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Download 1040ez Federal Tax Form

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Download 1040ez Federal Tax Form

Download 1040ez federal tax form 2. Download 1040ez federal tax form   Electing the Section 179 Deduction Table of Contents Introduction Useful Items - You may want to see: What Property Qualifies?Eligible Property Property Acquired for Business Use Property Acquired by Purchase What Property Does Not Qualify?Land and Improvements Excepted Property How Much Can You Deduct?Dollar Limits Business Income Limit Partnerships and Partners S Corporations Other Corporations How Do You Elect the Deduction? When Must You Recapture the Deduction? Introduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Download 1040ez federal tax form This is the section 179 deduction. Download 1040ez federal tax form You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. Download 1040ez federal tax form Estates and trusts cannot elect the section 179 deduction. Download 1040ez federal tax form This chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction (including special rules for partnerships and corporations), and how to elect it. Download 1040ez federal tax form It also explains when and how to recapture the deduction. Download 1040ez federal tax form Useful Items - You may want to see: Publication 537 Installment Sales 544 Sales and Other Dispositions of Assets 954 Tax Incentives for Distressed Communities Form (and Instructions) 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. Download 1040ez federal tax form What Property Qualifies? To qualify for the section 179 deduction, your property must meet all the following requirements. Download 1040ez federal tax form It must be eligible property. Download 1040ez federal tax form It must be acquired for business use. Download 1040ez federal tax form It must have been acquired by purchase. Download 1040ez federal tax form It must not be property described later under What Property Does Not Qualify . Download 1040ez federal tax form The following discussions provide information about these requirements and exceptions. Download 1040ez federal tax form Eligible Property To qualify for the section 179 deduction, your property must be one of the following types of depreciable property. Download 1040ez federal tax form Tangible personal property. Download 1040ez federal tax form Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services, A research facility used in connection with any of the activities in (a) above, or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Download 1040ez federal tax form Single purpose agricultural (livestock) or horticultural structures. Download 1040ez federal tax form See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures. Download 1040ez federal tax form Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Download 1040ez federal tax form Off-the-shelf computer software. Download 1040ez federal tax form Qualified real property (described below). Download 1040ez federal tax form Tangible personal property. Download 1040ez federal tax form   Tangible personal property is any tangible property that is not real property. Download 1040ez federal tax form It includes the following property. Download 1040ez federal tax form Machinery and equipment. Download 1040ez federal tax form Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs. Download 1040ez federal tax form Gasoline storage tanks and pumps at retail service stations. Download 1040ez federal tax form Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals. Download 1040ez federal tax form   The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. Download 1040ez federal tax form For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law. Download 1040ez federal tax form Off-the-shelf computer software. Download 1040ez federal tax form   Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. Download 1040ez federal tax form This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. Download 1040ez federal tax form It includes any program designed to cause a computer to perform a desired function. Download 1040ez federal tax form However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software. Download 1040ez federal tax form Qualified real property. Download 1040ez federal tax form   You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2013. Download 1040ez federal tax form If this election is made, the term “section 179 property” will include any qualified real property that is: Qualified leasehold improvement property, Qualified restaurant property, or Qualified retail improvement property. Download 1040ez federal tax form The maximum section 179 expense deduction that can be elected for qualified section 179 real property is $250,000 of the maximum section 179 deduction of $500,000 in 2013. Download 1040ez federal tax form For more information, see Special rules for qualified section 179 real property, later. Download 1040ez federal tax form Also, see Election for certain qualified section 179 real property, later, for information on how to make this election. Download 1040ez federal tax form Qualified leasehold improvement property. Download 1040ez federal tax form   Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. Download 1040ez federal tax form   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. Download 1040ez federal tax form A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Download 1040ez federal tax form Examples include the following. Download 1040ez federal tax form A complete liquidation of a subsidiary. Download 1040ez federal tax form A transfer to a corporation controlled by the transferor. Download 1040ez federal tax form An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Download 1040ez federal tax form Qualified restaurant property. Download 1040ez federal tax form   Qualified restaurant property is any section 1250 property that is a building or an improvement to a building placed in service after December 31, 2008, and before January 1, 2014. Download 1040ez federal tax form Also, more than 50% of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals. Download 1040ez federal tax form Qualified retail improvement property. Download 1040ez federal tax form   Generally, this is any improvement (placed in service after December 31, 2008, and before January 1, 2014) to an interior portion of nonresidential real property if it meets the following requirements. Download 1040ez federal tax form The portion is open to the general public and is used in the retail trade or business of selling tangible property to the general public. Download 1040ez federal tax form The improvement is placed in service more than 3 years after the date the building was first placed in service. Download 1040ez federal tax form The expenses are not for the enlargement of the building, any elevator or escalator, any structural components benefiting a common area, or the internal structural framework of the building. Download 1040ez federal tax form In addition, an improvement made by the lessor does not qualify as qualified retail improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. Download 1040ez federal tax form A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Download 1040ez federal tax form Examples include the following. Download 1040ez federal tax form A complete liquidation of a subsidiary. Download 1040ez federal tax form A transfer to a corporation controlled by the transferor. Download 1040ez federal tax form An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Download 1040ez federal tax form Property Acquired for Business Use To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Download 1040ez federal tax form Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify. Download 1040ez federal tax form Partial business use. Download 1040ez federal tax form   When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. Download 1040ez federal tax form If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. Download 1040ez federal tax form Use the resulting business cost to figure your section 179 deduction. Download 1040ez federal tax form Example. Download 1040ez federal tax form May Oak bought and placed in service an item of section 179 property costing $11,000. Download 1040ez federal tax form She used the property 80% for her business and 20% for personal purposes. Download 1040ez federal tax form The business part of the cost of the property is $8,800 (80% × $11,000). Download 1040ez federal tax form Property Acquired by Purchase To qualify for the section 179 deduction, your property must have been acquired by purchase. Download 1040ez federal tax form For example, property acquired by gift or inheritance does not qualify. Download 1040ez federal tax form Property is not considered acquired by purchase in the following situations. Download 1040ez federal tax form It is acquired by one component member of a controlled group from another component member of the same group. Download 1040ez federal tax form Its basis is determined either— In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or Under the stepped-up basis rules for property acquired from a decedent. Download 1040ez federal tax form It is acquired from a related person. Download 1040ez federal tax form Related persons. Download 1040ez federal tax form   Related persons are described under Related persons earlier. Download 1040ez federal tax form However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears. Download 1040ez federal tax form Example. Download 1040ez federal tax form Ken Larch is a tailor. Download 1040ez federal tax form He bought two industrial sewing machines from his father. Download 1040ez federal tax form He placed both machines in service in the same year he bought them. Download 1040ez federal tax form They do not qualify as section 179 property because Ken and his father are related persons. Download 1040ez federal tax form He cannot claim a section 179 deduction for the cost of these machines. Download 1040ez federal tax form What Property Does Not Qualify? Certain property does not qualify for the section 179 deduction. Download 1040ez federal tax form This includes the following. Download 1040ez federal tax form Land and Improvements Land and land improvements do not qualify as section 179 property. Download 1040ez federal tax form Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences. Download 1040ez federal tax form Excepted Property Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property. Download 1040ez federal tax form Certain property you lease to others (if you are a noncorporate lessor). Download 1040ez federal tax form Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Download 1040ez federal tax form Air conditioning or heating units. Download 1040ez federal tax form Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code. Download 1040ez federal tax form Property used by certain tax-exempt organizations, except property used in connection with the production of income subject to the tax on unrelated trade or business income. Download 1040ez federal tax form Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months. Download 1040ez federal tax form Leased property. Download 1040ez federal tax form   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. Download 1040ez federal tax form This rule does not apply to corporations. Download 1040ez federal tax form However, you can claim a section 179 deduction for the cost of the following property. Download 1040ez federal tax form Property you manufacture or produce and lease to others. Download 1040ez federal tax form Property you purchase and lease to others if both the following tests are met. Download 1040ez federal tax form The term of the lease (including options to renew) is less than 50% of the property's class life. Download 1040ez federal tax form For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property. Download 1040ez federal tax form Property used for lodging. Download 1040ez federal tax form   Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. Download 1040ez federal tax form However, this does not apply to the following types of property. Download 1040ez federal tax form Nonlodging commercial facilities that are available to those not using the lodging facilities on the same basis as they are available to those using the lodging facilities. Download 1040ez federal tax form Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients. Download 1040ez federal tax form Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures. Download 1040ez federal tax form Any energy property. Download 1040ez federal tax form Energy property. Download 1040ez federal tax form   Energy property is property that meets the following requirements. Download 1040ez federal tax form It is one of the following types of property. Download 1040ez federal tax form Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat, except for equipment used to generate energy to heat a swimming pool. Download 1040ez federal tax form Equipment placed in service after December 31, 2005, and before January 1, 2017, that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. Download 1040ez federal tax form Equipment used to produce, distribute, or use energy derived from a geothermal deposit. Download 1040ez federal tax form For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage. Download 1040ez federal tax form Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017. Download 1040ez federal tax form The construction, reconstruction, or erection of the property must be completed by you. Download 1040ez federal tax form For property you acquire, the original use of the property must begin with you. Download 1040ez federal tax form The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the property. Download 1040ez federal tax form   For periods before February 14, 2008, energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in effect on November 4, 1990). Download 1040ez federal tax form How Much Can You Deduct? Your section 179 deduction is generally the cost of the qualifying property. Download 1040ez federal tax form However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Download 1040ez federal tax form These limits apply to each taxpayer, not to each business. Download 1040ez federal tax form However, see Married Individuals under Dollar Limits , later. Download 1040ez federal tax form For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. Download 1040ez federal tax form See Do the Passenger Automobile Limits Apply in chapter 5 . Download 1040ez federal tax form If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. Download 1040ez federal tax form Trade-in of other property. Download 1040ez federal tax form   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid. Download 1040ez federal tax form Example. Download 1040ez federal tax form Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. Download 1040ez federal tax form They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. Download 1040ez federal tax form The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. Download 1040ez federal tax form They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van. Download 1040ez federal tax form Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. Download 1040ez federal tax form Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200). Download 1040ez federal tax form Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 generally cannot be more than $500,000. Download 1040ez federal tax form If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $500,000. Download 1040ez federal tax form You do not have to claim the full $500,000. Download 1040ez federal tax form Qualified real property (described earlier) that you elected to treat as section 179 real property is limited to $250,000 of the maximum deduction of $500,000 for 2013. Download 1040ez federal tax form The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying property in service for only a part of a 12-month tax year. Download 1040ez federal tax form After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit (described later) to determine your actual section 179 deduction. Download 1040ez federal tax form Example. Download 1040ez federal tax form In 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. Download 1040ez federal tax form You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. Download 1040ez federal tax form This is the maximum amount you can deduct. Download 1040ez federal tax form Your $25,000 deduction for the saw completely recovered its cost. Download 1040ez federal tax form Your basis for depreciation is zero. Download 1040ez federal tax form The basis for depreciation of your machinery is $25,000. Download 1040ez federal tax form You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery. Download 1040ez federal tax form Situations affecting dollar limit. Download 1040ez federal tax form   Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. Download 1040ez federal tax form The general dollar limit is affected by any of the following situations. Download 1040ez federal tax form The cost of your section 179 property placed in service exceeds $2,000,000. Download 1040ez federal tax form Your business is an enterprise zone business. Download 1040ez federal tax form You placed in service a sport utility or certain other vehicles. Download 1040ez federal tax form You are married filing a joint or separate return. Download 1040ez federal tax form Costs exceeding $2,000,000 If the cost of your qualifying section 179 property placed in service in a year is more than $2,000,000, you generally must reduce the dollar limit (but not below zero) by the amount of cost over $2,000,000. Download 1040ez federal tax form If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. Download 1040ez federal tax form Example. Download 1040ez federal tax form In 2013, Jane Ash placed in service machinery costing $2,100,000. Download 1040ez federal tax form This cost is $100,000 more than $2,000,000, so she must reduce her dollar limit to $400,000 ($500,000 − $100,000). Download 1040ez federal tax form Enterprise Zone Businesses An increased section 179 deduction is available to enterprise zone businesses for qualified zone property placed in service during the tax year, in an empowerment zone. Download 1040ez federal tax form For more information including the definitions of “enterprise zone business” and “qualified zone property,” see sections 1397A, 1397C, and 1397D of the Internal Revenue Code. Download 1040ez federal tax form The dollar limit on the section 179 deduction is increased by the smaller of: $35,000, or The cost of section 179 property that is also qualified zone property placed in service before January 1, 2014 (including such property placed in service by your spouse, even if you are filing a separate return). Download 1040ez federal tax form Note. Download 1040ez federal tax form   You take into account only 50% (instead of 100%) of the cost of qualified zone property placed in service in a year when figuring the reduced dollar limit for costs exceeding $2,000,000 (explained earlier). Download 1040ez federal tax form Sport Utility and Certain Other Vehicles You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service during the tax year. Download 1040ez federal tax form This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Download 1040ez federal tax form However, the $25,000 limit does not apply to any vehicle: Designed to seat more than nine passengers behind the driver's seat, Equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible from the passenger compartment, or That has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. Download 1040ez federal tax form Married Individuals If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. Download 1040ez federal tax form If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Download 1040ez federal tax form If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2,000,000. Download 1040ez federal tax form You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. Download 1040ez federal tax form If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Download 1040ez federal tax form Example. Download 1040ez federal tax form Jack Elm is married. Download 1040ez federal tax form He and his wife file separate returns. Download 1040ez federal tax form Jack bought and placed in service $2,000,000 of qualified farm machinery in 2013. Download 1040ez federal tax form His wife has her own business, and she bought and placed in service $30,000 of qualified business equipment. Download 1040ez federal tax form Their combined dollar limit is $470,000. Download 1040ez federal tax form This is because they must figure the limit as if they were one taxpayer. Download 1040ez federal tax form They reduce the $500,000 dollar limit by the $30,000 excess of their costs over $2,000,000. Download 1040ez federal tax form They elect to allocate the $470,000 dollar limit as follows. Download 1040ez federal tax form $446,500 ($470,000 x 95%) to Mr. Download 1040ez federal tax form Elm's machinery. Download 1040ez federal tax form $23,500 ($470,000 x 5%) to Mrs. Download 1040ez federal tax form Elm's equipment. Download 1040ez federal tax form If they did not make an election to allocate their costs in this way, they would have to allocate $235,000 ($470,000 × 50%) to each of them. Download 1040ez federal tax form Joint return after filing separate returns. Download 1040ez federal tax form   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Download 1040ez federal tax form The dollar limit (after reduction for any cost of section 179 property over $2,000,000). Download 1040ez federal tax form The total cost of section 179 property you and your spouse elected to expense on your separate returns. Download 1040ez federal tax form Example. Download 1040ez federal tax form The facts are the same as in the previous example except that Jack elected to deduct $30,000 of the cost of section 179 property on his separate return and his wife elected to deduct $2,000. Download 1040ez federal tax form After the due date of their returns, they file a joint return. Download 1040ez federal tax form Their dollar limit for the section 179 deduction is $32,000. Download 1040ez federal tax form This is the lesser of the following amounts. Download 1040ez federal tax form $470,000—The dollar limit less the cost of section 179 property over $2,000,000. Download 1040ez federal tax form $32,000—The total they elected to expense on their separate returns. Download 1040ez federal tax form Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Download 1040ez federal tax form Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Download 1040ez federal tax form Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Download 1040ez federal tax form Special rules apply to a 2013 deduction of qualified section 179 real property that is disallowed because of the business income limit. Download 1040ez federal tax form See Special rules for qualified section 179 property under Carryover of disallowed deduction, later. Download 1040ez federal tax form Taxable income. Download 1040ez federal tax form   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Download 1040ez federal tax form Net income or loss from a trade or business includes the following items. Download 1040ez federal tax form Section 1231 gains (or losses). Download 1040ez federal tax form Interest from working capital of your trade or business. Download 1040ez federal tax form Wages, salaries, tips, or other pay earned as an employee. Download 1040ez federal tax form For information about section 1231 gains and losses, see chapter 3 in Publication 544. Download 1040ez federal tax form   In addition, figure taxable income without regard to any of the following. Download 1040ez federal tax form The section 179 deduction. Download 1040ez federal tax form The self-employment tax deduction. Download 1040ez federal tax form Any net operating loss carryback or carryforward. Download 1040ez federal tax form Any unreimbursed employee business expenses. Download 1040ez federal tax form Two different taxable income limits. Download 1040ez federal tax form   In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. Download 1040ez federal tax form You may have to figure the limit for this other deduction taking into account the section 179 deduction. Download 1040ez federal tax form If so, complete the following steps. Download 1040ez federal tax form Step Action 1 Figure taxable income without the section 179 deduction or the other deduction. Download 1040ez federal tax form 2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. Download 1040ez federal tax form 3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. Download 1040ez federal tax form 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Download 1040ez federal tax form 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1. Download 1040ez federal tax form 6 Figure your actual section 179 deduction using the taxable income figured in Step 5. Download 1040ez federal tax form 7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1. Download 1040ez federal tax form 8 Figure your actual other deduction using the taxable income figured in Step 7. Download 1040ez federal tax form Example. Download 1040ez federal tax form On February 1, 2013, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $500,000. Download 1040ez federal tax form It elects to expense the entire $500,000 cost under section 179. Download 1040ez federal tax form In June, the corporation gave a charitable contribution of $10,000. Download 1040ez federal tax form A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. Download 1040ez federal tax form The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. Download 1040ez federal tax form XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $520,000. Download 1040ez federal tax form XYZ figures its section 179 deduction and its deduction for charitable contributions as follows. Download 1040ez federal tax form Step 1– Taxable income figured without either deduction is $520,000. Download 1040ez federal tax form Step 2– Using $520,000 as taxable income, XYZ's hypothetical section 179 deduction is $500,000. Download 1040ez federal tax form Step 3– $20,000 ($520,000 − $500,000). Download 1040ez federal tax form Step 4– Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Download 1040ez federal tax form Step 5– $518,000 ($520,000 − $2,000). Download 1040ez federal tax form Step 6– Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Download 1040ez federal tax form Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 deduction. Download 1040ez federal tax form Step 7– $20,000 ($520,000 − $500,000). Download 1040ez federal tax form Step 8– Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Download 1040ez federal tax form Carryover of disallowed deduction. Download 1040ez federal tax form   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Download 1040ez federal tax form This disallowed deduction amount is shown on line 13 of Form 4562. Download 1040ez federal tax form You use the amount you carry over to determine your section 179 deduction in the next year. Download 1040ez federal tax form Enter that amount on line 10 of your Form 4562 for the next year. Download 1040ez federal tax form   If you place more than one property in service in a year, you can select the properties for which all or a part of the costs will be carried forward. Download 1040ez federal tax form Your selections must be shown in your books and records. Download 1040ez federal tax form For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. Download 1040ez federal tax form If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year. Download 1040ez federal tax form   If costs from more than one year are carried forward to a subsequent year in which only part of the total carryover can be deducted, you must deduct the costs being carried forward from the earliest year first. Download 1040ez federal tax form Special rules for qualified section 179 real property. Download 1040ez federal tax form   You can carry over to 2013 a 2012 deduction attributable to qualified section 179 real property that you elected to expense but were unable to take because of the business income limitation. Download 1040ez federal tax form Any such 2012 carryover amounts that are not deducted in 2013, plus any 2013 disallowed section 179 expense deductions attributable to qualified real property, are not carried over to 2014. Download 1040ez federal tax form Instead these amounts are treated as property placed in service on the first day of 2013 for purposes of computing depreciation (including the special depreciation allowance, if applicable). Download 1040ez federal tax form See section 179(f) of the Internal Revenue Code and Notice 2013-59 for more information. Download 1040ez federal tax form If there is a sale or other disposition of your property (including a transfer at death) before you can use the full amount of any outstanding carryover of your disallowed section 179 deduction, neither you nor the new owner can deduct any of the unused amount. Download 1040ez federal tax form Instead, you must add it back to the property's basis. Download 1040ez federal tax form Partnerships and Partners The section 179 deduction limits apply both to the partnership and to each partner. Download 1040ez federal tax form The partnership determines its section 179 deduction subject to the limits. Download 1040ez federal tax form It then allocates the deduction among its partners. Download 1040ez federal tax form Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Download 1040ez federal tax form ) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. Download 1040ez federal tax form To determine any reduction in the dollar limit for costs over $2,000,000, the partner does not include any of the cost of section 179 property placed in service by the partnership. Download 1040ez federal tax form After the dollar limit (reduced for any nonpartnership section 179 costs over $2,000,000) is applied, any remaining cost of the partnership and nonpartnership section 179 property is subject to the business income limit. Download 1040ez federal tax form Partnership's taxable income. Download 1040ez federal tax form   For purposes of the business income limit, figure the partnership's taxable income by adding together the net income and losses from all trades or businesses actively conducted by the partnership during the year. Download 1040ez federal tax form See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). Download 1040ez federal tax form However, figure taxable income without regard to credits, tax-exempt income, the section 179 deduction, and guaranteed payments under section 707(c) of the Internal Revenue Code. Download 1040ez federal tax form Partner's share of partnership's taxable income. Download 1040ez federal tax form   For purposes of the business income limit, the taxable income of a partner engaged in the active conduct of one or more of a partnership's trades or businesses includes his or her allocable share of taxable income derived from the partnership's active conduct of any trade or business. Download 1040ez federal tax form Example. Download 1040ez federal tax form In 2013, Beech Partnership placed in service section 179 property with a total cost of $2,025,000. Download 1040ez federal tax form The partnership must reduce its dollar limit by $25,000 ($2,025,000 − $2,000,000). Download 1040ez federal tax form Its maximum section 179 deduction is $475,000 ($500,000 − $25,000), and it elects to expense that amount. Download 1040ez federal tax form The partnership's taxable income from the active conduct of all its trades or businesses for the year was $600,000, so it can deduct the full $475,000. Download 1040ez federal tax form It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners. Download 1040ez federal tax form In addition to being a partner in Beech Partnership, Dean is also a partner in the Cedar Partnership, which allocated to him a $30,000 section 179 deduction and $35,000 of its taxable income from the active conduct of its business. Download 1040ez federal tax form He also conducts a business as a sole proprietor and, in 2013, placed in service in that business qualifying section 179 property costing $55,000. Download 1040ez federal tax form He had a net loss of $5,000 from that business for the year. Download 1040ez federal tax form Dean does not have to include section 179 partnership costs to figure any reduction in his dollar limit, so his total section 179 costs for the year are not more than $2,000,000 and his dollar limit is not reduced. Download 1040ez federal tax form His maximum section 179 deduction is $500,000. Download 1040ez federal tax form He elects to expense all of the $70,000 in section 179 deductions allocated from the partnerships ($40,000 from Beech Partnership plus $30,000 from Cedar Partnership), plus $55,000 of his sole proprietorship's section 179 costs, and notes that information in his books and records. Download 1040ez federal tax form However, his deduction is limited to his business taxable income of $80,000 ($50,000 from Beech Partnership, plus $35,000 from Cedar Partnership minus $5,000 loss from his sole proprietorship). Download 1040ez federal tax form He carries over $45,000 ($125,000 − $80,000) of the elected section 179 costs to 2014. Download 1040ez federal tax form He allocates the carryover amount to the cost of section 179 property placed in service in his sole proprietorship, and notes that allocation in his books and records. Download 1040ez federal tax form Different tax years. Download 1040ez federal tax form   For purposes of the business income limit, if the partner's tax year and that of the partnership differ, the partner's share of the partnership's taxable income for a tax year is generally the partner's distributive share for the partnership tax year that ends with or within the partner's tax year. Download 1040ez federal tax form Example. Download 1040ez federal tax form John and James Oak are equal partners in Oak Partnership. Download 1040ez federal tax form Oak Partnership uses a tax year ending January 31. Download 1040ez federal tax form John and James both use a tax year ending December 31. Download 1040ez federal tax form For its tax year ending January 31, 2013, Oak Partnership's taxable income from the active conduct of its business is $80,000, of which $70,000 was earned during 2012. Download 1040ez federal tax form John and James each include $40,000 (each partner's entire share) of partnership taxable income in computing their business income limit for the 2013 tax year. Download 1040ez federal tax form Adjustment of partner's basis in partnership. Download 1040ez federal tax form   A partner must reduce the basis of his or her partnership interest by the total amount of section 179 expenses allocated from the partnership even if the partner cannot currently deduct the total amount. Download 1040ez federal tax form If the partner disposes of his or her partnership interest, the partner's basis for determining gain or loss is increased by any outstanding carryover of disallowed section 179 expenses allocated from the partnership. Download 1040ez federal tax form Adjustment of partnership's basis in section 179 property. Download 1040ez federal tax form   The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. Download 1040ez federal tax form This reduction of basis must be made even if a partner cannot deduct all or part of the section 179 deduction allocated to that partner by the partnership because of the limits. Download 1040ez federal tax form S Corporations Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. Download 1040ez federal tax form The deduction limits apply to an S corporation and to each shareholder. Download 1040ez federal tax form The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits. Download 1040ez federal tax form Figuring taxable income for an S corporation. Download 1040ez federal tax form   To figure taxable income (or loss) from the active conduct by an S corporation of any trade or business, you total the net income and losses from all trades or businesses actively conducted by the S corporation during the year. Download 1040ez federal tax form   To figure the net income (or loss) from a trade or business actively conducted by an S corporation, you take into account the items from that trade or business that are passed through to the shareholders and used in determining each shareholder's tax liability. Download 1040ez federal tax form However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. Download 1040ez federal tax form For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. Download 1040ez federal tax form In figuring the taxable income of an S corporation, disregard any limits on the amount of an S corporation item that must be taken into account when figuring a shareholder's taxable income. Download 1040ez federal tax form Other Corporations A corporation's taxable income from its active conduct of any trade or business is its taxable income figured with the following changes. Download 1040ez federal tax form It is figured before deducting the section 179 deduction, any net operating loss deduction, and special deductions (as reported on the corporation's income tax return). Download 1040ez federal tax form It is adjusted for items of income or deduction included in the amount figured in 1, above, not derived from a trade or business actively conducted by the corporation during the tax year. Download 1040ez federal tax form How Do You Elect the Deduction? You elect to take the section 179 deduction by completing Part I of Form 4562. Download 1040ez federal tax form If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I. Download 1040ez federal tax form For property placed in service in 2013, file Form 4562 with either of the following. Download 1040ez federal tax form Your original 2013 tax return, whether or not you file it timely. Download 1040ez federal tax form An amended return for 2013 filed within the time prescribed by law. Download 1040ez federal tax form An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Download 1040ez federal tax form The amended return must also include any resulting adjustments to taxable income. Download 1040ez federal tax form You must keep records that show the specific identification of each piece of qualifying section 179 property. Download 1040ez federal tax form These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. Download 1040ez federal tax form Election for certain qualified section 179 real property. Download 1040ez federal tax form   You can elect to expense certain qualified real property that you placed in service as section 179 property for tax years beginning in 2013. Download 1040ez federal tax form If you elect to treat this property as section 179 property, you must elect the application of the special rules for qualified real property described in section 179(f) of the Internal Revenue Code. Download 1040ez federal tax form   To make the election, attach a statement indicating you are “electing the application of section 179(f) of the Internal Revenue Code” with either of the following. Download 1040ez federal tax form Your original 2013 tax return, whether or not you file it timely. Download 1040ez federal tax form An amended return for 2013 filed within the time prescribed by law. Download 1040ez federal tax form The amended return must also include any adjustments to taxable income. Download 1040ez federal tax form   The statement should indicate your election to expense certain qualified real property under section 179(f) on your return. Download 1040ez federal tax form It must specify one or more of the three types of qualified property (described under Qualified real property ) to which the election applies, the cost of each such type, and the portion of the cost of each such property to be taken into account. Download 1040ez federal tax form Also, report this on line 6 of Form 4562. Download 1040ez federal tax form    The maximum section 179 expense deduction that can be taken for qualified section 179 real property is limited to $250,000. Download 1040ez federal tax form Revoking an election. Download 1040ez federal tax form   An election (or any specification made in the election) to take a section 179 deduction for 2013 can be revoked without IRS approval by filing an amended return. Download 1040ez federal tax form The amended return must be filed within the time prescribed by law. Download 1040ez federal tax form The amended return must also include any resulting adjustments to taxable income. Download 1040ez federal tax form Once made, the revocation is irrevocable. Download 1040ez federal tax form When Must You Recapture the Deduction? You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Download 1040ez federal tax form In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797. Download 1040ez federal tax form You also increase the basis of the property by the recapture amount. Download 1040ez federal tax form Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4 . Download 1040ez federal tax form If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Download 1040ez federal tax form Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property. Download 1040ez federal tax form For qualified real property (described earlier), see Notice 2013-59 for determining the portion of the gain that is attributable to section 1245 property upon the sale or other disposition of qualified real property. Download 1040ez federal tax form If the property is listed property (described in chapter 5 ), do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Download 1040ez federal tax form Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement. Download 1040ez federal tax form Figuring the recapture amount. Download 1040ez federal tax form   To figure the amount to recapture, take the following steps. Download 1040ez federal tax form Figure the depreciation that would have been allowable on the section 179 deduction you claimed. Download 1040ez federal tax form Begin with the year you placed the property in service and include the year of recapture. Download 1040ez federal tax form Subtract the depreciation figured in (1) from the section 179 deduction you claimed. Download 1040ez federal tax form The result is the amount you must recapture. Download 1040ez federal tax form Example. Download 1040ez federal tax form In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Download 1040ez federal tax form The property is not listed property. Download 1040ez federal tax form The property is 3-year property. Download 1040ez federal tax form He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. Download 1040ez federal tax form He used the property only for business in 2011 and 2012. Download 1040ez federal tax form In 2013, he used the property 40% for business and 60% for personal use. Download 1040ez federal tax form He figures his recapture amount as follows. Download 1040ez federal tax form Section 179 deduction claimed (2011) $5,000. Download 1040ez federal tax form 00 Minus: Allowable depreciation using Table A-1 (instead of section 179 deduction):   2011 $1,666. Download 1040ez federal tax form 50   2012 2,222. Download 1040ez federal tax form 50   2013 ($740. Download 1040ez federal tax form 50 × 40% (business)) 296. Download 1040ez federal tax form 20 4,185. Download 1040ez federal tax form 20 2013 — Recapture amount $ 814. Download 1040ez federal tax form 80 Paul must include $814. Download 1040ez federal tax form 80 in income for 2013. Download 1040ez federal tax form If any qualified zone property placed in service during the year ceases to be used in an empowerment zone by an enterprise zone business in a later year, the benefit of the increased section 179 deduction must be reported as other income on your return. Download 1040ez federal tax form Prev  Up  Next   Home   More Online Publications
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The Download 1040ez Federal Tax Form

Download 1040ez federal tax form 4. Download 1040ez federal tax form   Special Situations Table of Contents Condominiums CooperativesDepreciation Property Changed to Rental UseBasis of Property Changed to Rental Use Figuring the Depreciation Deduction Renting Part of Property Not Rented for ProfitPostponing decision. Download 1040ez federal tax form Example—Property Changed to Rental Use This chapter discusses some rental real estate activities that are subject to additional rules. Download 1040ez federal tax form Condominiums A condominium is most often a dwelling unit in a multi-unit building, but can also take other forms, such as a townhouse or garden apartment. Download 1040ez federal tax form If you own a condominium, you also own a share of the common elements, such as land, lobbies, elevators, and service areas. Download 1040ez federal tax form You and the other condominium owners may pay dues or assessments to a special corporation that is organized to take care of the common elements. Download 1040ez federal tax form Special rules apply if you rent your condominium to others. Download 1040ez federal tax form You can deduct as rental expenses all the expenses discussed in chapters 1 and 2. Download 1040ez federal tax form In addition, you can deduct any dues or assessments paid for maintenance of the common elements. Download 1040ez federal tax form You cannot deduct special assessments you pay to a condominium management corporation for improvements. Download 1040ez federal tax form However, you may be able to recover your share of the cost of any improvement by taking depreciation. Download 1040ez federal tax form Cooperatives If you live in a cooperative, you do not own your apartment. Download 1040ez federal tax form Instead, a corporation owns the apartments and you are a tenant-stockholder in the cooperative housing corporation. Download 1040ez federal tax form If you rent your apartment to others, you usually can deduct, as a rental expense, all the maintenance fees you pay to the cooperative housing corporation. Download 1040ez federal tax form In addition to the maintenance fees paid to the cooperative housing corporation, you can deduct your direct payments for repairs, upkeep, and other rental expenses, including interest paid on a loan used to buy your stock in the corporation. Download 1040ez federal tax form Depreciation You will be depreciating your stock in the corporation rather than the apartment itself. Download 1040ez federal tax form Figure your depreciation deduction as follows. Download 1040ez federal tax form Figure the depreciation for all the depreciable real property owned by the corporation. Download 1040ez federal tax form (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. Download 1040ez federal tax form ) If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. Download 1040ez federal tax form Multiply your cost per share by the total number of outstanding shares. Download 1040ez federal tax form Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. Download 1040ez federal tax form Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. Download 1040ez federal tax form Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. Download 1040ez federal tax form Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Download 1040ez federal tax form Multiply the result of (2) by the percentage you figured in (3). Download 1040ez federal tax form This is your depreciation on the stock. Download 1040ez federal tax form Your depreciation deduction for the year cannot be more than the part of your adjusted basis (defined in chapter 2) in the stock of the corporation that is allocable to your rental property. Download 1040ez federal tax form Payments added to capital account. Download 1040ez federal tax form   Payments earmarked for a capital asset or improvement, or otherwise charged to the corporation's capital account are added to the basis of your stock in the corporation. Download 1040ez federal tax form For example, you cannot deduct a payment used to pave a community parking lot, install a new roof, or pay the principal of the corporation's mortgage. Download 1040ez federal tax form   Treat as a capital cost the amount you were assessed for capital items. Download 1040ez federal tax form This cannot be more than the amount by which your payments to the corporation exceeded your share of the corporation's mortgage interest and real estate taxes. Download 1040ez federal tax form   Your share of interest and taxes is the amount the corporation elected to allocate to you, if it reasonably reflects those expenses for your apartment. Download 1040ez federal tax form Otherwise, figure your share in the following manner. Download 1040ez federal tax form Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Download 1040ez federal tax form Multiply the corporation's deductible interest by the number you figured in (1). Download 1040ez federal tax form This is your share of the interest. Download 1040ez federal tax form Multiply the corporation's deductible taxes by the number you figured in (1). Download 1040ez federal tax form This is your share of the taxes. Download 1040ez federal tax form Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. Download 1040ez federal tax form You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. Download 1040ez federal tax form You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Download 1040ez federal tax form However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). Download 1040ez federal tax form Example. Download 1040ez federal tax form Your tax year is the calendar year. Download 1040ez federal tax form You moved from your home in May and started renting it out on June 1. Download 1040ez federal tax form You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Download 1040ez federal tax form Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Download 1040ez federal tax form When figuring depreciation, treat the property as placed in service on June 1. Download 1040ez federal tax form Basis of Property Changed to Rental Use When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion. Download 1040ez federal tax form Fair market value. Download 1040ez federal tax form   This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Download 1040ez federal tax form Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property. Download 1040ez federal tax form Figuring the basis. Download 1040ez federal tax form   The basis for depreciation is the lesser of: The fair market value of the property on the date you changed it to rental use, or Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. Download 1040ez federal tax form For other increases and decreases to basis, see Adjusted Basis in chapter 2. Download 1040ez federal tax form Example. Download 1040ez federal tax form Several years ago you built your home for $140,000 on a lot that cost you $14,000. Download 1040ez federal tax form Before changing the property to rental use this year, you added $28,000 of permanent improvements to the house and claimed a $3,500 casualty loss deduction for damage to the house. Download 1040ez federal tax form Part of the improvements qualified for a $500 residential energy credit, which you claimed on your 2010 tax return. Download 1040ez federal tax form Because land is not depreciable, you can only include the cost of the house when figuring the basis for depreciation. Download 1040ez federal tax form The adjusted basis of the house at the time of the change in its use was $164,000 ($140,000 + $28,000 − $3,500 − $500). Download 1040ez federal tax form On the date of the change in use, your property had a fair market value of $168,000, of which $21,000 was for the land and $147,000 was for the house. Download 1040ez federal tax form The basis for depreciation on the house is the fair market value on the date of the change ($147,000), because it is less than your adjusted basis ($164,000). Download 1040ez federal tax form Cooperatives If you change your cooperative apartment to rental use, figure your allowable depreciation as explained earlier. Download 1040ez federal tax form (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. Download 1040ez federal tax form ) The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. Download 1040ez federal tax form The fair market value of the property on the date you change your apartment to rental use. Download 1040ez federal tax form This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. Download 1040ez federal tax form The corporation's adjusted basis in the property on that date. Download 1040ez federal tax form Do not subtract depreciation when figuring the corporation's adjusted basis. Download 1040ez federal tax form If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1) under Depreciation (under Cooperatives, near the beginning of this chapter). Download 1040ez federal tax form The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. Download 1040ez federal tax form Figuring the Depreciation Deduction To figure the deduction, use the depreciation system in effect when you convert your residence to rental use. Download 1040ez federal tax form Generally, that will be MACRS for any conversion after 1986. Download 1040ez federal tax form Treat the property as placed in service on the conversion date. Download 1040ez federal tax form Example. Download 1040ez federal tax form Your converted residence (see previous example under Figuring the basis) was available for rent on August 1. Download 1040ez federal tax form Using Table 2-2d (see chapter 2), the percentage for Year 1 beginning in August is 1. Download 1040ez federal tax form 364% and the depreciation deduction for Year 1 is $2,005 ($147,000 × . Download 1040ez federal tax form 01364). Download 1040ez federal tax form Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. Download 1040ez federal tax form You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). Download 1040ez federal tax form You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity, or painting the outside of the house. Download 1040ez federal tax form There is no change in the types of expenses deductible for the personal-use part of your property. Download 1040ez federal tax form Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Download 1040ez federal tax form You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Download 1040ez federal tax form You do not have to divide the expenses that belong only to the rental part of your property. Download 1040ez federal tax form For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. Download 1040ez federal tax form If you install a second phone line strictly for your tenant's use, all of the cost of the second line is deductible as a rental expense. Download 1040ez federal tax form You can deduct depreciation on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. Download 1040ez federal tax form How to divide expenses. Download 1040ez federal tax form   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. Download 1040ez federal tax form You can use any reasonable method for dividing the expense. Download 1040ez federal tax form It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Download 1040ez federal tax form The two most common methods for dividing an expense are (1) the number of rooms in your home, and (2) the square footage of your home. Download 1040ez federal tax form Example. Download 1040ez federal tax form You rent a room in your house. Download 1040ez federal tax form The room is 12 × 15 feet, or 180 square feet. Download 1040ez federal tax form Your entire house has 1,800 square feet of floor space. Download 1040ez federal tax form You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. Download 1040ez federal tax form If your heating bill for the year for the entire house was $600, $60 ($600 × . Download 1040ez federal tax form 10) is a rental expense. Download 1040ez federal tax form The balance, $540, is a personal expense that you cannot deduct. Download 1040ez federal tax form Duplex. Download 1040ez federal tax form   A common situation is the duplex where you live in one unit and rent out the other. Download 1040ez federal tax form Certain expenses apply to the entire property, such as mortgage interest and real estate taxes, and must be split to determine rental and personal expenses. Download 1040ez federal tax form Example. Download 1040ez federal tax form You own a duplex and live in one half, renting the other half. Download 1040ez federal tax form Both units are approximately the same size. Download 1040ez federal tax form Last year, you paid a total of $10,000 mortgage interest and $2,000 real estate taxes for the entire property. Download 1040ez federal tax form You can deduct $5,000 mortgage interest and $1,000 real estate taxes on Schedule E (Form 1040), and if you itemize your deductions, you can deduct the other $5,000 mortgage interest and $1,000 real estate taxes on Schedule A (Form 1040). Download 1040ez federal tax form Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. Download 1040ez federal tax form You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. Download 1040ez federal tax form Where to report. Download 1040ez federal tax form   Report your not-for-profit rental income on Form 1040 or 1040NR, line 21. Download 1040ez federal tax form For example, if you are filing Form 1040, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. Download 1040ez federal tax form   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. Download 1040ez federal tax form You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Download 1040ez federal tax form Presumption of profit. Download 1040ez federal tax form   If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. Download 1040ez federal tax form Postponing decision. Download 1040ez federal tax form   If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. Download 1040ez federal tax form You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. Download 1040ez federal tax form You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Download 1040ez federal tax form More information. Download 1040ez federal tax form   For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. Download 1040ez federal tax form Example—Property Changed to Rental Use In January, Eileen Johnson bought a condominium apartment to live in. Download 1040ez federal tax form Instead of selling the house she had been living in, she decided to change it to rental property. Download 1040ez federal tax form Eileen selected a tenant and started renting the house on February 1. Download 1040ez federal tax form Eileen charges $750 a month for rent and collects it herself. Download 1040ez federal tax form Eileen also received a $750 security deposit from her tenant. Download 1040ez federal tax form Because she plans to return it to her tenant at the end of the lease, she does not include it in her income. Download 1040ez federal tax form Her rental expenses for the year are as follows. Download 1040ez federal tax form   Mortgage interest $1,800     Fire insurance (1-year policy) 100     Miscellaneous repairs (after renting) 297     Real estate taxes imposed and paid 1,200   Eileen must divide the real estate taxes, mortgage interest, and fire insurance between the personal use of the property and the rental use of the property. Download 1040ez federal tax form She can deduct eleven-twelfths of these expenses as rental expenses. Download 1040ez federal tax form She can include the balance of the allowable taxes and mortgage interest on Schedule A (Form 1040) if she itemizes. Download 1040ez federal tax form She cannot deduct the balance of the fire insurance because it is a personal expense. Download 1040ez federal tax form Eileen bought this house in 1984 for $35,000. Download 1040ez federal tax form Her property tax was based on assessed values of $10,000 for the land and $25,000 for the house. Download 1040ez federal tax form Before changing it to rental property, Eileen added several improvements to the house. Download 1040ez federal tax form She figures her adjusted basis as follows:   Improvements Cost     House $25,000     Remodeled kitchen 4,200     Recreation room 5,800     New roof 1,600     Patio and deck 2,400     Adjusted basis $39,000   On February 1, when Eileen changed her house to rental property, the property had a fair market value of $152,000. Download 1040ez federal tax form Of this amount, $35,000 was for the land and $117,000 was for the house. Download 1040ez federal tax form Because Eileen's adjusted basis is less than the fair market value on the date of the change, Eileen uses $39,000 as her basis for depreciation. Download 1040ez federal tax form As specified for residential rental property, Eileen must use the straight line method of depreciation over the GDS or ADS recovery period. Download 1040ez federal tax form She chooses the GDS recovery period of 27. Download 1040ez federal tax form 5 years. Download 1040ez federal tax form She uses Table 2-2d to find her depreciation percentage. Download 1040ez federal tax form Since she placed the property in service in February, the percentage is 3. Download 1040ez federal tax form 182%. Download 1040ez federal tax form On April 1, Eileen bought a new dishwasher for the rental property at a cost of $425. Download 1040ez federal tax form The dishwasher is personal property used in a rental real estate activity, which has a 5-year recovery period. Download 1040ez federal tax form She uses Table 2-2a to find the percentage for Year 1 under “Half-year convention” (20%) to figure her depreciation deduction. Download 1040ez federal tax form On May 1, Eileen paid $4,000 to have a furnace installed in the house. Download 1040ez federal tax form The furnace is residential rental property. Download 1040ez federal tax form Because she placed the property in service in May, the percentage from Table 2-2d is 2. Download 1040ez federal tax form 273%. Download 1040ez federal tax form Eileen figures her net rental income or loss for the house as follows: Total rental income received  ($750 × 11) $8,250 Minus: Expenses     Mortgage interest ($1,800 × 11/12) $1,650   Fire insurance ($100 × 11/12) 92   Miscellaneous repairs 297   Real estate taxes ($1,200 × 11/12) 1,100   Total expenses 3,139 Balance $5,111 Minus: Depreciation     House ($39,000 × . Download 1040ez federal tax form 03182) $1,241   Dishwasher ($425 × . Download 1040ez federal tax form 20) 85   Furnace ($4,000 × . Download 1040ez federal tax form 02273) 91   Total depreciation 1,417 Net rental income for house   $3,694       Eileen uses Schedule E, Part I, to report her rental income and expenses. Download 1040ez federal tax form She enters her income, expenses, and depreciation for the house in the column for Property A. Download 1040ez federal tax form Since all property was placed in service this year, Eileen must use Form 4562 to figure the depreciation. Download 1040ez federal tax form See the Instructions for Form 4562 for more information on preparing the form. Download 1040ez federal tax form Prev  Up  Next   Home   More Online Publications