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Extension 9. Extension   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. Extension Repairs and Improvements Other Expenses Property Changed to Rental Use Renting Part of Property Not Rented for Profit Personal Use of Dwelling Unit (Including Vacation Home)Example. Extension Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. Extension Limits on Rental LossesAt-Risk Rules Passive Activity Limits How To Report Rental Income and ExpensesSchedule E (Form 1040) Introduction This chapter discusses rental income and expenses. Extension It also covers the following topics. Extension Personal use of dwelling unit (including vacation home). Extension Depreciation. Extension Limits on rental losses. Extension How to report your rental income and expenses. Extension If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. Extension If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. Extension If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. Extension See Publication 527, Residential Rental Property, for more information. Extension Useful Items - You may want to see: Publication 527 Residential Rental Property 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 6251 Alternative Minimum Tax—Individuals 8582 Passive Activity Loss Limitations Schedule E (Form 1040) Supplemental Income and Loss Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Extension Rental income is any payment you receive for the use or occupation of property. Extension In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. Extension When to report. Extension   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. Extension You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. Extension You constructively receive income when it is made available to you, for example, by being credited to your bank account. Extension   For more information about when you constructively receive income, see Accounting Methods in chapter 1. Extension Advance rent. Extension   Advance rent is any amount you receive before the period that it covers. Extension Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Extension Example. Extension You sign a 10-year lease to rent your property. Extension In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. Extension You must include $10,000 in your income in the first year. Extension Canceling a lease. Extension   If your tenant pays you to cancel a lease, the amount you receive is rent. Extension Include the payment in your income in the year you receive it regardless of your method of accounting. Extension Expenses paid by tenant. Extension   If your tenant pays any of your expenses, the payments are rental income. Extension Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. Extension See Rental Expenses , later, for more information. Extension Property or services. Extension   If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. Extension   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Extension Security deposits. Extension   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Extension But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Extension   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Extension Include it in your income when you receive it. Extension Part interest. Extension   If you own a part interest in rental property, you must report your part of the rental income from the property. Extension Rental of property also used as your home. Extension   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Extension However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Extension See Personal Use of Dwelling Unit (Including Vacation Home) , later. Extension Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. Extension It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. Extension Depreciation , which you can also deduct from your rental income, is discussed later. Extension Personal use of rental property. Extension   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Extension Also, your rental expense deductions may be limited. Extension See Personal Use of Dwelling Unit (Including Vacation Home) , later. Extension Part interest. Extension   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. Extension When to deduct. Extension   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. Extension Depreciation. Extension   You can begin to depreciate rental property when it is ready and available for rent. Extension See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. Extension Pre-rental expenses. Extension   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Extension Uncollected rent. Extension   If you are a cash-basis taxpayer, do not deduct uncollected rent. Extension Because you have not included it in your income, it is not deductible. Extension Vacant rental property. Extension   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Extension However, you cannot deduct any loss of rental income for the period the property is vacant. Extension Vacant while listed for sale. Extension   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Extension If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Extension Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Extension Improvements. Extension   You must capitalize any expense you pay to improve your rental property. Extension An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Extension Betterments. Extension   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Extension Restoration. Extension   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Extension Adaptation. Extension   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Extension Separate the costs of repairs and improvements, and keep accurate records. Extension You will need to know the cost of improvements when you sell or depreciate your property. Extension The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Extension Other Expenses Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next. Extension Insurance premiums paid in advance. Extension   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Extension You cannot deduct the total premium in the year you pay it. Extension Legal and other professional fees. Extension   You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. Extension For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. Extension You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Extension Local benefit taxes. Extension   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Extension These charges are nondepreciable capital expenditures, and must be added to the basis of your property. Extension However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Extension Local transportation expenses. Extension    You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Extension However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Extension See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Extension   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Extension For 2013, the standard mileage rate for business use is 56. Extension 5 cents per mile. Extension For more information, see chapter 26. Extension    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. Extension In addition, you must complete Form 4562, Part V, and attach it to your tax return. Extension Rental of equipment. Extension   You can deduct the rent you pay for equipment that you use for rental purposes. Extension However, in some cases, lease contracts are actually purchase contracts. Extension If so, you cannot deduct these payments. Extension You can recover the cost of purchased equipment through depreciation. Extension Rental of property. Extension   You can deduct the rent you pay for property that you use for rental purposes. Extension If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Extension Travel expenses. Extension   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Extension You must properly allocate your expenses between rental and nonrental activities. Extension You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. Extension You recover the cost of improvements by taking depreciation. Extension For information on travel expenses, see chapter 26. Extension    To deduct travel expenses, you must keep records that follow the rules in chapter 26. Extension   See Rental Expenses in Publication 527 for more information. Extension 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. Extension 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. Extension You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Extension 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). Extension Example. Extension Your tax year is the calendar year. Extension You moved from your home in May and started renting it out on June 1. Extension You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Extension Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Extension 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. Extension 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). Extension 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 your house. Extension There is no change in the types of expenses deductible for the personal-use part of your property. Extension Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Extension You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Extension You do not have to divide the expenses that belong only to the rental part of your property. Extension 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. Extension If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. Extension You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. Extension How to divide expenses. Extension   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 the rental use and the personal use. Extension You can use any reasonable method for dividing the expense. Extension It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Extension The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home. Extension 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. Extension 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. Extension 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. Extension Where to report. Extension   Report your not-for-profit rental income on Form 1040, line 21. Extension For example, 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. Extension   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 Form 1040, Schedule A, line 23. Extension You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Extension Personal Use of Dwelling Unit (Including Vacation Home) If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. Extension In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Extension Only your rental expenses may be deducted on Schedule E (Form 1040). Extension Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Extension You must also determine if the dwelling unit is considered a home. Extension The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Extension Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Extension There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. Extension Dwelling unit. Extension   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Extension It also includes all structures or other property belonging to the dwelling unit. Extension A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Extension   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. Extension Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. Extension Example. Extension   You rent a room in your home that is always available for short-term occupancy by paying customers. Extension You do not use the room yourself, and you allow only paying customers to use the room. Extension The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Extension Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Extension When dividing your expenses, follow these rules. Extension Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. Extension This rule does not apply when determining whether you used the unit as a home. Extension Any day that the unit is available for rent but not actually rented is not a day of rental use. Extension Example. Extension Your beach cottage was available for rent from June 1 through August 31 (92 days). Extension During that time, except for the first week in August (7 days) when you were unable to find a renter, you rented the cottage at a fair rental price. Extension The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Extension Your family also used the cottage during the last 2 weeks of May (14 days). Extension The cottage was not used at all before May 17 or after August 31. Extension You figure the part of the cottage expenses to treat as rental expenses as follows. Extension The cottage was used for rental a total of 85 days (92 − 7). Extension The days it was available for rent but not rented (7 days) are not days of rental use. Extension The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Extension You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Extension The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Extension Your rental expenses are 85/99 (86%) of the cottage expenses. Extension Note. Extension When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Extension Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Extension Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. Extension If you have a net loss, you may not be able to deduct all of the rental expenses. Extension See Dwelling Unit Used as a Home, next. Extension Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. Extension You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. Extension See What is a day of personal use , later. Extension Fair rental price. Extension   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. Extension The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. Extension   If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a day of rental use in applying (2) above. Extension Instead, count it as a day of personal use in applying both (1) and (2) above. Extension What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. Extension You or any other person who has an interest in the unit, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). Extension However, see Days used as a main home before or after renting , later. Extension A member of your family or a member of the family of any other person who owns an interest in the unit, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Extension Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Extension ), and lineal descendants (children, grandchildren, etc. Extension ). Extension Anyone under an arrangement that lets you use some other dwelling unit. Extension Anyone at less than a fair rental price. Extension Main home. Extension   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. Extension Shared equity financing agreement. Extension   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. Extension Donation of use of property. Extension   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. Extension Examples. Extension   The following examples show how to determine days of personal use. Extension Example 1. Extension You and your neighbor are co-owners of a condominium at the beach. Extension Last year, you rented the unit to vacationers whenever possible. Extension The unit was not used as a main home by anyone. Extension Your neighbor used the unit for 2 weeks last year; you did not use it at all. Extension Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. Extension Example 2. Extension You and your neighbors are co-owners of a house under a shared equity financing agreement. Extension Your neighbors live in the house and pay you a fair rental price. Extension Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. Extension This is because your neighbors rent the house as their main home under a shared equity financing agreement. Extension Example 3. Extension You own a rental property that you rent to your son. Extension Your son does not own any interest in this property. Extension He uses it as his main home and pays you a fair rental price. Extension Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. Extension Example 4. Extension You rent your beach house to Joshua. Extension Joshua rents his cabin in the mountains to you. Extension You each pay a fair rental price. Extension You are using your house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his house. Extension Days used for repairs and maintenance. Extension   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Extension Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. Extension Days used as a main home before or after renting. Extension   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Extension Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Extension You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. Extension However, this special rule does not apply when dividing expenses between rental and personal use. Extension Examples. Extension   The following examples show how to determine whether you used your rental property as a home. Extension Example 1. Extension You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Extension You rented the basement apartment at a fair rental price to college students during the regular school year. Extension You rented to them on a 9-month lease (273 days). Extension You figured 10% of the total days rented to others at a fair rental price is 27 days. Extension During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Extension Your basement apartment was used as a home because you used it for personal purposes for 30 days. Extension Rent-free use by your brothers is considered personal use. Extension Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Extension Example 2. Extension You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Extension Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Extension You figured 10% of the total days rented to others at a fair rental price is 3 days. Extension The room was used as a home because you used it for personal purposes for 21 days. Extension That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Extension Example 3. Extension You own a condominium apartment in a resort area. Extension You rented it at a fair rental price for a total of 170 days during the year. Extension For 12 of those days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Extension Your family actually used the apartment for 10 of those days. Extension Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. Extension You figured 10% of the total days rented to others at a fair rental price is 16 days. Extension Your family also used the apartment for 7 other days during the year. Extension You used the apartment as a home because you used it for personal purposes for 17 days. Extension That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Extension Minimal rental use. Extension   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. Extension See Used as a home but rented less than 15 days , later, for more information. Extension Limit on deductions. Extension   Renting a dwelling unit that is considered a home is not a passive activity. Extension Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. Extension The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Extension Any expenses carried forward to the next year will be subject to any limits that apply for that year. Extension This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. Extension   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. Extension Reporting Income and Deductions Property not used for personal purposes. Extension   If you do not use a dwelling unit for personal purposes, see How To Report Rental Income and Expenses , later, for how to report your rental income and expenses. Extension Property used for personal purposes. Extension   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. Extension Not used as a home. Extension   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Extension Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Extension The expenses for personal use are not deductible as rental expenses. Extension   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. Extension Used as a home but rented less than 15 days. Extension   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). Extension You are not required to report the rental income and rental expenses from this activity. Extension The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Extension See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Extension Used as a home and rented 15 days or more. Extension   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Extension Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Extension The expenses for personal use are not deductible as rental expenses. Extension   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. Extension You do not need to use Worksheet 9-1. Extension   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Extension To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. Extension Depreciation You recover the cost of income-producing property through yearly tax deductions. Extension You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Extension Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Extension You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. Extension You can deduct depreciation only on the part of your property used for rental purposes. Extension Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Extension You may have to use Form 4562 to figure and report your depreciation. Extension See How To Report Rental Income and Expenses , later. Extension Alternative minimum tax (AMT). Extension    If you use accelerated depreciation, you may be subject to the AMT. Extension Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Extension Claiming the correct amount of depreciation. Extension   You should claim the correct amount of depreciation each tax year. Extension If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Extension   If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Extension S Individual Income Tax Return. Extension If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Extension See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. Extension Changing your accounting method to deduct unclaimed depreciation. Extension   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Extension In some instances, that consent is automatic. Extension For more information, see chapter 1 of Publication 946. Extension Land. Extension   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Extension The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Extension More information. Extension   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. Extension Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. Extension You must consider these rules in the order shown below. Extension At-risk rules. Extension These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Extension This applies only if the real property was placed in service after 1986. Extension Passive activity limits. Extension Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. Extension However, there are exceptions. Extension At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. Extension Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Extension In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. Extension You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. Extension See Publication 925 for more information. Extension Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Extension For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. Extension Limits on passive activity deductions and credits. Extension    Deductions or losses from passive activities are limited. Extension You generally cannot offset income, other than passive income, with losses from passive activities. Extension Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Extension Any excess loss or credit is carried forward to the next tax year. Extension   For a detailed discussion of these rules, see Publication 925. Extension    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. Extension Real estate professionals. Extension   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. Extension For a detailed discussion of the requirements, see Publication 527. Extension For a detailed discussion of material participation, see Publication 925. Extension Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. Extension Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. Extension Exception for Rental Real Estate Activities With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. Extension This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Extension Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Extension Active participation. Extension   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Extension Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Extension Maximum special allowance. Extension   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. Extension   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. Extension If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. Extension   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Extension More information. Extension   See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity. Extension How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Extension However, do not use that schedule to report a not-for-profit activity. Extension See Not Rented for Profit, earlier. Extension Providing substantial services. Extension   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship). Extension Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Extension For information, see Publication 334, Tax Guide for Small Business. Extension You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Extension   Use Form 1065, U. Extension S. Extension Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Extension Qualified joint venture. Extension   If you and your spouse each materially participate as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. Extension This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. Extension For more information, see Publication 527. Extension Form 1098, Mortgage Interest Statement. Extension    If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, or similar statement showing the interest you paid for the year. Extension If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Extension Attach a statement to your return showing the name and address of the other person. Extension In the left margin of Schedule E, next to line 13, enter “See attached. Extension ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Extension , you normally report your rental income and expenses on Schedule E, Part I. Extension List your total income, expenses, and depreciation for each rental property. Extension Be sure to enter the number of fair rental and personal use days on line 2. Extension If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Extension Complete lines 1 and 2 for each property. Extension However, fill in lines 23a through 26 on only one Schedule E. Extension On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Extension To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. Extension If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Extension Form 6198, At-Risk Limitations. Extension See At-Risk Rules , earlier. Extension Also see Publication 925. Extension Form 8582, Passive Activity Loss Limitations. Extension See Passive Activity Limits , earlier. Extension Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Extension If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. Extension Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Extension Worksheet 9-1. Extension Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. Extension Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Extension ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. Extension Rental Use Percentage A. Extension Total days available for rent at fair rental price A. Extension       B. Extension Total days available for rent (line A) but not rented B. Extension       C. Extension Total days of rental use. Extension Subtract line B from line A C. Extension       D. Extension Total days of personal use (including days rented at less than fair rental price) D. Extension       E. Extension Total days of rental and personal use. Extension Add lines C and D E. Extension       F. Extension Percentage of expenses allowed for rental. Extension Divide line C by line E     F. Extension   PART II. Extension Allowable Rental Expenses 1. Extension Enter rents received 1. Extension   2a. Extension Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Extension       b. Extension Enter the rental portion of real estate taxes b. Extension       c. Extension Enter the rental portion of deductible casualty and theft losses (see instructions) c. Extension       d. Extension Enter direct rental expenses (see instructions) d. Extension       e. Extension Fully deductible rental expenses. Extension Add lines 2a–2d. Extension Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Extension   3. Extension Subtract line 2e from line 1. Extension If zero or less, enter -0- 3. Extension   4a. Extension Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Extension       b. Extension Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Extension       c. Extension Carryover of operating expenses from 2012 worksheet c. Extension       d. Extension Add lines 4a–4c d. Extension       e. Extension Allowable expenses. Extension Enter the smaller of line 3 or line 4d (see instructions) 4e. Extension   5. Extension Subtract line 4e from line 3. Extension If zero or less, enter -0- 5. Extension   6a. Extension Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Extension       b. Extension Enter the rental portion of depreciation of the dwelling unit b. Extension       c. Extension Carryover of excess casualty losses and depreciation from 2012 worksheet c. Extension       d. Extension Add lines 6a–6c d. Extension       e. Extension Allowable excess casualty and theft losses and depreciation. Extension Enter the smaller of  line 5 or line 6d (see instructions) 6e. Extension   PART III. Extension Carryover of Unallowed Expenses to Next Year 7a. Extension Operating expenses to be carried over to next year. Extension Subtract line 4e from line 4d 7a. Extension   b. Extension Excess casualty and theft losses and depreciation to be carried over to next year. Extension  Subtract line 6e from line 6d b. Extension   Worksheet 9-1 Instructions. Extension Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Extension Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. Extension Line 2a. Extension Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Extension Do not include interest on a loan that did not benefit the dwelling unit. Extension For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Extension Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Extension Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Extension   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. Extension See the Schedule A instructions. Extension However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Extension See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Extension Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Extension   Note. Extension Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Extension Instead, figure the personal portion on a separate Schedule A. Extension If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. Extension           Line 2c. Extension Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. Extension To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Extension If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Extension On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Extension Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Extension   Note. Extension Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Extension Instead, figure the personal portion on a separate Form 4684. Extension           Line 2d. Extension Enter the total of your rental expenses that are directly related only to the rental activity. Extension These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Extension Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Extension           Line 2e. Extension You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Extension Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Extension           Line 4b. Extension On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. Extension If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Extension Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). Extension           Line 4e. Extension You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. Extension *           Line 6a. Extension To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Extension   A. Extension Enter the amount from Form 4684, line 10       B. Extension Enter the rental portion of line A       C. Extension Enter the amount from line 2c of this worksheet       D. Extension Subtract line C from line B. Extension Enter the result here and on line 6a of this worksheet               Line 6e. Extension You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. Extension * *Allocating the limited deduction. Extension If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Extension Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Extension Prev  Up  Next   Home   More Online Publications
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Rural Housing Service

The Department of Agriculture's Rural Housing Service provides grants and loans for housing and community facilities in rural areas of the U.S.

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Extension Publication 521 - Additional Material Prev  Up  Next   Home   More Online Publications