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H&r Block Free State

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H&r block free state Publication 936 - Main Content Table of Contents Part I. H&r block free state Home Mortgage InterestSecured Debt Qualified Home Special Situations Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement How To Report Special Rule for Tenant-Stockholders in Cooperative Housing Corporations Part II. H&r block free state Limits on Home Mortgage Interest DeductionHome Acquisition Debt Home Equity Debt Grandfathered Debt Table 1 Instructions How To Get Tax HelpLow Income Taxpayer Clinics Part I. H&r block free state Home Mortgage Interest This part explains what you can deduct as home mortgage interest. H&r block free state It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. H&r block free state Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). H&r block free state The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. H&r block free state You can deduct home mortgage interest if all the following conditions are met. H&r block free state You file Form 1040 and itemize deductions on Schedule A (Form 1040). H&r block free state The mortgage is a secured debt on a qualified home in which you have an ownership interest. H&r block free state Secured Debt and Qualified Home are explained later. H&r block free state  Both you and the lender must intend that the loan be repaid. H&r block free state Fully deductible interest. H&r block free state   In most cases, you can deduct all of your home mortgage interest. H&r block free state How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. H&r block free state   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. H&r block free state (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. H&r block free state ) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct. H&r block free state   The three categories are as follows. H&r block free state Mortgages you took out on or before October 13, 1987 (called grandfathered debt). H&r block free state Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). H&r block free state Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). H&r block free state The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. H&r block free state   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. H&r block free state    You can use Figure A to check whether your home mortgage interest is fully deductible. H&r block free state This image is too large to be displayed in the current screen. H&r block free state Please click the link to view the image. H&r block free state Figure A. H&r block free state Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. H&r block free state A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that: Makes your ownership in a qualified home security for payment of the debt, Provides, in case of default, that your home could satisfy the debt, and Is recorded or is otherwise perfected under any state or local law that applies. H&r block free state In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. H&r block free state If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. H&r block free state In this publication, mortgage will refer to secured debt. H&r block free state Debt not secured by home. H&r block free state   A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien). H&r block free state   A debt is not secured by your home if it once was, but is no longer secured by your home. H&r block free state Wraparound mortgage. H&r block free state   This is not a secured debt unless it is recorded or otherwise perfected under state law. H&r block free state Example. H&r block free state Beth owns a home subject to a mortgage of $40,000. H&r block free state She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. H&r block free state Beth continues to make the payments on the $40,000 note. H&r block free state John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. H&r block free state Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. H&r block free state Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. H&r block free state Choice to treat the debt as not secured by your home. H&r block free state   You can choose to treat any debt secured by your qualified home as not secured by the home. H&r block free state This treatment begins with the tax year for which you make the choice and continues for all later tax years. H&r block free state You can revoke your choice only with the consent of the Internal Revenue Service (IRS). H&r block free state   You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. H&r block free state This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest. H&r block free state Cooperative apartment owner. H&r block free state   If you own stock in a cooperative housing corporation, see the Special Rule for Tenant-Stockholders in Cooperative Housing Corporations , near the end of this Part I. H&r block free state Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. H&r block free state This means your main home or your second home. H&r block free state A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. H&r block free state The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. H&r block free state Otherwise, it is considered personal interest and is not deductible. H&r block free state Main home. H&r block free state   You can have only one main home at any one time. H&r block free state This is the home where you ordinarily live most of the time. H&r block free state Second home. H&r block free state   A second home is a home that you choose to treat as your second home. H&r block free state Second home not rented out. H&r block free state   If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. H&r block free state You do not have to use the home during the year. H&r block free state Second home rented out. H&r block free state   If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. H&r block free state You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. H&r block free state If you do not use the home long enough, it is considered rental property and not a second home. H&r block free state For information on residential rental property, see Publication 527. H&r block free state More than one second home. H&r block free state   If you have more than one second home, you can treat only one as the qualified second home during any year. H&r block free state However, you can change the home you treat as a second home during the year in the following situations. H&r block free state If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it. H&r block free state If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home. H&r block free state If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home. H&r block free state Divided use of your home. H&r block free state   The only part of your home that is considered a qualified home is the part you use for residential living. H&r block free state If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. H&r block free state You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. H&r block free state Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. H&r block free state (See Home Acquisition Debt in Part II. H&r block free state ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . H&r block free state Renting out part of home. H&r block free state   If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply. H&r block free state The rented part of your home is used by the tenant primarily for residential living. H&r block free state The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. H&r block free state You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. H&r block free state If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. H&r block free state Office in home. H&r block free state   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. H&r block free state It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. H&r block free state Home under construction. H&r block free state   You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. H&r block free state   The 24-month period can start any time on or after the day construction begins. H&r block free state Home destroyed. H&r block free state   You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. H&r block free state This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. H&r block free state   You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you: Rebuild the destroyed home and move into it, or Sell the land on which the home was located. H&r block free state   This rule applies to your main home and to a second home that you treat as a qualified home. H&r block free state Time-sharing arrangements. H&r block free state   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. H&r block free state A time-sharing plan is an arrangement between two or more people that limits each person's interest in the home or right to use it to a certain part of the year. H&r block free state Rental of time-share. H&r block free state   If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year. H&r block free state See Second home rented out , earlier, for the use requirement. H&r block free state To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it. H&r block free state Married taxpayers. H&r block free state   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. H&r block free state Separate returns. H&r block free state   If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. H&r block free state However, if you both consent in writing, then one spouse can take both the main home and a second home into account. H&r block free state Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. H&r block free state It also describes certain special situations that may affect your deduction. H&r block free state Late payment charge on mortgage payment. H&r block free state   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. H&r block free state Mortgage prepayment penalty. H&r block free state   If you pay off your home mortgage early, you may have to pay a penalty. H&r block free state You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. H&r block free state Sale of home. H&r block free state   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale. H&r block free state Example. H&r block free state John and Peggy Harris sold their home on May 7. H&r block free state Through April 30, they made home mortgage interest payments of $1,220. H&r block free state The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. H&r block free state Their mortgage interest deduction is $1,270 ($1,220 + $50). H&r block free state Prepaid interest. H&r block free state   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. H&r block free state You can deduct in each year only the interest that qualifies as home mortgage interest for that year. H&r block free state However, there is an exception that applies to points, discussed later. H&r block free state Mortgage interest credit. H&r block free state    You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. H&r block free state Figure the credit on Form 8396, Mortgage Interest Credit. H&r block free state If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. H&r block free state   See Form 8396 and Publication 530 for more information on the mortgage interest credit. H&r block free state Ministers' and military housing allowance. H&r block free state   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. H&r block free state Hardest Hit Fund and Emergency Homeowners' Loan Programs. H&r block free state   You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. H&r block free state You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. H&r block free state You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. H&r block free state If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098–MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums), and box 5 (other information including real property taxes paid). H&r block free state However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. H&r block free state Mortgage assistance payments under section 235 of the National Housing Act. H&r block free state   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. H&r block free state You cannot deduct the interest that is paid for you. H&r block free state No other effect on taxes. H&r block free state   Do not include these mortgage assistance payments in your income. H&r block free state Also, do not use these payments to reduce other deductions, such as real estate taxes. H&r block free state Divorced or separated individuals. H&r block free state   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. H&r block free state See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. H&r block free state Redeemable ground rents. H&r block free state   In some states (such as Maryland), you can buy your home subject to a ground rent. H&r block free state A ground rent is an obligation you assume to pay a fixed amount per year on the property. H&r block free state Under this arrangement, you are leasing (rather than buying) the land on which your home is located. H&r block free state   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. H&r block free state   A ground rent is a redeemable ground rent if all of the following are true. H&r block free state Your lease, including renewal periods, is for more than 15 years. H&r block free state You can freely assign the lease. H&r block free state You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specific amount. H&r block free state The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. H&r block free state   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. H&r block free state Nonredeemable ground rents. H&r block free state   Payments on a nonredeemable ground rent are not mortgage interest. H&r block free state You can deduct them as rent if they are a business expense or if they are for rental property. H&r block free state Reverse mortgages. H&r block free state   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. H&r block free state With a reverse mortgage, you retain title to your home. H&r block free state Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. H&r block free state Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. H&r block free state Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. H&r block free state Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. H&r block free state Rental payments. H&r block free state   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. H&r block free state This is true even if the settlement papers call them interest. H&r block free state You cannot deduct these payments as home mortgage interest. H&r block free state Mortgage proceeds invested in tax-exempt securities. H&r block free state   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. H&r block free state “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. H&r block free state Refunds of interest. H&r block free state   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. H&r block free state If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. H&r block free state However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. H&r block free state This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. H&r block free state If you need to include the refund in income, report it on Form 1040, line 21. H&r block free state   If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. H&r block free state For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. H&r block free state   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. H&r block free state Cooperative apartment owner. H&r block free state   If you own a cooperative apartment, you must reduce your home mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. H&r block free state The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. H&r block free state   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. H&r block free state Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. H&r block free state Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. H&r block free state This image is too large to be displayed in the current screen. H&r block free state Please click the link to view the image. H&r block free state Figure B. H&r block free state Are My Points Fully Deductible This Year? A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. H&r block free state See Points paid by the seller , later. H&r block free state General Rule You generally cannot deduct the full amount of points in the year paid. H&r block free state Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. H&r block free state See Deduction Allowed Ratably , next. H&r block free state For exceptions to the general rule, see Deduction Allowed in Year Paid , later. H&r block free state Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. H&r block free state You use the cash method of accounting. H&r block free state This means you report income in the year you receive it and deduct expenses in the year you pay them. H&r block free state Most individuals use this method. H&r block free state Your loan is secured by a home. H&r block free state (The home does not need to be your main home. H&r block free state ) Your loan period is not more than 30 years. H&r block free state If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. H&r block free state Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. H&r block free state Example. H&r block free state You use the cash method of accounting. H&r block free state In 2013, you took out a $100,000 loan payable over 20 years. H&r block free state The terms of the loan are the same as for other 20-year loans offered in your area. H&r block free state You paid $4,800 in points. H&r block free state You made 3 monthly payments on the loan in 2013. H&r block free state You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. H&r block free state In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). H&r block free state Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. H&r block free state (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. H&r block free state ) Your loan is secured by your main home. H&r block free state (Your main home is the one you ordinarily live in most of the time. H&r block free state ) Paying points is an established business practice in the area where the loan was made. H&r block free state The points paid were not more than the points generally charged in that area. H&r block free state You use the cash method of accounting. H&r block free state This means you report income in the year you receive it and deduct expenses in the year you pay them. H&r block free state Most individuals use this method. H&r block free state The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. H&r block free state The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. H&r block free state The funds you provided are not required to have been applied to the points. H&r block free state They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. H&r block free state You cannot have borrowed these funds from your lender or mortgage broker. H&r block free state You use your loan to buy or build your main home. H&r block free state The points were computed as a percentage of the principal amount of the mortgage. H&r block free state The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. H&r block free state The points may be shown as paid from either your funds or the seller's. H&r block free state Note. H&r block free state If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. H&r block free state Home improvement loan. H&r block free state   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. H&r block free state Second home. H&r block free state You cannot fully deduct in the year paid points you pay on loans secured by your second home. H&r block free state You can deduct these points only over the life of the loan. H&r block free state Refinancing. H&r block free state   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. H&r block free state This is true even if the new mortgage is secured by your main home. H&r block free state   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. H&r block free state You can deduct the rest of the points over the life of the loan. H&r block free state Example 1. H&r block free state In 1998, Bill Fields got a mortgage to buy a home. H&r block free state In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. H&r block free state The mortgage is secured by his home. H&r block free state To get the new loan, he had to pay three points ($3,000). H&r block free state Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. H&r block free state Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. H&r block free state The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. H&r block free state Bill's first payment on the new loan was due July 1. H&r block free state He made six payments on the loan in 2013 and is a cash basis taxpayer. H&r block free state Bill used the funds from the new mortgage to repay his existing mortgage. H&r block free state Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. H&r block free state He cannot deduct all of the points in 2013. H&r block free state He can deduct two points ($2,000) ratably over the life of the loan. H&r block free state He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. H&r block free state The other point ($1,000) was a fee for services and is not deductible. H&r block free state Example 2. H&r block free state The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. H&r block free state Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. H&r block free state His deduction is $500 ($2,000 × 25%). H&r block free state Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. H&r block free state This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. H&r block free state The total amount Bill deducts in 2013 is $550 ($500 + $50). H&r block free state Special Situations This section describes certain special situations that may affect your deduction of points. H&r block free state Original issue discount. H&r block free state   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. H&r block free state This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. H&r block free state Amounts charged for services. H&r block free state    Amounts charged by the lender for specific services connected to the loan are not interest. H&r block free state Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. H&r block free state  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. H&r block free state Points paid by the seller. H&r block free state   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. H&r block free state Treatment by seller. H&r block free state   The seller cannot deduct these fees as interest. H&r block free state But they are a selling expense that reduces the amount realized by the seller. H&r block free state See Publication 523 for information on selling your home. H&r block free state Treatment by buyer. H&r block free state   The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. H&r block free state If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. H&r block free state If any of those tests are not met, the buyer deducts the points over the life of the loan. H&r block free state   If you need information about the basis of your home, see Publication 523 or Publication 530. H&r block free state Funds provided are less than points. H&r block free state   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. H&r block free state In addition, you can deduct any points paid by the seller. H&r block free state Example 1. H&r block free state When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). H&r block free state You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. H&r block free state Of the $1,000 charged for points, you can deduct $750 in the year paid. H&r block free state You spread the remaining $250 over the life of the mortgage. H&r block free state Example 2. H&r block free state The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. H&r block free state In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). H&r block free state You spread the remaining $250 over the life of the mortgage. H&r block free state You must reduce the basis of your home by the $1,000 paid by the seller. H&r block free state Excess points. H&r block free state   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. H&r block free state You must spread any additional points over the life of the mortgage. H&r block free state Mortgage ending early. H&r block free state   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. H&r block free state However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. H&r block free state Instead, deduct the remaining balance over the term of the new loan. H&r block free state   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. H&r block free state Example. H&r block free state Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. H&r block free state He deducts $200 points per year. H&r block free state Through 2012, Dan has deducted $2,200 of the points. H&r block free state Dan prepaid his mortgage in full in 2013. H&r block free state He can deduct the remaining $800 of points in 2013. H&r block free state Limits on deduction. H&r block free state   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . H&r block free state See the Table 1 Instructions for line 10. H&r block free state Form 1098. H&r block free state    The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. H&r block free state See Form 1098, Mortgage Interest Statement , later. H&r block free state Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. H&r block free state The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. H&r block free state Qualified mortgage insurance. H&r block free state   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). H&r block free state   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. H&r block free state If provided by the Rural Housing Service, it is commonly known as a guarantee fee. H&r block free state The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. H&r block free state These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. H&r block free state Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. H&r block free state Special rules for prepaid mortgage insurance. H&r block free state   Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. H&r block free state You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. H&r block free state No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. H&r block free state This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. H&r block free state Example. H&r block free state Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. H&r block free state Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. H&r block free state Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. H&r block free state Ryan's adjusted gross income (AGI) for 2012 is $76,000. H&r block free state Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. H&r block free state For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. H&r block free state In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). H&r block free state Limit on deduction. H&r block free state   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. H&r block free state See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. H&r block free state If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. H&r block free state Form 1098. H&r block free state   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your mortgage insurance premiums paid during the year, which may qualify to be treated as deductible mortgage interest. H&r block free state See Form 1098, Mortgage Interest Statement, next. H&r block free state Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. H&r block free state You will receive the statement if you pay interest to a person (including a financial institution or cooperative housing corporation) in the course of that person's trade or business. H&r block free state A governmental unit is a person for purposes of furnishing the statement. H&r block free state The statement for each year should be sent to you by January 31 of the following year. H&r block free state A copy of this form will also be sent to the IRS. H&r block free state The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. H&r block free state However, it should not show any interest that was paid for you by a government agency. H&r block free state As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. H&r block free state However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. H&r block free state See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. H&r block free state Prepaid interest on Form 1098. H&r block free state   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. H&r block free state However, you cannot deduct the prepaid amount for January 2014 in 2013. H&r block free state (See Prepaid interest , earlier. H&r block free state ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. H&r block free state You will include the interest for January 2014 with other interest you pay for 2014. H&r block free state Refunded interest. H&r block free state   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. H&r block free state See Refunds of interest , earlier. H&r block free state Mortgage insurance premiums. H&r block free state   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. H&r block free state See Mortgage Insurance Premiums , earlier. H&r block free state How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. H&r block free state If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. H&r block free state Attach a statement explaining the difference and print “See attached” next to line 10. H&r block free state Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. H&r block free state If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. H&r block free state The seller must give you this number and you must give the seller your TIN. H&r block free state A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. H&r block free state Failure to meet any of these requirements may result in a $50 penalty for each failure. H&r block free state The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. H&r block free state If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. H&r block free state Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. H&r block free state More than one borrower. H&r block free state   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 a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. H&r block free state Show how much of the interest each of you paid, and give the name and address of the person who received the form. H&r block free state Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. H&r block free state Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. H&r block free state   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. H&r block free state Let each of the other borrowers know what his or her share is. H&r block free state Mortgage proceeds used for business or investment. H&r block free state   If your home mortgage interest deduction is limited under the rules explained in Part II , but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. H&r block free state It shows where to deduct the part of your excess interest that is for those activities. H&r block free state The Table 1 Instructions for line 13 in Part II explain how to divide the excess interest among the activities for which the mortgage proceeds were used. H&r block free state Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. H&r block free state This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. H&r block free state Cooperative housing corporation. H&r block free state   This is a corporation that meets all of the following conditions. H&r block free state Has only one class of stock outstanding, Has no stockholders other than those who own the stock that can live in a house, apartment, or house trailer owned or leased by the corporation, Has no stockholders who can receive any distribution out of capital other than on a liquidation of the corporation, and Meets at least one of the following requirements. H&r block free state Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. H&r block free state For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. H&r block free state At all times during the year, at least 80% of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential or residential-related use. H&r block free state At least 90% of the corporation's expenditures paid or incurred during the year are for the acquisition, construction, management, maintenance, or care of corporate property for the benefit of the tenant-stockholders. H&r block free state Stock used to secure debt. H&r block free state   In some cases, you cannot use your cooperative housing stock to secure a debt because of either: Restrictions under local or state law, or Restrictions in the cooperative agreement (other than restrictions in which the main purpose is to permit the tenant- stockholder to treat unsecured debt as secured debt). H&r block free state However, you can treat a debt as secured by the stock to the extent that the proceeds are used to buy the stock under the allocation of interest rules. H&r block free state See chapter 4 of Publication 535 for details on these rules. H&r block free state Figuring deductible home mortgage interest. H&r block free state   Generally, if you are a tenant-stockholder, you can deduct payments you make for your share of the interest paid or incurred by the cooperative. H&r block free state The interest must be on a debt to buy, build, change, improve, or maintain the cooperative's housing, or on a debt to buy the land. H&r block free state   Figure your share of this interest by multiplying the total by the following fraction. H&r block free state      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. H&r block free state   To figure how the limits discussed in Part II apply to you, treat your share of the cooperative's debt as debt incurred by you. H&r block free state The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. H&r block free state (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. H&r block free state ) After your share of the average balance of each type of debt is determined, you include it with the average balance of that type of debt secured by your stock. H&r block free state Form 1098. H&r block free state    The cooperative should give you a Form 1098 showing your share of the interest. H&r block free state Use the rules in this publication to determine your deductible mortgage interest. H&r block free state Part II. H&r block free state Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. H&r block free state These limits apply to your home mortgage interest expense if you have a home mortgage that does not fit into any of the three categories listed at the beginning of Part I under Fully deductible interest . H&r block free state Your home mortgage interest deduction is limited to the interest on the part of your home mortgage debt that is not more than your qualified loan limit. H&r block free state This is the part of your home mortgage debt that is grandfathered debt or that is not more than the limits for home acquisition debt and home equity debt. H&r block free state Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. H&r block free state Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). H&r block free state It also must be secured by that home. H&r block free state If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. H&r block free state The additional debt may qualify as home equity debt (discussed later). H&r block free state Home acquisition debt limit. H&r block free state   The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). H&r block free state This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). H&r block free state Debt over this limit may qualify as home equity debt (also discussed later). H&r block free state Refinanced home acquisition debt. H&r block free state   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. H&r block free state However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. H&r block free state Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt (discussed later). H&r block free state Mortgage that qualifies later. H&r block free state   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. H&r block free state For example, a debt that you use to buy your home may not qualify as home acquisition debt because it is not secured by the home. H&r block free state However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. H&r block free state Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. H&r block free state However, if the property later becomes a qualified home, the debt may qualify after that time. H&r block free state Mortgage treated as used to buy, build, or improve home. H&r block free state   A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home. H&r block free state This applies in the following situations. H&r block free state You buy your home within 90 days before or after the date you take out the mortgage. H&r block free state The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). H&r block free state (See Example 1 later. H&r block free state ) You build or improve your home and take out the mortgage before the work is completed. H&r block free state The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. H&r block free state You build or improve your home and take out the mortgage within 90 days after the work is completed. H&r block free state The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. H&r block free state (See Example 2 later. H&r block free state ) Example 1. H&r block free state You bought your main home on June 3 for $175,000. H&r block free state You paid for the home with cash you got from the sale of your old home. H&r block free state On July 15, you took out a mortgage of $150,000 secured by your main home. H&r block free state You used the $150,000 to invest in stocks. H&r block free state You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. H&r block free state The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. H&r block free state Example 2. H&r block free state On January 31, John began building a home on the lot that he owned. H&r block free state He used $45,000 of his personal funds to build the home. H&r block free state The home was completed on October 31. H&r block free state On November 21, John took out a $36,000 mortgage that was secured by the home. H&r block free state The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. H&r block free state The entire mortgage qualifies as home acquisition debt because it was not more than the expenses incurred within the period beginning 24 months before the home was completed. H&r block free state This is illustrated by Figure C. H&r block free state   Please click here for the text description of the image. H&r block free state Figure C. H&r block free state John's example Date of the mortgage. H&r block free state   The date you take out your mortgage is the day the loan proceeds are disbursed. H&r block free state This is generally the closing date. H&r block free state You can treat the day you apply in writing for your mortgage as the date you take it out. H&r block free state However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. H&r block free state If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. H&r block free state Cost of home or improvements. H&r block free state   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. H&r block free state   The cost of building or substantially improving a qualified home includes the costs to acquire real property and building materials, fees for architects and design plans, and required building permits. H&r block free state Substantial improvement. H&r block free state   An improvement is substantial if it: Adds to the value of your home, Prolongs your home's useful life, or Adapts your home to new uses. H&r block free state    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. H&r block free state However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements. H&r block free state Acquiring an interest in a home because of a divorce. H&r block free state   If you incur debt to acquire the interest of a spouse or former spouse in a home, because of a divorce or legal separation, you can treat that debt as home acquisition debt. H&r block free state Part of home not a qualified home. H&r block free state    To figure your home acquisition debt, you must divide the cost of your home and improvements between the part of your home that is a qualified home and any part that is not a qualified home. H&r block free state See Divided use of your home under Qualified Home in Part I. H&r block free state Home Equity Debt If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. H&r block free state In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt. H&r block free state Home equity debt is a mortgage you took out after October 13, 1987, that: Does not qualify as home acquisition debt or as grandfathered debt, and Is secured by your qualified home. H&r block free state Example. H&r block free state You bought your home for cash 10 years ago. H&r block free state You did not have a mortgage on your home until last year, when you took out a $50,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. H&r block free state This loan is home equity debt. H&r block free state Home equity debt limit. H&r block free state   There is a limit on the amount of debt that can be treated as home equity debt. H&r block free state The total home equity debt on your main home and second home is limited to the smaller of: $100,000 ($50,000 if married filing separately), or The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. H&r block free state Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home. H&r block free state Example. H&r block free state You own one home that you bought in 2000. H&r block free state Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. H&r block free state Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. H&r block free state To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. H&r block free state Your home equity debt is limited to $15,000. H&r block free state This is the smaller of: $100,000, the maximum limit, or $15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000. H&r block free state Debt higher than limit. H&r block free state   Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 − $15,000] in the preceding example) generally is treated as personal interest and is not deductible. H&r block free state But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. H&r block free state If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. H&r block free state Part of home not a qualified home. H&r block free state   To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. H&r block free state See Divided use of your home under Qualified Home in Part I. H&r block free state Fair market value (FMV). H&r block free state    This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. H&r block free state Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV. H&r block free state Grandfathered Debt If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt. H&r block free state To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. H&r block free state How you used the proceeds does not matter. H&r block free state Grandfathered debt is not limited. H&r block free state All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. H&r block free state However, the amount of your grandfathered debt reduces the $1 million limit for home acquisition debt and the limit based on your home's fair market value for home equity debt. H&r block free state Refinanced grandfathered debt. H&r block free state   If you refinanced grandfathered debt after October 13, 1987, for an amount that was not more than the mortgage principal left on the debt, then you still treat it as grandfathered debt. H&r block free state To the extent the new debt is more than that mortgage principal, it is treated as home acquisition or home equity debt, and the mortgage is a mixed-use mortgage (discussed later under Average Mortgage Balance in the Table 1 instructions). H&r block free state The debt must be secured by the qualified home. H&r block free state   You treat grandfathered debt that was refinanced after October 13, 1987, as grandfathered debt only for the term left on the debt that was refinanced. H&r block free state After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. H&r block free state Exception. H&r block free state   If the debt before refinancing was like a balloon note (the principal on the debt was not amortized over the term of the debt), then you treat the refinanced debt as grandfathered debt for the term of the first refinancing. H&r block free state This term cannot be more than 30 years. H&r block free state Example. H&r block free state Chester took out a $200,000 first mortgage on his home in 1986. H&r block free state The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. H&r block free state Chester refinanced the debt in 1991 with a new 20-year mortgage. H&r block free state The refinanced debt is treated as grandfathered debt for its entire term (20 years). H&r block free state Line-of-credit mortgage. H&r block free state    If you had a line-of-credit mortgage on October 13, 1987, and borrowed additional amounts against it after that date, then the additional amounts are either home acquisition debt or home equity debt depending on how you used the proceeds. H&r block free state The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. H&r block free state The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. H&r block free state See Average Mortgage Balance in the Table 1 Instructions that follow. H&r block free state Table 1 Instructions Unless you are subject to the overall limit on itemized deductions, you can deduct all of the interest you paid during the year on mortgages secured by your main home or second home in either of the following two situations. H&r block free state All the mortgages are grandfathered debt. H&r block free state The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . H&r block free state In either of those cases, you do not need Table 1. H&r block free state Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. H&r block free state Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. H&r block free state Table 1. H&r block free state Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. H&r block free state Part I Qualified Loan Limit 1. H&r block free state Enter the average balance of all your grandfathered debt. H&r block free state See line 1 instructions 1. H&r block free state   2. H&r block free state Enter the average balance of all your home acquisition debt. H&r block free state See line 2 instructions 2. H&r block free state   3. H&r block free state Enter $1,000,000 ($500,000 if married filing separately) 3. H&r block free state   4. H&r block free state Enter the larger of the amount on line 1 or the amount on line 3 4. H&r block free state   5. H&r block free state Add the amounts on lines 1 and 2. H&r block free state Enter the total here 5. H&r block free state   6. H&r block free state Enter the smaller of the amount on line 4 or the amount on line 5 6. H&r block free state   7. H&r block free state If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. H&r block free state See the line 7 instructions for the limit which may apply to you. H&r block free state 7. H&r block free state   8. H&r block free state Add the amounts on lines 6 and 7. H&r block free state Enter the total. H&r block free state This is your qualified loan limit. H&r block free state 8. H&r block free state   Part II Deductible Home Mortgage Interest 9. H&r block free state Enter the total of the average balances of all mortgages on all qualified homes. H&r block free state  See line 9 instructions 9. H&r block free state     If line 8 is less than line 9, go on to line 10. H&r block free state If line 8 is equal to or more than line 9, stop here. H&r block free state All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). H&r block free state     10. H&r block free state Enter the total amount of interest that you paid. H&r block free state See line 10 instructions 10. H&r block free state   11. H&r block free state Divide the amount on line 8 by the amount on line 9. H&r block free state Enter the result as a decimal amount (rounded to three places) 11. H&r block free state × . H&r block free state 12. H&r block free state Multiply the amount on line 10 by the decimal amount on line 11. H&r block free state Enter the result. H&r block free state This is your deductible home mortgage interest. H&r block free state Enter this amount on Schedule A (Form 1040) 12. H&r block free state   13. H&r block free state Subtract the amount on line 12 from the amount on line 10. H&r block free state Enter the result. H&r block free state This is not home mortgage interest. H&r block free state See line 13 instructions 13. H&r block free state   Home equity debt only. H&r block free state   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. H&r block free state Enter zero on line 6 and complete the rest of Table 1. H&r block free state Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. H&r block free state You need these amounts to complete lines 1, 2, and 9 of Table 1. H&r block free state You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. H&r block free state The following are methods you can use to figure your average mortgage balances. H&r block free state However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. H&r block free state Average of first and last balance method. H&r block free state   You can use this method if all the following apply. H&r block free state You did not borrow any new amounts on the mortgage during the year. H&r block free state (This does not include borrowing the original mortgage amount. H&r block free state ) You did not prepay more than one month's principal during the year. H&r block free state (This includes prepayment by refinancing your home or by applying proceeds from its sale. H&r block free state ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. H&r block free state You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. H&r block free state    To figure your average balance, complete the following worksheet. H&r block free state    1. H&r block free state Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally January 1)   2. H&r block free state Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally December 31)   3. H&r block free state Add amounts on lines 1 and 2   4. H&r block free state Divide the amount on line 3 by 2. H&r block free state Enter the result   Interest paid divided by interest rate method. H&r block free state   You can use this method if at all times in 2013 the mortgage was secured by your qualified home and the interest was paid at least monthly. H&r block free state    Complete the following worksheet to figure your average balance. H&r block free state    1. H&r block free state Enter the interest paid in 2013. H&r block free state Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. H&r block free state However, do include interest that is for 2013 but was paid in an earlier year   2. H&r block free state Enter the annual interest rate on the mortgage. H&r block free state If the interest rate varied in 2013, use the lowest rate for the year   3. H&r block free state Divide the amount on line 1 by the amount on line 2. H&r block free state Enter the result   Example. H&r block free state Mr. H&r block free state Blue had a line of credit secured by his main home all year. H&r block free state He paid interest of $2,500 on this loan. H&r block free state The interest rate on the loan was 9% (. H&r block free state 09) all year. H&r block free state His average balance using this method is $27,778, figured as follows. H&r block free state 1. H&r block free state Enter the interest paid in 2013. H&r block free state Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. H&r block free state However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. H&r block free state Enter the annual interest rate on the mortgage. H&r block free state If the interest rate varied in 2013, use the lowest rate for the year . H&r block free state 09 3. H&r block free state Divide the amount on line 1 by the amount on line 2. H&r block free state Enter the result $27,778 Statements provided by your lender. H&r block free state   If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. H&r block free state You can treat the balance as zero for any month the mortgage was not secured by your qualified home. H&r block free state   For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. H&r block free state   If your lender can give you your average balance for the year, you can use that amount. H&r block free state Example. H&r block free state Ms. H&r block free state Brown had a home equity loan secured by her main home all year. H&r block free state She received monthly statements showing her average balance for each month. H&r block free state She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. H&r block free state Mixed-use mortgages. H&r block free state   A mixed-use mortgage is a loan that consists of more than one of the three categories of debt (grandfathered debt, home acquisition debt, and home equity debt). H&r block free state For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt). H&r block free state   Complete lines 1 and 2 of Table 1 by including the separate average balances of any grandfathered debt and home acquisition debt in your mixed-use mortgage. H&r block free state Do not use the methods described earlier in this section to figure the average balance of either category. H&r block free state Instead, for each category, use the following method. H&r block free state Figure the balance of that category of debt for each month. H&r block free state This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. H&r block free state Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order: First, any home equity debt, Next, any grandfathered debt, and Finally, any home acquisition debt. H&r block free state Add together the monthly balances figured in (1). H&r block free state Divide the result in (2) by 12. H&r block free state   Complete line 9 of Table 1 by including the average balance of the entire mixed-use mortgage, figured under one of the methods described earlier in this section. H&r block free state Example 1. H&r block free state In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). H&r block free state On March 2, 2013, when the home had a fair market value of $1,700,000 and she owed $1,100,000 on the mortgage, Sharon took out a second mortgage for $200,000. H&r block free state She used $180,000 of the proceeds to make substantial improvements to her home (home acquisition debt) and the remaining $20,000 to buy a car (home equity debt). H&r block free state Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. H&r block free state During 2013, her principal payments on the second mortgage totaled $10,000. H&r block free state To complete Table 1, line 2, Sharon must figure a separate average balance for the part of her second mortgage that is home acquisition debt. H&r block free state The January and February balances were zero. H&r block free state The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. H&r block free state (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. H&r block free state ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). H&r block free state Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). H&r block free state Example 2. H&r block free state The facts are the same as in Example 1. H&r block free state In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. H&r block free state The balance of the home acquisition debt remains $180,000 for each of those months. H&r block free state Because her November and December principal payments are applied to the home acquisition debt, the November balance is $179,000 ($180,000 − $1,000) and the December balance is $178,000 ($180,000 − $2,000). H&r block free state The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. H&r block free state Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). H&r block free state L
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Letter 1961C Frequently Asked Questions (FAQs)

What is the letter telling me?

This letter is in response to an oral or written request for a Direct Debit Installment Agreement. It explains why your request for a Direct Debit could not be granted and the steps you need to take to qualify for a Direct Debit Installment Agreement.

What do I have to do?

You need to complete the Form 433 and return it to us with your bank account and routing numbers.

How much time do I have?

You should return this information to us as soon as possible.

What happens if I don't take any action?

If you do not make an arrangement to pay the balance you owe, enforced collection action may be taken to collect the amount you owe, including the filing of a Notice of Federal Tax Lien, or garnishment of your wages and/or bank accounts.

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If you have any questions about this letter, call us at the number printed in the letter. The person who answers the phone will assist you.

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If you do not agree with this letter, call us immediately at the number included. We will do our best to help you. If you have called us about this matter before, but we did not correct the problem, you may want to contact the Office of the Taxpayer Advocate.

Page Last Reviewed or Updated: 30-Jan-2014

The H&r Block Free State

H&r block free state 5. H&r block free state   Additional Rules for Listed Property Table of Contents Introduction Useful Items - You may want to see: What Is Listed Property?Passenger Automobiles Other Property Used for Transportation Computers and Related Peripheral Equipment Can Employees Claim a Deduction? What Is the Business-Use Requirement?How To Allocate Use Qualified Business Use Recapture of Excess Depreciation Lessee's Inclusion Amount Do the Passenger Automobile Limits Apply?Maximum Depreciation Deduction Deductions After the Recovery Period Deductions For Passenger Automobiles Acquired in a Trade-in What Records Must Be Kept?Adequate Records How Is Listed Property Information Reported? Introduction This chapter discusses the deduction limits and other special rules that apply to certain listed property. H&r block free state Listed property includes cars and other property used for transportation, property used for entertainment, and certain computers. H&r block free state Deductions for listed property (other than certain leased property) are subject to the following special rules and limits. H&r block free state Deduction for employees. H&r block free state If your use of the property is not for your employer's convenience or is not required as a condition of your employment, you cannot deduct depreciation or rent expenses for your use of the property as an employee. H&r block free state Business-use requirement. H&r block free state If the property is not used predominantly (more than 50%) for qualified business use, you cannot claim the section 179 deduction or a special depreciation allowance. H&r block free state In addition, you must figure any depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS) using the straight line method over the ADS recovery period. H&r block free state You may also have to recapture (include in income) any excess depreciation claimed in previous years. H&r block free state A similar inclusion amount applies to certain leased property. H&r block free state Passenger automobile limits and rules. H&r block free state Annual limits apply to depreciation deductions (including section 179 deductions and any special depreciation allowance) for certain passenger automobiles. H&r block free state You can continue to deduct depreciation for the unrecovered basis resulting from these limits after the end of the recovery period. H&r block free state This chapter defines listed property and explains the special rules and depreciation deduction limits that apply, including the special inclusion amount rule for leased property. H&r block free state It also discusses the recordkeeping rules for listed property and explains how to report information about the property on your tax return. H&r block free state Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. H&r block free state What Is Listed Property? Listed property is any of the following. H&r block free state Passenger automobiles (as defined later). H&r block free state Any other property used for transportation, unless it is an excepted vehicle. H&r block free state Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video-recording equipment). H&r block free state Computers and related peripheral equipment, unless used only at a regular business establishment and owned or leased by the person operating the establishment. H&r block free state A regular business establishment includes a portion of a dwelling unit that is used both regularly and exclusively for business as discussed in Publication 587. H&r block free state Improvements to listed property. H&r block free state   An improvement made to listed property that must be capitalized is treated as a new item of depreciable property. H&r block free state The recovery period and method of depreciation that apply to the listed property as a whole also apply to the improvement. H&r block free state For example, if you must depreciate the listed property using the straight line method, you also must depreciate the improvement using the straight line method. H&r block free state Passenger Automobiles A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans). H&r block free state It includes any part, component, or other item physically attached to the automobile at the time of purchase or usually included in the purchase price of an automobile. H&r block free state The following vehicles are not considered passenger automobiles for these purposes. H&r block free state An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business. H&r block free state A vehicle used directly in the trade or business of transporting persons or property for pay or hire. H&r block free state A truck or van that is a qualified nonpersonal use vehicle. H&r block free state Qualified nonpersonal use vehicles. H&r block free state   Qualified nonpersonal use vehicles are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. H&r block free state They include the trucks and vans listed as excepted vehicles under Other Property Used for Transportation , next. H&r block free state They also include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company's name. H&r block free state For a detailed discussion of passenger automobiles, including leased passenger automobiles, see  Publication 463. H&r block free state Other Property Used for Transportation Although vehicles used to transport persons or property for pay or hire and vehicles rated at more than the 6,000-pound threshold are not passenger automobiles, they are still “other property used for transportation” and are subject to the special rules for listed property. H&r block free state Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles used to transport persons or goods. H&r block free state Excepted vehicles. H&r block free state   Other property used for transportation does not include the following qualified nonpersonal use vehicles (defined earlier under Passenger Automobiles ). H&r block free state Clearly marked police and fire vehicles. H&r block free state Unmarked vehicles used by law enforcement officers if the use is officially authorized. H&r block free state Ambulances used as such and hearses used as such. H&r block free state Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo. H&r block free state Bucket trucks (cherry pickers), cement mixers, dump trucks (including garbage trucks), flatbed trucks, and refrigerated trucks. H&r block free state Combines, cranes and derricks, and forklifts. H&r block free state Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat. H&r block free state Qualified moving vans. H&r block free state Qualified specialized utility repair trucks. H&r block free state School buses used in transporting students and employees of schools. H&r block free state Other buses with a capacity of at least 20 passengers that are used as passenger buses. H&r block free state Tractors and other special purpose farm vehicles. H&r block free state Clearly marked police and fire vehicle. H&r block free state   A clearly marked police or fire vehicle is a vehicle that meets all the following requirements. H&r block free state It is owned or leased by a governmental unit or an agency or instrumentality of a governmental unit. H&r block free state It is required to be used for commuting by a police officer or fire fighter who, when not on a regular shift, is on call at all times. H&r block free state It is prohibited from being used for personal use (other than commuting) outside the limit of the police officer's arrest powers or the fire fighter's obligation to respond to an emergency. H&r block free state It is clearly marked with painted insignia or words that make it readily apparent that it is a police or fire vehicle. H&r block free state A marking on a license plate is not a clear marking for these purposes. H&r block free state Qualified moving van. H&r block free state   A qualified moving van is any truck or van used by a professional moving company for moving household or business goods if the following requirements are met. H&r block free state No personal use of the van is allowed other than for travel to and from a move site or for minor personal use, such as a stop for lunch on the way from one move site to another. H&r block free state Personal use for travel to and from a move site happens no more than five times a month on average. H&r block free state Personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee's residence in relation to the location of the move site, for the van not to be returned to the employer's business location. H&r block free state Qualified specialized utility repair truck. H&r block free state   A truck is a qualified specialized utility repair truck if it is not a van or pickup truck and all the following apply. H&r block free state The truck was specifically designed for and is used to carry heavy tools, testing equipment, or parts. H&r block free state Shelves, racks, or other permanent interior construction has been installed to carry and store the tools, equipment, or parts and would make it unlikely that the truck would be used, other than minimally, for personal purposes. H&r block free state The employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services. H&r block free state Computers and Related Peripheral Equipment A computer is a programmable, electronically activated device capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention. H&r block free state It consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities. H&r block free state Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer. H&r block free state The following are neither computers nor related peripheral equipment. H&r block free state Any equipment that is an integral part of other property that is not a computer. H&r block free state Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment. H&r block free state Equipment of a kind used primarily for the user's amusement or entertainment, such as video games. H&r block free state Can Employees Claim a Deduction? If you are an employee, you can claim a depreciation deduction for the use of your listed property (whether owned or rented) in performing services as an employee only if your use is a business use. H&r block free state The use of your property in performing services as an employee is a business use only if both the following requirements are met. H&r block free state The use is for your employer's convenience. H&r block free state The use is required as a condition of your employment. H&r block free state If these requirements are not met, you cannot deduct depreciation (including the section 179 deduction) or rent expenses for your use of the property as an employee. H&r block free state Employer's convenience. H&r block free state   Whether the use of listed property is for your employer's convenience must be determined from all the facts. H&r block free state The use is for your employer's convenience if it is for a substantial business reason of the employer. H&r block free state The use of listed property during your regular working hours to carry on your employer's business generally is for the employer's convenience. H&r block free state Condition of employment. H&r block free state   Whether the use of listed property is a condition of your employment depends on all the facts and circumstances. H&r block free state The use of property must be required for you to perform your duties properly. H&r block free state Your employer does not have to require explicitly that you use the property. H&r block free state However, a mere statement by the employer that the use of the property is a condition of your employment is not sufficient. H&r block free state Example 1. H&r block free state Virginia Sycamore is employed as a courier with We Deliver, which provides local courier services. H&r block free state She owns and uses a motorcycle to deliver packages to downtown offices. H&r block free state We Deliver explicitly requires all delivery persons to own a car or motorcycle for use in their employment. H&r block free state Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment. H&r block free state Example 2. H&r block free state Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. H&r block free state He must travel to these sites on a regular basis. H&r block free state Uplift does not furnish an automobile or explicitly require him to use his own automobile. H&r block free state However, it pays him for any costs he incurs in traveling to the various sites. H&r block free state The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment. H&r block free state Example 3. H&r block free state Assume the same facts as in Example 2 except that Uplift furnishes a car to Bill, who chooses to use his own car and receive payment for using it. H&r block free state The use of his own car is neither for the convenience of Uplift nor required as a condition of employment. H&r block free state Example 4. H&r block free state Marilyn Lee is a pilot for Y Company, a small charter airline. H&r block free state Y requires pilots to obtain 80 hours of flight time annually in addition to flight time spent with the airline. H&r block free state Pilots usually can obtain these hours by flying with the Air Force Reserve or by flying part-time with another airline. H&r block free state Marilyn owns her own airplane. H&r block free state The use of her airplane to obtain the required flight hours is neither for the convenience of the employer nor required as a condition of employment. H&r block free state Example 5. H&r block free state David Rule is employed as an engineer with Zip, an engineering contracting firm. H&r block free state He occasionally takes work home at night rather than work late in the office. H&r block free state He owns and uses a home computer which is virtually identical to the office model. H&r block free state His use of the computer is neither for the convenience of his employer nor required as a condition of employment. H&r block free state What Is the Business-Use Requirement? You can claim the section 179 deduction and a special depreciation allowance for listed property and depreciate listed property using GDS and a declining balance method if the property meets the business-use requirement. H&r block free state To meet this requirement, listed property must be used predominantly (more than 50% of its total use) for qualified business use. H&r block free state If this requirement is not met, the following rules apply. H&r block free state Property not used predominantly for qualified business use during the year it is placed in service does not qualify for the section 179 deduction. H&r block free state Property not used predominantly for qualified business use during the year it is placed in service does not qualify for a special depreciation allowance. H&r block free state Any depreciation deduction under MACRS for property not used predominantly for qualified business use during any year must be figured using the straight line method over the ADS recovery period. H&r block free state This rule applies each year of the recovery period. H&r block free state Excess depreciation on property previously used predominantly for qualified business use must be recaptured (included in income) in the first year in which it is no longer used predominantly for qualified business use. H&r block free state A lessee must add an inclusion amount to income in the first year in which the leased property is not used predominantly for qualified business use. H&r block free state Being required to use the straight line method for an item of listed property not used predominantly for qualified business use is not the same as electing the straight line method. H&r block free state It does not mean that you have to use the straight line method for other property in the same class as the item of listed property. H&r block free state Exception for leased property. H&r block free state   The business-use requirement generally does not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property. H&r block free state   You are considered regularly engaged in the business of leasing listed property only if you enter into contracts for the leasing of listed property with some frequency over a continuous period of time. H&r block free state This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of your business in its entirety. H&r block free state Occasional or incidental leasing activity is insufficient. H&r block free state For example, if you lease only one passenger automobile during a tax year, you are not regularly engaged in the business of leasing automobiles. H&r block free state An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee. H&r block free state How To Allocate Use To determine whether the business-use requirement is met, you must allocate the use of any item of listed property used for more than one purpose during the year among its various uses. H&r block free state For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. H&r block free state You determine the percentage of qualified business use by dividing the number of miles you drove the vehicle for business purposes during the year by the total number of miles you drove the vehicle for all purposes (including business miles) during the year. H&r block free state For other listed property, allocate the property's use on the basis of the most appropriate unit of time the property is actually used (rather than merely being available for use). H&r block free state For example, you can determine the percentage of business use of a computer by dividing the number of hours you used the computer for business purposes during the year by the total number of hours you used the computer for all purposes (including business use) during the year. H&r block free state Entertainment use. H&r block free state   Treat the use of listed property for entertainment, recreation, or amusement purposes as a business use only to the extent you can deduct expenses (other than interest and property tax expenses) due to its use as an ordinary and necessary business expense. H&r block free state Commuting use. H&r block free state   The use of an automobile for commuting is not business use, regardless of whether work is performed during the trip. H&r block free state For example, a business telephone call made on a car telephone while commuting to work does not change the character of the trip from commuting to business. H&r block free state This is also true for a business meeting held in a car while commuting to work. H&r block free state Similarly, a business call made on an otherwise personal trip does not change the character of a trip from personal to business. H&r block free state The fact that an automobile is used to display material that advertises the owner's or user's trade or business does not convert an otherwise personal use into business use. H&r block free state Use of your automobile by another person. H&r block free state   If someone else uses your automobile, do not treat that use as business use unless one of the following conditions applies. H&r block free state That use is directly connected with your business. H&r block free state You properly report the value of the use as income to the other person and withhold tax on the income where required. H&r block free state You are paid a fair market rent. H&r block free state Treat any payment to you for the use of the automobile as a rent payment for purposes of item (3). H&r block free state Employee deductions. H&r block free state   If you are an employee, do not treat your use of listed property as business use unless it is for your employer's convenience and is required as a condition of your employment. H&r block free state See Can Employees Claim a Deduction , earlier. H&r block free state Qualified Business Use Qualified business use of listed property is any use of the property in your trade or business. H&r block free state However, it does not include the following uses. H&r block free state The leasing of property to any 5% owner or related person (to the extent the property is used by a 5% owner or person related to the owner or lessee of the property). H&r block free state The use of property as pay for the services of a 5% owner or related person. H&r block free state The use of property as pay for services of any person (other than a 5% owner or related person), unless the value of the use is included in that person's gross income and income tax is withheld on that amount where required. H&r block free state Property does not stop being used predominantly for qualified business use because of a transfer at death. H&r block free state Exception for leasing or compensatory use of aircraft. H&r block free state   Treat the leasing of any aircraft by a 5% owner or related person, or the compensatory use of any aircraft, as a qualified business use if at least 25% of the total use of the aircraft during the year is for a qualified business use. H&r block free state 5% owner. H&r block free state   For a business entity that is not a corporation, a 5% owner is any person who owns more than 5% of the capital or profits interest in the business. H&r block free state   For a corporation, a 5% owner is any person who owns, or is considered to own, either of the following. H&r block free state More than 5% of the outstanding stock of the corporation. H&r block free state Stock possessing more than 5% of the total combined voting power of all stock in the corporation. H&r block free state Related persons. H&r block free state   For a description of related persons, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 . H&r block free state For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. H&r block free state Examples. H&r block free state   The following examples illustrate whether the use of business property is qualified business use. H&r block free state Example 1. H&r block free state John Maple is the sole proprietor of a plumbing contracting business. H&r block free state John employs his brother, Richard, in the business. H&r block free state As part of Richard's pay, he is allowed to use one of the company automobiles for personal use. H&r block free state The company includes the value of the personal use of the automobile in Richard's gross income and properly withholds tax on it. H&r block free state The use of the automobile is pay for the performance of services by a related person, so it is not a qualified business use. H&r block free state Example 2. H&r block free state John, in Example 1, allows unrelated employees to use company automobiles for personal purposes. H&r block free state He does not include the value of the personal use of the company automobiles as part of their compensation and he does not withhold tax on the value of the use of the automobiles. H&r block free state This use of company automobiles by employees is not a qualified business use. H&r block free state Example 3. H&r block free state James Company Inc. H&r block free state owns several automobiles that its employees use for business purposes. H&r block free state The employees also are allowed to take the automobiles home at night. H&r block free state The fair market value of each employee's use of an automobile for any personal purpose, such as commuting to and from work, is reported as income to the employee and James Company withholds tax on it. H&r block free state This use of company automobiles by employees, even for personal purposes, is a qualified business use for the company. H&r block free state Investment Use The use of property to produce income in a nonbusiness activity (investment use) is not a qualified business use. H&r block free state However, you can treat the investment use as business use to figure the depreciation deduction for the property in a given year. H&r block free state Example 1. H&r block free state Sarah Bradley uses a home computer 50% of the time to manage her investments. H&r block free state She also uses the computer 40% of the time in her part-time consumer research business. H&r block free state Sarah's home computer is listed property because it is not used at a regular business establishment. H&r block free state She does not use the computer predominantly for qualified business use. H&r block free state Therefore, she cannot elect a section 179 deduction or claim a special depreciation allowance for the computer. H&r block free state She must depreciate it using the straight line method over the ADS recovery period. H&r block free state Her combined business/investment use for determining her depreciation deduction is 90%. H&r block free state Example 2. H&r block free state If Sarah uses her computer 30% of the time to manage her investments and 60% of the time in her consumer research business, it is used predominantly for qualified business use. H&r block free state She can elect a section 179 deduction and, if she does not deduct all the computer's cost, she can claim a special depreciation allowance and depreciate the computer using the 200% declining balance method over the GDS recovery period. H&r block free state Her combined business/investment use for determining her depreciation deduction is 90%. H&r block free state Recapture of Excess Depreciation If you used listed property more than 50% in a qualified business use in the year you placed it in service, you must recapture (include in income) excess depreciation in the first year you use it 50% or less. H&r block free state You also increase the adjusted basis of your property by the same amount. H&r block free state Excess depreciation is: The depreciation allowable for the property (including any section 179 deduction and special depreciation allowance claimed) for years before the first year you do not use the property predominantly for qualified business use, minus The depreciation that would have been allowable for those years if you had not used the property predominantly for qualified business use in the year you placed it in service. H&r block free state To determine the amount in (2) above, you must refigure the depreciation using the straight line method and the ADS recovery period. H&r block free state Example. H&r block free state In June 2009, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. H&r block free state She used it only for qualified business use for 2009 through 2012. H&r block free state Ellen claimed a section 179 deduction of $10,000 based on the purchase of the truck. H&r block free state She began depreciating it using the 200% DB method over a 5-year GDS recovery period. H&r block free state The pickup truck's gross vehicle weight was over 6,000 pounds, so it was not subject to the passenger automobile limits discussed later under Do the Passenger Automobile Limits Apply. H&r block free state During 2013, she used the truck 50% for business and 50% for personal purposes. H&r block free state She includes $4,018 excess depreciation in her gross income for 2013. H&r block free state The excess depreciation is determined as follows. H&r block free state Total section 179 deduction ($10,000) and depreciation claimed ($6,618) for 2009 through 2012. H&r block free state (Depreciation is from Table A-1. H&r block free state ) $16,618 Minus: Depreciation allowable (Table A-8):     2009 – 10% of $18,000 $1,800   2010 – 20% of $18,000 3,600   2011 – 20% of $18,000 3,600   2012 – 20% of $18,000 3,600 12,600 Excess depreciation $4,018 If Ellen's use of the truck does not change to 50% for business and 50% for personal purposes until 2015, there will be no excess depreciation. H&r block free state The total depreciation allowable using Table A-8 through 2015 will be $18,000, which equals the total of the section 179 deduction and depreciation she will have claimed. H&r block free state Where to figure and report recapture. H&r block free state   Use Form 4797, Part IV, to figure the recapture amount. H&r block free state Report the recapture amount as other income on the same form or schedule on which you took the depreciation deduction. H&r block free state For example, report the recapture amount as other income on Schedule C (Form 1040) if you took the depreciation deduction on Schedule C. H&r block free state If you took the depreciation deduction on Form 2106, report the recapture amount as other income on Form 1040, line 21. H&r block free state Lessee's Inclusion Amount If you use leased listed property other than a passenger automobile for business/investment use, you must include an amount in your income in the first year your qualified business-use percentage is 50% or less. H&r block free state Your qualified business-use percentage is the part of the property's total use that is qualified business use (defined earlier). H&r block free state For the inclusion amount rules for a leased passenger automobile, see Leasing a Car in chapter 4 of Publication 463. H&r block free state The inclusion amount is the sum of Amount A and Amount B, described next. H&r block free state However, see the special rules for the inclusion amount, later, if your lease begins in the last 9 months of your tax year or is for less than one year. H&r block free state Amount A. H&r block free state   Amount A is: The fair market value of the property, multiplied by The business/investment use for the first tax year the qualified business-use percentage is 50% or less, multiplied by The applicable percentage from Table A-19 in Appendix A . H&r block free state   The fair market value of the property is the value on the first day of the lease term. H&r block free state If the capitalized cost of an item of listed property is specified in the lease agreement, you must treat that amount as the fair market value. H&r block free state Amount B. H&r block free state   Amount B is: The fair market value of the property, multiplied by The average of the business/investment use for all tax years the property was leased that precede the first tax year the qualified business-use percentage is 50% or less, multiplied by The applicable percentage from Table A–20 in Appendix A . H&r block free state Maximum inclusion amount. H&r block free state   The inclusion amount cannot be more than the sum of the deductible amounts of rent for the tax year in which the lessee must include the amount in gross income. H&r block free state Inclusion amount worksheet. H&r block free state   The following worksheet is provided to help you figure the inclusion amount for leased listed property. H&r block free state Inclusion Amount Worksheet for Leased Listed Property 1. H&r block free state Fair market value   2. H&r block free state Business/investment use for first year business use is 50% or less   3. H&r block free state Multiply line 1 by line 2. H&r block free state   4. H&r block free state Rate (%) from Table A-19   5. H&r block free state Multiply line 3 by line 4. H&r block free state This is Amount A. H&r block free state   6. H&r block free state Fair market value   7. H&r block free state Average business/investment use for years property leased before the first year business use is 50% or less . H&r block free state . H&r block free state . H&r block free state . H&r block free state . H&r block free state . H&r block free state . H&r block free state . H&r block free state . H&r block free state . H&r block free state . H&r block free state . H&r block free state . H&r block free state   8. H&r block free state Multiply line 6 by line 7   9. H&r block free state Rate (%) from Table A-20   10. H&r block free state Multiply line 8 by line 9. H&r block free state This is Amount B. H&r block free state   11. H&r block free state Add line 5 and line 10. H&r block free state This is your inclusion amount. H&r block free state Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc. H&r block free state )         Example. H&r block free state On February 1, 2011, Larry House, a calendar year taxpayer, leased and placed in service a computer with a fair market value of $3,000. H&r block free state The lease is for a period of 5 years. H&r block free state Larry does not use the computer at a regular business establishment, so it is listed property. H&r block free state His business use of the property (all of which is qualified business use) is 80% in 2011, 60% in 2012, and 40% in 2013. H&r block free state He must add an inclusion amount to gross income for 2013, the first tax year his qualified business-use percentage is 50% or less. H&r block free state The computer has a 5-year recovery period under both GDS and ADS. H&r block free state 2013 is the third tax year of the lease, so the applicable percentage from Table A-19 is −19. H&r block free state 8%. H&r block free state The applicable percentage from Table A-20 is 22. H&r block free state 0%. H&r block free state Larry's deductible rent for the computer for 2013 is $800. H&r block free state Larry uses the Inclusion amount worksheet. H&r block free state to figure the amount he must include in income for 2013. H&r block free state His inclusion amount is $224, which is the sum of −$238 (Amount A) and $462 (Amount B). H&r block free state Inclusion Amount Worksheet for Leased Listed Property 1. H&r block free state Fair market value $3,000   2. H&r block free state Business/investment use for first year business use is 50% or less 40 % 3. H&r block free state Multiply line 1 by line 2. H&r block free state 1,200   4. H&r block free state Rate (%) from Table A-19 −19. H&r block free state 8 % 5. H&r block free state Multiply line 3 by line 4. H&r block free state This is Amount A. H&r block free state −238   6. H&r block free state Fair market value 3,000   7. H&r block free state Average business/investment use for years property leased before the first year business use is 50% or less 70 % 8. H&r block free state Multiply line 6 by line 7 2,100   9. H&r block free state Rate (%) from Table A-20 22. H&r block free state 0 % 10. H&r block free state Multiply line 8 by line 9. H&r block free state This is Amount B. H&r block free state 462   11. H&r block free state Add line 5 and line 10. H&r block free state This is your inclusion amount. H&r block free state Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc. H&r block free state ) $224           Lease beginning in the last 9 months of your tax year. H&r block free state    The inclusion amount is subject to a special rule if all the following apply. H&r block free state The lease term begins within 9 months before the close of your tax year. H&r block free state You do not use the property predominantly (more than 50%) for qualified business use during that part of the tax year. H&r block free state The lease term continues into your next tax year. H&r block free state Under this special rule, add the inclusion amount to income in the next tax year. H&r block free state Figure the inclusion amount by taking into account the average of the business/investment use for both tax years (line 2 of the Inclusion Amount Worksheet for Leased Listed Property) and the applicable percentage for the tax year the lease term begins. H&r block free state Skip lines 6 through 9 of the worksheet and enter zero on line 10. H&r block free state Example 1. H&r block free state On August 1, 2012, Julie Rule, a calendar year taxpayer, leased and placed in service an item of listed property. H&r block free state The property is 5-year property with a fair market value of $10,000. H&r block free state Her property has a recovery period of 5 years under ADS. H&r block free state The lease is for 5 years. H&r block free state Her business use of the property was 50% in 2012 and 90% in 2013. H&r block free state She paid rent of $3,600 for 2012, of which $3,240 is deductible. H&r block free state She must include $147 in income in 2013. H&r block free state The $147 is the sum of Amount A and Amount B. H&r block free state Amount A is $147 ($10,000 × 70% × 2. H&r block free state 1%), the product of the fair market value, the average business use for 2012 and 2013, and the applicable percentage for year one from Table A-19 . H&r block free state Amount B is zero. H&r block free state Lease for less than one year. H&r block free state   A special rule for the inclusion amount applies if the lease term is less than one year and you do not use the property predominantly (more than 50%) for qualified business use. H&r block free state The amount included in income is the inclusion amount (figured as described in the preceding discussions) multiplied by a fraction. H&r block free state The numerator of the fraction is the number of days in the lease term and the denominator is 365 (or 366 for leap years). H&r block free state   The lease term for listed property other than residential rental or nonresidential real property includes options to renew. H&r block free state If you have two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property, treat them as one lease. H&r block free state Example 2. H&r block free state On October 1, 2012, John Joyce, a calendar year taxpayer, leased and placed in service an item of listed property that is 3-year property. H&r block free state This property had a fair market value of $15,000 and a recovery period of 5 years under ADS. H&r block free state The lease term was 6 months (ending on March 31, 2013), during which he used the property 45% in business. H&r block free state He must include $71 in income in 2013. H&r block free state The $71 is the sum of Amount A and Amount B. H&r block free state Amount A is $71 ($15,000 × 45% × 2. H&r block free state 1% × 183/365), the product of the fair market value, the average business use for both years, and the applicable percentage for year one from Table A-19 , prorated for the length of the lease. H&r block free state Amount B is zero. H&r block free state Where to report inclusion amount. H&r block free state   Report the inclusion amount figured as described in the preceding discussions as other income on the same form or schedule on which you took the deduction for your rental costs. H&r block free state For example, report the inclusion amount as other income on Schedule C (Form 1040) if you took the deduction on Schedule C. H&r block free state If you took the deduction for rental costs on Form 2106, report the inclusion amount as other income on Form 1040, line 21. H&r block free state Do the Passenger Automobile Limits Apply? The depreciation deduction, including the section 179 deduction and special depreciation allowance, you can claim for a passenger automobile (defined earlier) each year is limited. H&r block free state This section describes the maximum depreciation deduction amounts for 2013 and explains how to deduct, after the recovery period, the unrecovered basis of your property that results from applying the passenger automobile limit. H&r block free state Exception for leased cars. H&r block free state   The passenger automobile limits generally do not apply to passenger automobiles leased or held for leasing by anyone regularly engaged in the business of leasing passenger automobiles. H&r block free state For information on when you are considered regularly engaged in the business of leasing listed property, including passenger automobiles, see Exception for leased property , earlier, under What Is the Business-Use Requirement . H&r block free state Maximum Depreciation Deduction The passenger automobile limits are the maximum depreciation amounts you can deduct for a passenger automobile. H&r block free state They are based on the date you placed the automobile in service. H&r block free state Passenger Automobiles The maximum deduction amounts for most passenger automobiles are shown in the following table. H&r block free state Maximum Depreciation Deduction for Passenger Automobiles Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,1601 $5,100 $3,050 $1,875 2012 11,1601 5,100 3,050 1,875 2011 11,0602 4,900 2,950 1,775 2010 11,0602  4,900 2,950 1,775 2009 10,9603 4,800 2,850 1,775 2008 10,9603  4,800 2,850 1,775 2007 3,060 4,900 2,850 1,775 2006 2,960 4,800 2,850 1,775 2005 2,960 4,700 2,850 1,675 2004 10,6104 4,800 2,850 1,675 5/06/2003– 12/31/2003 10,7105 4,900 2,950 1,775 1/01/2003– 5/05/2003 7,6606 4,900 2,950 1,775 1If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. H&r block free state 2If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,060. H&r block free state 3If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $2,960. H&r block free state 4If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $2,960. H&r block free state 5If you acquired the vehicle before 5/06/03, the maximum deduction is $7,660. H&r block free state If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,060. H&r block free state 6If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,060. H&r block free state If your business/investment use of the automobile is less than 100%, you must reduce the maximum deduction amount by multiplying the maximum amount by the percentage of business/investment use determined on an annual basis during the tax year. H&r block free state If you have a short tax year, you must reduce the maximum deduction amount by multiplying the maximum amount by a fraction. H&r block free state The numerator of the fraction is the number of months and partial months in the short tax year and the denominator is 12. H&r block free state Example. H&r block free state On April 15, 2013, Virginia Hart bought and placed in service a new car for $14,500. H&r block free state She used the car only in her business. H&r block free state She files her tax return based on the calendar year. H&r block free state She does not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. H&r block free state Under MACRS, a car is 5-year property. H&r block free state Since she placed her car in service on April 15 and used it only for business, she uses the percentages in Table A-1 to figure her MACRS depreciation on the car. H&r block free state Virginia multiplies the $14,500 unadjusted basis of her car by 0. H&r block free state 20 to get her MACRS depreciation of $2,900 for 2013. H&r block free state This $2,900 is below the maximum depreciation deduction of $3,160 for passenger automobiles placed in service in 2013. H&r block free state She can deduct the full $2,900. H&r block free state Electric Vehicles The maximum depreciation deductions for passenger automobiles that are produced to run primarily on electricity are higher than those for other automobiles. H&r block free state The maximum deduction amounts for electric vehicles placed in service after August 5, 1997, and before January 1, 2007, are shown in the following table. H&r block free state Owners of electric vehicles placed in service after December 31, 2006, should use the table of maximum deduction amounts later for electric vehicles classified as passenger automobiles or use the table of maximum deduction amounts for trucks and vans later, for electric vehicles classified as trucks and vans. H&r block free state Maximum Depreciation Deduction For Electric Vehicles Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2006 $8,980 $14,400 $8,650 $5,225 2005 8,880 14,200 8,450 5,125 2004 31,8301 14,300 8,550 5,125 5/06/2003– 12/31/2003 32,0302 14,600 8,750 5,225 1/01/2003– 5/05/2003 22,8803 14,600 8,750 5,225 1If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $8,880. H&r block free state 2If you acquired the vehicle before 5/06/03, the maximum deduction is $22,880. H&r block free state If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,080. H&r block free state 3 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,080. H&r block free state Trucks and Vans The maximum depreciation deductions for trucks and vans placed in service after 2002 are higher than those for other passenger automobiles. H&r block free state The maximum deduction amounts for trucks and vans are shown in the following table. H&r block free state Maximum Depreciation Deduction For Trucks and Vans Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,3601 $5,400 $3,250 $1,975 2012 11,3601 5,300 3,150 1,875 2011 11,2602 5,200 3,150 1,875 2010 11,1603 5,100 3,050 1,875 2009 11,0604 4,900 2,950 1,775 2008 11,1605 5,100 3,050 1,875 2007 3,260 5,200 3,050 1,875 2006 3,260 5,200 3,150 1,875 2005 3,260 5,200 3,150 1,875 2004 10,9106 5,300 3,150 1,875 5/06/2003– 12/31/2003 11,0107 5,400 3,250 1,975 1/01/2003– 5/05/2003 7,9608 5,400 3,250 1,975 1 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,360. H&r block free state 2 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,260. H&r block free state 3 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. H&r block free state 4 If you elect not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,060. H&r block free state 5If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,160. H&r block free state 6If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, or the maximum deduction is $3,260. H&r block free state 7 If you acquired the vehicle before 5/06/03, the maximum deduction is $7,960. H&r block free state If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,360. H&r block free state 8 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,360. H&r block free state Depreciation Worksheet for Passenger Automobiles You can use the following worksheet to figure your depreciation deduction using the percentage tables. H&r block free state Then use the information from this worksheet to prepare Form 4562. H&r block free state Depreciation Worksheet for Passenger Automobiles   Part I   1. H&r block free state MACRS system (GDS or ADS)     2. H&r block free state Property class     3. H&r block free state Date placed in service     4. H&r block free state Recovery period     5. H&r block free state Method and convention     6. H&r block free state Depreciation rate (from tables)     7. H&r block free state Maximum depreciation deduction for this year from the appropriate table       8. H&r block free state Business/investment-use percentage       9. H&r block free state Multiply line 7 by line 8. H&r block free state This is your adjusted maximum depreciation deduction       10. H&r block free state Section 179 deduction claimed this year (not more than line 9). H&r block free state Enter -0- if this is not the year you placed the car in service. H&r block free state         Note. H&r block free state  1) If line 10 is equal to line 9, stop here. H&r block free state Your combined section 179 and depreciation deduction (including your special depreciation allowance) is limited to the amount on line 9. H&r block free state  2) If line 10 is less than line 9, complete Part II. H&r block free state   Part II   11. H&r block free state Subtract line 10 from line 9. H&r block free state This is the limit on the amount you can deduct for depreciation (including any special depreciation allowance )       12. H&r block free state Cost or other basis (reduced by any alternative motor vehicle credit 1or credit for electric vehicles 2)       13. H&r block free state Multiply line 12 by line 8. H&r block free state This is your business/investment cost       14. H&r block free state Section 179 deduction claimed in the year you placed the car in service       15. H&r block free state Subtract line 14 from line 13. H&r block free state This is your tentative basis for depreciation       16. H&r block free state Multiply line 15 by . H&r block free state 50 if the 50% special depreciation allowance applies. H&r block free state This is your special depreciation allowance. H&r block free state Enter -0- if this is not the year you placed the car in service, the car is not qualified property, or you elected not to claim a special depreciation allowance       Note 1) If line 16 is equal to line 11, stop here. H&r block free state Your depreciation deduction (including your special depreciation allowance) is limited to the amount on line 11. H&r block free state  2) If line 16 is less than line 11, complete Part III. H&r block free state   Part III   17. H&r block free state Subtract line 16 from 11. H&r block free state This is the limit on the amount you can deduct for MACRS depreciation       18. H&r block free state Subtract line 16 from line 15. H&r block free state This is your basis for depreciation. H&r block free state       19. H&r block free state Multiply line 18 by line 6. H&r block free state This is your tentative MACRS depreciation deduction. H&r block free state       20. H&r block free state Enter the lesser of line 17 or line 19. H&r block free state This is your MACRS depreciation deduction. H&r block free state     1 When figuring the amount to enter on line 12, do not reduce your cost or other basis by any section 179 deduction you claimed for your car. H&r block free state 2 Reduce the basis by the lesser of $4,000 or 10% of the cost of the vehicle even if the credit is less than that amount. H&r block free state             Deductions After the Recovery Period If the depreciation deductions for your automobile are reduced under the passenger automobile limits, you will have unrecovered basis in your automobile at the end of the recovery period. H&r block free state If you continue to use the automobile for business, you can deduct that unrecovered basis after the recovery period ends. H&r block free state You can claim a depreciation deduction in each succeeding tax year until you recover your full basis in the car. H&r block free state The maximum amount you can deduct each year is determined by the date you placed the car in service and your business/investment-use percentage. H&r block free state See Maximum Depreciation Deduction , earlier. H&r block free state Unrecovered basis is the cost or other basis of the passenger automobile reduced by any clean-fuel vehicle deduction, electric vehicle credit, depreciation, and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use and the passenger automobile limits had not applied. H&r block free state You cannot claim a depreciation deduction for listed property other than passenger automobiles after the recovery period ends. H&r block free state There is no unrecovered basis at the end of the recovery period because you are considered to have used this property 100% for business and investment purposes during all of the recovery period. H&r block free state Example. H&r block free state In May 2007, you bought and placed in service a car costing $31,500. H&r block free state The car was 5-year property under GDS (MACRS). H&r block free state You did not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. H&r block free state You used the car exclusively for business during the recovery period (2007 through 2012). H&r block free state You figured your depreciation as shown below. H&r block free state Year Percentage Amount Limit   Allowed 2007 20. H&r block free state 0% $6,300 $2,960   $2,960 2008 32. H&r block free state 0 10,080 4,800   4,800 2009 19. H&r block free state 2 6,048 2,850   2,850 2010 11. H&r block free state 52 3,629 1,675   1,675 2011 11. H&r block free state 52 3,629 1,675   1,675 2012 5. H&r block free state 76 1,814 1,675   1,675 Total   $15,635 At the end of 2012, you had an unrecovered basis of $15,865 ($31,500 − $15,635). H&r block free state If in 2013 and later years you continue to use the car 100% for business, you can deduct each year the lesser of $1,675 or your remaining unrecovered basis. H&r block free state If your business use of the car had been less than 100% during any year, your depreciation deduction would have been less than the maximum amount allowable for that year. H&r block free state However, in figuring your unrecovered basis in the car, you would still reduce your basis by the maximum amount allowable as if the business use had been 100%. H&r block free state For example, if you had used your car 60% for business instead of 100%, your allowable depreciation deductions would have been $9,519 ($15,865 × 60%), but you still would have to reduce your basis by $15,865 to determine your unrecovered basis. H&r block free state Deductions For Passenger Automobiles Acquired in a Trade-in If you acquire a passenger automobile in a trade-in, depreciate the carryover basis separately as if the trade-in did not occur. H&r block free state Depreciate the part of the new automobile's basis that exceeds its carryover basis (excess basis) as if it were newly placed in service property. H&r block free state This excess basis is the additional cash paid for the new automobile in the trade-in. H&r block free state The depreciation figured for the two components of the basis (carryover basis and excess basis) is subject to a single passenger automobile limit. H&r block free state Special rules apply in determining the passenger automobile limits. H&r block free state These rules and examples are discussed in section 1. H&r block free state 168(i)-6(d)(3) of the regulations. H&r block free state Instead of figuring depreciation for the carryover basis and the excess basis separately, you can elect to treat the old automobile as disposed of and both of the basis components for the new automobile as if placed in service at the time of the trade-in. H&r block free state For more information, including how to make this election, see Election out under Property Acquired in a Like-kind Exchange or Involuntary Conversion in chapter 4 and sections 1. H&r block free state 168(i)-6(i) and 1. H&r block free state 168(i)-6(j) of the regulations. H&r block free state What Records Must Be Kept? You cannot take any depreciation or section 179 deduction for the use of listed property unless you can prove your business/investment use with adequate records or with sufficient evidence to support your own statements. H&r block free state For listed property, you must keep records for as long as any recapture can still occur. H&r block free state Recapture can occur in any tax year of the recovery period. H&r block free state Adequate Records To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. H&r block free state You do not have to record information in an account book, diary, or similar record if the information is already shown on the receipt. H&r block free state However, your records should back up your receipts in an orderly manner. H&r block free state Elements of expenditure or use. H&r block free state   Your records or other documentary evidence must support all the following. H&r block free state The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses. H&r block free state The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year. H&r block free state The date of the expenditure or use. H&r block free state The business or investment purpose for the expenditure or use. H&r block free state   Written documents of your expenditure or use are generally better evidence than oral statements alone. H&r block free state You do not have to keep a daily log. H&r block free state However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time of the expenditure or use and backed up by other documents is preferable to a statement you prepare later. H&r block free state Timeliness. H&r block free state   You must record the elements of an expenditure or use at the time you have full knowledge of the elements. H&r block free state An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use generally is considered a timely record if, in the regular course of business: The statement is given by an employee to the employer, or The statement is given by an independent contractor to the client or customer. H&r block free state   For example, a log maintained on a weekly basis, that accounts for use during the week, will be considered a record made at or near the time of use. H&r block free state Business purpose supported. H&r block free state   Generally, an adequate record of business purpose must be in the form of a written statement. H&r block free state However, the amount of detail necessary to establish a business purpose depends on the facts and circumstances of each case. H&r block free state A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. H&r block free state For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel. H&r block free state Business use supported. H&r block free state   An adequate record contains enough information on each element of every business or investment use. H&r block free state The amount of detail required to support the use depends on the facts and circumstances. H&r block free state For example, a taxpayer who uses a truck for both business and personal purposes and whose only business use of the truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips. H&r block free state   Although you generally must prepare an adequate written record, you can prepare a record of the business use of listed property in a computer memory device that uses a logging program. H&r block free state Separate or combined expenditures or uses. H&r block free state   Each use by you normally is considered a separate use. H&r block free state However, you can combine repeated uses as a single item. H&r block free state   Record each expenditure as a separate item. H&r block free state Do not combine it with other expenditures. H&r block free state If you choose, however, you can combine amounts you spent for the use of listed property during a tax year, such as for gasoline or automobile repairs. H&r block free state If you combine these expenses, you do not need to support the business purpose of each expense. H&r block free state Instead, you can divide the expenses based on the total business use of the listed property. H&r block free state   You can account for uses that can be considered part of a single use, such as a round trip or uninterrupted business use, by a single record. H&r block free state For example, you can account for the use of a truck to make deliveries at several locations that begin and end at the business premises and can include a stop at the business in between deliveries by a single record of miles driven. H&r block free state You can account for the use of a passenger automobile by a salesperson for a business trip away from home over a period of time by a single record of miles traveled. H&r block free state Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use. H&r block free state Confidential information. H&r block free state   If any of the information on the elements of an expenditure or use is confidential, you do not need to include it in the account book or similar record if you record it at or near the time of the expenditure or use. H&r block free state You must keep it elsewhere and make it available as support to the IRS director for your area on request. H&r block free state Substantial compliance. H&r block free state   If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the satisfaction of the IRS director for your area, you can establish this element by any evidence the IRS director for your area deems adequate. H&r block free state   If you fail to establish to the satisfaction of the IRS director for your area that you have substantially complied with the adequate records requirement for an element of an expenditure or use, you must establish the element as follows. H&r block free state By your own oral or written statement containing detailed information as to the element. H&r block free state By other evidence sufficient to establish the element. H&r block free state   If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct evidence, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. H&r block free state If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence. H&r block free state Sampling. H&r block free state   You can maintain an adequate record for part of a tax year and use that record to support your business and investment use of listed property for the entire tax year if it can be shown by other evidence that the periods for which you maintain an adequate record are representative of the use throughout the year. H&r block free state Example 1. H&r block free state Denise Williams, a sole proprietor and calendar year taxpayer, operates an interior decorating business out of her home. H&r block free state She uses her automobile for local business visits to the homes or offices of clients, for meetings with suppliers and subcontractors, and to pick up and deliver items to clients. H&r block free state There is no other business use of the automobile, but she and family members also use it for personal purposes. H&r block free state She maintains adequate records for the first 3 months of the year showing that 75% of the automobile use was for business. H&r block free state Subcontractor invoices and paid bills show that her business continued at approximately the same rate for the rest of the year. H&r block free state If there is no change in circumstances, such as the purchase of a second car for exclusive use in her business, the determination that her combined business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence. H&r block free state Example 2. H&r block free state Assume the same facts as in Example 1, except that Denise maintains adequate records during the first week of every month showing that 75% of her use of the automobile is for business. H&r block free state Her business invoices show that her business continued at the same rate during the later weeks of each month so that her weekly records are representative of the automobile's business use throughout the month. H&r block free state The determination that her business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence. H&r block free state Example 3. H&r block free state Bill Baker, a sole proprietor and calendar year taxpayer, is a salesman in a large metropolitan area for a company that manufactures household products. H&r block free state For the first 3 weeks of each month, he occasionally uses his own automobile for business travel within the metropolitan area. H&r block free state During these weeks, his business use of the automobile does not follow a consistent pattern. H&r block free state During the fourth week of each month, he delivers all business orders taken during the previous month. H&r block free state The business use of his automobile, as supported by adequate records, is 70% of its total use during that fourth week. H&r block free state The determination based on the record maintained during the fourth week of the month that his business/investment use of the automobile for the tax year is 70% does not rest on sufficient supporting evidence because his use during that week is not representative of use during other periods. H&r block free state Loss of records. H&r block free state   When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use. H&r block free state How Is Listed Property Information Reported? You must provide the information about your listed property requested in Part V of Form 4562, Section A, if you claim either of the following deductions. H&r block free state Any deduction for a vehicle. H&r block free state A depreciation deduction for any other listed property. H&r block free state If you claim any deduction for a vehicle, you also must provide the information requested in Section B. H&r block free state If you provide the vehicle for your employee's use, the employee must give you this information. H&r block free state If you provide any vehicle for use by an employee, you must first answer the questions in Section C to see if you meet an exception to completing Section B for that vehicle. H&r block free state Vehicles used by your employees. H&r block free state   You do not have to complete Section B, Part V, for vehicles used by your employees who are not more-than-5% owners or related persons if you meet at least one of the following requirements. H&r block free state You maintain a written policy statement that prohibits one of the following uses of the vehicles. H&r block free state All personal use including commuting. H&r block free state Personal use, other than commuting, by employees who are not officers, directors, or 1%-or-more owners. H&r block free state You treat all use of the vehicles by your employees as personal use. H&r block free state You provide more than five vehicles for use by your employees, and you keep in your records the information on their use given to you by the employees. H&r block free state For demonstrator automobiles provided to full-time salespersons, you maintain a written policy statement that limits the total mileage outside the salesperson's normal working hours and prohibits use of the automobile by anyone else, for vacation trips, or to store personal possessions. H&r block free state Exceptions. H&r block free state   If you file Form 2106, 2106-EZ, or Schedule C-EZ (Form 1040), and you are not required to file Form 4562, report information about listed property on that form and not on Form 4562. H&r block free state Also, if you file Schedule C (Form 1040) and are claiming the standard mileage rate or actual vehicle expenses (except depreciation) and you are not required to file Form 4562 for any other reason, report vehicle information in Part IV of Schedule C and not on Form 4562. H&r block free state Prev  Up  Next   Home   More Online Publications