Mary and Charles have owned a beach cottage for several years and have always used it for vacations. When they acquired the property, they had no intentions of renting it. Becaue family circumstances have changed they are considering using the cottage for only two weeks a year and renting it for the remainder of the year. Their AGI approzimates $80,000 per year, and they are in the 30% tax bracket (combined federal and state) Interest and real estate taxes total $8,000 per year and expected to continue at this level for the forseeable future. If Mary and Charles rent the property, their incremental revenue and expenses are projected to be:
Rent Income — $20,000
Rental Commissions — ($3,000)
Maintenance Expenses ($8,000)
Depreciation expense ($10,000)
If the cottage is converted to rental property they plan to be actively involved in key rental and maintenance decisions. Given the tax effects of converting the property to rental use, would the cash flow from renting the property be enough to meet the $12,000 annual mortage payment?
I don’t understand how it could even possibly meet the mortage payment and how this problem works.