyed Cab
Adjusted basis
Insurance reimbursement
Casualty loss
$3,750
(2,800)
$ 950
#49
Partially destroyed cab:
 The loss is the lesser of:
1.
2.
the decline in the value of the property—$4,200 ($7,800 - $3,600)
the property’s basis—$3,800
 Stella’s loss is the cab’s basis of $3,800 reduced by the $2,900
insurance reimbursement for a net casualty loss deduction of
$900:
Damaged Cab
Lower of:
Adjusted basis
$3,800
or
Reduction in FMV
$4,200
Insurance reimbursement
(2,900)
Casualty loss
$ 900
#49
 Stella’s total casualty loss on the two accidents is $ 1 ,850
($950 + $900)
#52
During 2012, Yoko has total capital gains of $ 8,000 and total
capital losses of $16,000.
a. What is the ef fect of the capital gains and losses on Yoko’s
2012 taxable income? Explain.
 The capital gains and losses are netted together to determine
the net capital gain (loss) position for the year
 Yoko has a net capital loss of $ 8,000:
Total capital gains
Total capital losses
Net capital loss
$
8,000
(16,000)
$ (8,000)
#52
2012 Deduction:
$
3,000
Loss carried forward to 2013:
$ (5,000)
 The deduction for capital losses is limited to $ 3,000 per year,
with any excess capital loss carried forward for netting in
subsequent years
 Yoko has a $5,000 capital loss carryforward
#52
b. Assume that in 2013 Yoko has total capital gains of $ 10,000
and total capital losses of $ 7,500. What is the ef fect of the
capital gains and losses on Yoko’s taxable income in 2013?
Explain.
 The 2013 capital gains and losses are netted with the 2012
$5,000 capital loss carryforward
 This results in a net capital loss of $ 2,500
 Because it is under the $ 3,000 maximum deduction limit, the
entire $2,500 net capital loss is deductible in 2013
#52
Total capital gains
Total capital losses
2012 Loss carryforward
Net capital loss
$ 10,000
(7,500)
(5,000)
$ (2,500)
2013 Deduction
$ (2,500)
#52
c. How would your answer change if Yoko’s total capital losses
are $14,000 in 2013?
 The netting of the 2013 gains and losses with the 2012
$5,000 capital loss carryforward results in a net capital loss
of $9,000
 Only $3,000 of the loss is deductible in 2013
 The $6,000 loss is carried for ward to 2014
#52
Total capital gains
Total capital losses
2012 Loss carryforward
Net capital loss
$ 10,000
(14,000)
(5,000)
$ (9,000)
2013 Deduction
$
3,000
Loss carryforward to 2014
$
(6,000)
#66
J o r g e a n d h i s w i f e o w n a b e a c h f ro n t v a c a t i o n h o m e i n S av a n n a h , G e o r g i a . D u r i n g t h e
ye a r, h i g h w i n d s f r o m a t r o p i c al s to r m s h a t te r a s l i d i n g g l a s s d o o r a n d r a i n f r o m t h e
s to r m c a u s e s ex te n s i v e w a te r d a m a g e to t h e k i t c h e n . Fo r t un a te l y, d u r i n g a c a l m i n
t h e s to r m , J o r g e i s a b l e to b o a r d u p t h e d o o r, w h i c h l i m it s t h e w a te r d a m a g e to t h e
k i t c h e n . T h e i te m s d a m a g e d i n t h e s to r m a r e :
Insurance
K i t c h e n Fu r n i t ur e
TV
Re f r i g e r ato r
L i n o l e um F l o o r in g
Cost
$ 2 ,1 0 0
$ 250
$1 ,000
$1 ,600
Va l u e
Va l u e
Before
$1 ,400
$ 200
$ 950
$ 900
A f te r
$400
$ -0$100
$ -0-
Proceeds
$650
$125
$800
$500
I n a d d i t i o n , J o r g e p ay s $ 6 2 5 to r e p l ac e t h e s l i d i n g g l a s s d o o r. T h e i n s u r a n c e c o m pany
w i l l n o t r e i m b ur s e h i m f o r t h e c o s t o f t h e n ew d o o r b e c a u s e t h e o l d s l i d i n g g l a s s d o o r
d i d n o t m e et t h e c o m p a ny ’ s s t a n d a r d s f o r a h u r r i c a n e a r e a . W h a t i s t h e a m o un t o f
J o r g e ’ s c a s u a l t y l o s s b e f o r e c o n s i d e r i n g a ny a n n u a l l i m i t a t io n s t h a t m ay a p p l y ?
#66
 The measure of a personal casualty loss is the lesser of
1.
2.
the decline in market value of the property
the property’s basis
 The loss must be reduced by any insurance reimbursements
and the $100 statutory floor (personal casualty loss)
 Jorge’s casualty loss is $ 1 ,400 before considering the annual
personal casualty loss limitation (10% of AGI)
#66
Kitchen furniture ( decline in value)
Television ( decline in value)
Refrigerator ( decline in value)
Linoleum Flooring ( decline in value)
Glass door damage ( cost to repair)
Total loss before insurance reimbursement
Less: Insurance reimbursement ($ 650 + $1 25 + $800 + $500)
Loss net of insurance
Less: statutor y floor
Net casualty loss before annual limitation
$ 1 ,000
200
850
900
625
$ 3,575
( 2,075)
$ 1 ,500
(100)
$ 1 ,400
 Jorge’s deductible casualty loss will be decreased by 10% of his AGI
#69
Marsha owns a two-family condominium in southern California
that she paid $140,000 for in 1997. One unit has 2,400 square
feet of space, and the other has 1 ,600 square feet. Marsha
uses the 2,400-square-foot unit as a vacation home and rents
the other unit to a retired couple. During the current year, an
electrical fire destroys the condominium. Because part of it
was used as rental property, Marsha’s insurance company
reimburses her only $ 120,000. The fair market value of the
condominium before the fire was $ 160,000, and her adjusted
basis in the rental unit is $ 20,000. Assume that Marsha’s
adjusted gross income before considering the casualty is
$55,000. Write a letter to Marsha explaining the ef fect of the
casualty on her taxable income.
#69
 Because the rental property is a mixed -use asset, it must be
accounted for as two assets—a business asset and a personal
asset
 Allocate the business and personal portion of the
condominium based on the total square footage of the two
units:
40% [1,600  (2,400 + 1,600)] of the casualty loss is business
60% [2,400  (2,400 + 1,600)] of loss is personal
 The gain or loss from the casualty must be computed
separately and the appropriate rules for business and
personal property applied to each portion
#69
40%
Business
60%
Personal
Initial basis ($ 140,000)
84,000
L e s s : d e p r e c i a t io n ( $ 5 6 ,0 0 0 - $ 2 0 ,0 0 0 )
$ 56,000
$
A d j us te d b a s is
84,000
$ 20,000
(36,000)
A m o un t o f l o s s :
A d j us te d b a s is
$ 20,000
84,000
OR
D e c l in e i n v a l ue — Pe r so n a l ( $ 16 0 , 0 0 0 x 6 0 % = $ 9 6 , 0 0 0 )
96,000
Less: Insurance proceeds
48,000
72,000
N e t c a s ua lt y g a i n ( l o s s )
$ 28,000
$(12,000)
-0$
$
$
#69
 Marsha has a $28,000 casualty gain on the business portion of
condominium and a $ 12,000 loss on the personal portion of the
condominium
 The $28,000 gain is added to her $ 55,000 AGI, giving her an
adjusted gross income of $ 83,000 ($28,000 + $55,000)
 Assuming that Marsha itemizes her deductions, her deductible
casualty loss is $ 3,600:
Loss net of insurance
Less: statutor y floor
Net casualty loss before annual limitation
Annual limitation ($83,000 x 10%)
Deductible personal casualty loss
$ 12,000
(100)
$ 11 ,900
(8,300)
$ 3,600
MIDTERM 1
 Midterms have raw grades
Average 117/150
 Professor Cerf is reviewing and adjusting for the curve
 The class generally did well on the short answer section
 Multiple choice section seemed to be more challenging (lower
ratio of correct answers)
 I assume the time crunch accounted for a lot of the variability
in the multiple choice answers
 I will post solutions on bSpace
 Email me for questions regarding grading for the midterm
MIDTERM 1
Recommended time allocation (for students to gauge progress
during exam)
Question
1
2
3
MC
Total
Weight
30
40
40
40
150
Percent
20%
27%
27%
27%
100%
MC time per question (minutes):
Minutes
16
21
21
21
80
2.1
MIDTERM 1—MC
1 . During the current year, Trane invests $ 35,000 in each of two
separate corporations. Each investment gives him a 20%
ownership interest. Brazil Corporation is a regular corporation that
has taxable income of $ 200,000 and pays dividends totaling
$50,000. China Corporation is an S corporation that has taxable
income of $100,000 and pays $50,000 of dividends. As a result of
these two investments, Trane
I. Has $40,000 of taxable income from Brazil Corporation.
II. Has $20,000 of taxable income from China Corporation.
a.
b.
c.
d.
Only statement I is correct.
Only statement II is correct.
Both statements are correct.
Neither statement is correct.
MIDTERM 1—MC
 Distinguish between C corporation and S corporation (conduit)
 Brazil Corporation (C)
Only count dividend income
20% of $50,000 = $10,000 taxable income
 China Corporation (S)
Income flow through to partners
20% of $100,000 = $20,000 taxable income
Dividends reduce basis
MIDTERM 1—MC
1 . During the current year, Trane invests $ 35,000 in each of two
separate corporations. Each investment gives him a 20%
ownership interest. Brazil Corporation is a regular corporation
that has taxable income of $ 200,000 and pays dividends
totaling $50,000. China Corporation is an S corporation that
has taxable income of $ 100,000 and pays $50,000 of
dividends. As a result of these two investments, Trane
I. Has $40,000 of taxable income from Brazil Corporation.
II. Has $20,000 of taxable income from China Corporation.
a.
b.
c.
d.
Only statement I is correct.
Only statement II is correct.
Both statements are correct.
Neither statement is correct.
MIDTERM 1—MC
2. Roberta invests $16,000 for a 10% interest in Bowie
Partnership. In the first year of operations, Bowie reports net
income from operations of $ 80,000 and distributes $6,000
cash to Roberta. How much gross income must Roberta
recognize from her investment in Bowie?
a. $ 2,000
b. $ 6,000
c. $ 8,000
d. $ 80,000
 10% x $80,000 = $8,000
MIDTERM 1—MC
3. Nora receives a salary of $55,000 during the current year.
She sells some land that she held as an investment at a loss of
$15,000 and some stock at a gain of $ 10,000. Nora's adjusted
gross income is:
a. $50,000
b. $52,000
c. $55,000
d. $62,000
e. $65,000
MIDTERM 1—MC
4. Boris, a single individual, has two sales of stock during the
current year. The first sale produces a short -term loss of
$27,000 and the second sale results in a long -term gain of
$57,000. Boris's taxable income without considering the gain is
$125,000. Boris's stock transactions will increase his taxable
income by:
a. $ -0b. $30,000
c. $34,000
d. $54,000
MIDTERM 1—MC
5. Chip, a single individual has two sales of stock during the
current year. The first sale produces a short -term loss of
$10,000 and the second sale results in a long -term gain of
$40,000. Chip's taxable income without considering the gain is
$150,000. Chip's stock transactions will increase his income
tax liability by:
a. $ 3,200
b. $ 4,500
c. $ 6,000
d. $ 8,000
e. $ 8,400
 $30,000 x 15% = $4,500
MIDTERM 1—MC
6. Ramona's employer pays 100% of the cost of all employees'
group-term life insurance. The life insurance plan is not
discriminatory. Ramona’s annual salary is $ 100,000. What is
the maximum amount of coverage that can be provided tax free?
a. $ - 0 b. $ 5,000
c. $ 10,000
d. $ 50,000
e. $100,000
MIDTERM 1—MC
7. Conzo is injured in an accident while working at his job. He
received $1 ,500 in worker's compensation benefits for 5 weeks
of lost work. How much should Conzo report as gross income
from the receipt of these benefits?
a. $ - 0 b. $ 300
c. $ 750
d. $ 900
e. $ 1 ,500
MIDTERM 1—MC
8 . T h e i n f o r m a t i o n t h a t f o l l ow s a p p l i e s to t h e c u r r e n t ye a r f o r A a r o n a n d J a n e l l e , a
m a r r i e d c o u p le :
 A a r o n i s e m p l oye d a s a s h o e s a l e s m a n ; h i s c o m p e n s a t io n i s $ 7 5 , 0 0 0 .
 J a n e l l e i s e m p l oye d b y t h e s t a te o f I n d i a n a ; h e r c o m p e n s a t io n i s $ 3 5 , 0 0 0 .
 A a r o n a n d J a n e l l e h av e to t a l a l l owa b le i te m i z e d d e d u c t io n s o f $ 1 2 , 0 0 0 .
 A a r o n a n d J a n e l l e h av e t w o d e p e n d e n t c h i l d r e n .
 A a r o n a n d J a n e l l e h av e o t h e r e c o n o m i c i n c o m e a s f o l l ow s :
- Interest on U.S. Treasur y notes $ 1,000.
- Interest on Compost Computer bonds $ 1,500.
- Interest on German government bonds $ 750.
- Interest on City of Nashville. bonds $ 1,200.
- Aaron's wealthy uncle gives him $1,000.
- Janelle sold Aaron's football card collection for $ 3,000. It cost $800.
- Janelle sells Aaron's fishing boat for $ 2,000. Aaron had purchased the boat 3 years ago for
$2,800.
B a s e d o n t h e a b o v e i n f o r m a t io n , w h a t i s A a r o n a n d J a n e l l e ' s a d j u s te d g r o s s i n c o m e ?
a. $114,450
b. $114,700
c. $115,450
d . $ 1 16 , 4 5 0
e . $ 1 16 , 6 5 0
MIDTERM 1—MC
Income “Broadly Defined” (includes income from all sources)
Minus:
Equals:
Minus:
Equals:
Minus:
Minus:
Equals:
X
Equals:
Minus:
Equals:
Excluded income
Gross income
Deductions for AGI
AGI
Deductions from AGI
Exemptions
Taxable income
Tax rate (schedule of rates)
Income tax
Tax credits
Tax prepayments
Tax (refund) due with return
MIDTERM 1—MC
Aaron’s compensation
Janelle’s compensation
Itemized deductions
Personal exemptions (x2)
Dependency exemptions (x2)
Interest on U.S. Treasury notes
Interest on Compost Computer bonds
Interest on German government bonds
Interest on City of Nashville bonds
Aaron's wealthy uncle gives him
Football card ($3,000 - $800)
Boat ($2,000 - $2,800)
$75,000
$35,000
$12,000
$7,600
$7,600
$1 ,000
$1 ,500
$750
$1 ,200
$1 ,000
$2,200
($800)
Included
Included
Included
Included
Included
Included
MIDTERM 1—MC
8 . T h e i n f o r m a t i o n t h a t f o l l ow s a p p l i e s to t h e c u r r e n t ye a r f o r A a r o n a n d J a n e l l e , a
m a r r i e d c o u p le :
 A a r o n i s e m p l oye d a s a s h o e s a l e s m a n ; h i s c o m p e n s a t io n i s $ 7 5 , 0 0 0 .
 J a n e l l e i s e m p l oye d b y t h e s t a te o f I n d i a n a ; h e r c o m p e n s a t io n i s $ 3 5 , 0 0 0 .
 A a r o n a n d J a n e l l e h av e to t a l a l l owa b le i te m i z e d d e d u c t io n s o f $ 1 2 , 0 0 0 .
 A a r o n a n d J a n e l l e h av e t w o d e p e n d e n t c h i l d r e n .
 A a r o n a n d J a n e l l e h av e o t h e r e c o n o m i c i n c o m e a s f o l l ow s :
- Interest on U.S. Treasur y notes $ 1,000.
- Interest on Compost Computer bonds $ 1,500.
- Interest on German government bonds $ 750.
- Interest on City of Nashville. bonds $ 1,200.
- Aaron's wealthy uncle gives him $ 1,000.
- Janelle sold Aaron's football card collection for $ 3,000. It cost $800.
- Janelle sells Aaron's fishing boat for $ 2,000. Aaron had purchased the boat 3 years ago for
$2,800.
B a s e d o n t h e a b o v e i n f o r m a t io n , w h a t i s A a r o n a n d J a n e l l e ' s a d j u s te d g r o s s i n c o m e ?
a. $114,450
b. $114,700
c. $115,450
d . $ 1 16 , 4 5 0
e . $ 1 16 , 6 5 0
MIDTERM 1—MC
9. The information that follows applies to the current year for Revis and
Patrica, a married couple.
•Revis is employed as a shoe salesman; his compensati on is $ 65,000.
•Patrica is employed as an interior designer; her compensati on is $ 90,000.
•Revis and Patrica have total allowable itemized deductions of $ 15,000.
•Revis and Patrica have two dependent children.
•Revis and Patrica have other economi c income as follows:
-
Interest on U.S. Treasury bonds $ 1,000.
Interest on French government bonds $ 750.
Interest on City of Miami, Fla. bonds $ 1,200.
Patrica won $500 from the state lottery
Revis's wealthy uncle dies and leaves him $ 10,000.
Patrica sold Revis's baseball card collection for $ 3,000. Revis bought it for $800.
Patrica sells Revis's fishing boat for $2,000. Revis had purchased the boat for $2,500.
Based on the above information, what is Revis and Patrica 's taxable income ?
a. $1 29,450
b. $1 29,950
c. $1 29,650
d. $144,450
e. $159,450
MIDTERM 1—MC
Income “Broadly Defined” (includes income from all sources)
Minus:
Equals:
Minus:
Equals:
Minus:
Minus:
Equals:
X
Equals:
Minus:
Equals:
Excluded income
Gross income
Deductions for AGI
AGI
Deductions from AGI
Exemptions
Taxable income
Tax rate (schedule of rates)
Income tax
Tax credits
Tax prepayments
Tax (refund) due with return
MIDTERM 1—MC
Revis’s compensation
Patrica’s compensation
Itemized deductions
Personal exemptions (x2)
Dependency exemptions (x2)
Interest on U.S. Treasury bonds
Interest on French government bonds
Interest on City of Miami, Fla. bonds
Lottery
Revis's wealthy uncle dies
Baseball card ($3,000 - $800)
Boat ($2,000 - $2,500)
$65,000
$90,000
($15,000)
($7,600)
($7,600)
$1,000
$750
$1,200
$500
$10,000
$2,200
($500)
Included
Included
Included
Included
Included
Included
Included
Included
Included
MIDTERM 1—MC
9 . T h e i n f o r m a t i o n t h a t f o l l ow s a p p l i e s to t h e c u r r e n t ye a r f o r Rev i s a n d P a t r i c a , a
m a r r i e d c o u p le .
• Rev i s i s e m p l oyed a s a s h o e s a l e s m a n ; h i s c o m p e n s a t i o n i s $ 6 5 , 0 0 0 .
• P a t r i ca i s e m p l oye d a s a n i n te r i o r d e s i g n e r ; h e r c o m p e n s a t io n i s $ 9 0 , 0 0 0 .
• R ev i s a n d P a t r i c a h av e to t a l a l l owa b l e i te m i z e d d e d uc t i o n s o f $ 1 5 , 0 0 0 .
• R ev i s a n d P a t r i c a h av e t w o d e p e n d e n t c h i l d r e n .
• R ev i s a n d P a t r i c a h av e o t h e r e c o n o m i c i n c o m e a s f o l l ows :
-
Interest on U.S. Treasur y bonds $ 1,000.
Interest on French government bonds $ 750.
Interest on City of Miami, Fla. bonds $ 1,200.
Patrica won $500 from the state lotter y
Revis's wealthy uncle dies and leaves him $ 10,000.
Patrica sold Revis's baseball card collection for $ 3,000. Revis bought it for $800.
Patrica sells Revis's fishing boat for $2,000. Revis had purchased the boat for $2,500.
B a s e d o n t h e a b o v e i n f o r m a t io n , w h a t i s Rev i s a n d P a t r i c a ' s t a x a b l e i n c o m e ?
a. $129,450
b. $129,950
c. $129,650
d. $144,450
e. $159,450
f. $129,250
MIDTERM 1—MC
10. Mike and Pam own a cabin near Teluride , Colorado. In the current year
the cabin was rented for 8 days to friends. Mike and Pam used the cabin a
total of 82 days during the same year. Af ter allocating the expenses between
per sonal and rental use, the following rental loss was determined:
Rental income
$700
Proper ty taxes
(250)
Mor tgage interest
(300)
Repair s and maintenance
(100)
Utilities
(150)
Rental loss
$(100)
How should Mike and Pam repor t the rental income and expenses for last
year?
a. Repor t the $100 loss for AGI.
b. Include the $700 in gross income, but no deductions are allowed.
c. Only expenses up to the amount of $ 700 rental income may be deducted.
d. Repor t the interest ($ 300) and taxes ($ 250) as itemized deductions and
the other expenses for AGI.
e. No repor ting for the rental activity is necessar y.
MIDTERM 1—MC
MIDTERM 1—MC
10. Mike and Pam own a cabin near Teluride , Colorado. In the current year
the cabin was rented for 8 days to friends. Mike and Pam used the cabin a
total of 82 days during the same year. Af ter allocating the expenses between
per sonal and rental use, the following rental loss was determined:
Rental income
$700
Proper ty taxes
(250)
Mor tgage interest
(300)
Repair s and maintenance
(100)
Utilities
(150)
Rental loss
$(100)
How should Mike and Pam repor t the rental income and expenses for last
year?
a. Repor t the $100 loss for AGI.
b. Include the $700 in gross income, but no deductions are allowed.
c. Only expenses up to the amount of $700 rental income may be deducted.
d. Repor t the interest ($300) and taxes ($250) as itemized deductions and
the other expenses for AGI.
e. No repor ting for the rental activity is necessar y.