Mary and Charles have owned a beach cottage on the New Jersey shore for several years and have always used it as a family retreat. When they acquired the property they had no intention of renting it. Because family circumstances have changed, they are considering using the cottage for only 2 weeks a year and renting it for the reminder of the year. Their AGI is approx. $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 are expected to continue at this level in the foreseeable future. If Mary and Charles rent the property their incremental revenue and expenses are projected to be:
- Rent Income $20,000
- Rental Commission ($3,000)
- Maintenance Expense ($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 covering the property to rental use - would the cash flow from renting the property be enough to meet the $12,000 annual mortgage payment?