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H&r Block Military

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H&r Block Military

H&r block military 4. H&r block military   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. H&r block military Payments from checking accounts. H&r block military Amounts paid within 30 days. H&r block military Optional method for determining date of reallocation. H&r block military Interest on a segregated account. H&r block military How to report. H&r block military Interest You Can DeductStatement. H&r block military Expenses paid to obtain a mortgage. H&r block military Prepayment penalty. H&r block military De minimis OID. H&r block military Constant-yield method. H&r block military Loan or mortgage ends. H&r block military Interest You Cannot DeductPenalties. H&r block military Who is a key person? Exceptions for pre-June 1997 contracts. H&r block military Interest allocated to unborrowed policy cash value. H&r block military Capitalization of Interest When To Deduct InterestPrepaid interest. H&r block military Discounted loan. H&r block military Refunds of interest. H&r block military Prepaid interest. H&r block military Discounted loan. H&r block military Tax deficiency. H&r block military Related person. H&r block military Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. H&r block military Introduction This chapter discusses the tax treatment of business interest expense. H&r block military Business interest expense is an amount charged for the use of money you borrowed for business activities. H&r block military Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. H&r block military Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. H&r block military 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. H&r block military Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. H&r block military If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. H&r block military Allocate your interest expense to the following categories. H&r block military Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. H&r block military You allocate loan proceeds by tracing disbursements to specific uses. H&r block military The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. H&r block military Secured loan. H&r block military   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. H&r block military Example. H&r block military You secure a loan with property used in your business. H&r block military You use the loan proceeds to buy an automobile for personal use. H&r block military You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. H&r block military    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. H&r block military The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. H&r block military For more information, see Publication 936. H&r block military Allocation period. H&r block military   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. H&r block military The date the loan is repaid. H&r block military The date the loan is reallocated to another use. H&r block military Proceeds not disbursed to borrower. H&r block military   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. H&r block military This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. H&r block military Proceeds deposited in borrower's account. H&r block military   Treat loan proceeds deposited in an account as property held for investment. H&r block military It does not matter whether the account pays interest. H&r block military Any interest you pay on the loan is investment interest expense. H&r block military If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. H&r block military Example. H&r block military Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. H&r block military No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. H&r block military On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. H&r block military On September 4, Celina uses an additional $40,000 from the account for personal purposes. H&r block military Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. H&r block military From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. H&r block military From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. H&r block military Order of funds spent. H&r block military   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. H&r block military Any unborrowed amounts held in the same account. H&r block military Any amounts deposited after these loan proceeds. H&r block military Example. H&r block military On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. H&r block military The following table shows the transactions in her account during the tax year. H&r block military Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. H&r block military She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. H&r block military She treats the $800 used for an investment as made entirely from the proceeds of Loan C. H&r block military She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. H&r block military For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. H&r block military Payments from checking accounts. H&r block military   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. H&r block military You can treat checks written on the same day as written in any order. H&r block military Amounts paid within 30 days. H&r block military   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. H&r block military This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. H&r block military   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. H&r block military If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. H&r block military   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. H&r block military Example. H&r block military Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. H&r block military Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. H&r block military Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. H&r block military Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. H&r block military In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. H&r block military Optional method for determining date of reallocation. H&r block military   You can use the following method to determine the date loan proceeds are reallocated to another use. H&r block military You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. H&r block military The first day of that month. H&r block military The date the loan proceeds are deposited in the account. H&r block military However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. H&r block military Interest on a segregated account. H&r block military   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. H&r block military When the interest earned is used up, any remaining payments are from loan proceeds. H&r block military Example. H&r block military You borrowed $20,000 and used the proceeds of this loan to open a new savings account. H&r block military When the account had earned interest of $867, you withdrew $20,000 for personal purposes. H&r block military You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). H&r block military All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. H&r block military The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. H&r block military The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. H&r block military Loan repayment. H&r block military   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. H&r block military Personal use. H&r block military Investments and passive activities (other than those included in (3)). H&r block military Passive activities in connection with a rental real estate activity in which you actively participate. H&r block military Former passive activities. H&r block military Trade or business use and expenses for certain low-income housing projects. H&r block military Line of credit (continuous borrowings). H&r block military   The following rules apply if you have a line of credit or similar arrangement. H&r block military Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. H&r block military Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. H&r block military Treat these loans as repaid in the order shown on the loan agreement. H&r block military Loan refinancing. H&r block military   Allocate the replacement loan to the same uses to which the repaid loan was allocated. H&r block military Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. H&r block military Debt-financed distribution. H&r block military   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. H&r block military The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. H&r block military How to report. H&r block military   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). H&r block military If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). H&r block military If the proceeds were used in an investment activity, enter the interest on Form 4952. H&r block military If the proceeds are used for personal purposes, the interest is generally not deductible. H&r block military Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. H&r block military Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. H&r block military It does not matter what type of property secures the loan. H&r block military You can deduct interest on a debt only if you meet all the following requirements. H&r block military You are legally liable for that debt. H&r block military Both you and the lender intend that the debt be repaid. H&r block military You and the lender have a true debtor-creditor relationship. H&r block military Partial liability. H&r block military   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. H&r block military Example. H&r block military You and your brother borrow money. H&r block military You are liable for 50% of the note. H&r block military You use your half of the loan in your business, and you make one-half of the loan payments. H&r block military You can deduct your half of the total interest payments as a business deduction. H&r block military Mortgage. H&r block military   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. H&r block military However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. H&r block military Statement. H&r block military   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. H&r block military You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. H&r block military A governmental unit is a person for purposes of furnishing the statement. H&r block military   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. H&r block military You cannot deduct this amount. H&r block military For information on how to report this refund, see Refunds of interest, later in this chapter. H&r block military Expenses paid to obtain a mortgage. H&r block military   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. H&r block military These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. H&r block military If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. H&r block military Prepayment penalty. H&r block military   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. H&r block military Interest on employment tax deficiency. H&r block military   Interest charged on employment taxes assessed on your business is deductible. H&r block military Original issue discount (OID). H&r block military   OID is a form of interest. H&r block military A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. H&r block military The OID is the difference between the stated redemption price at maturity and the issue price of the loan. H&r block military   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. H&r block military Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. H&r block military You generally deduct OID over the term of the loan. H&r block military Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. H&r block military De minimis OID. H&r block military   The OID is de minimis if it is less than one-fourth of 1% (. H&r block military 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). H&r block military   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. H&r block military On a constant-yield basis over the term of the loan. H&r block military On a straight-line basis over the term of the loan. H&r block military In proportion to stated interest payments. H&r block military In its entirety at maturity of the loan. H&r block military You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. H&r block military Example. H&r block military On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. H&r block military The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. H&r block military Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. H&r block military The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . H&r block military 0025 × 10). H&r block military You choose to deduct the OID on a straight-line basis over the term of the loan. H&r block military Beginning in 2013, you can deduct $150 each year for 10 years. H&r block military Constant-yield method. H&r block military   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. H&r block military You figure your deduction for the first year using the following steps. H&r block military Determine the issue price of the loan. H&r block military Generally, this equals the proceeds of the loan. H&r block military If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. H&r block military Multiply the result in (1) by the yield to maturity. H&r block military Subtract any qualified stated interest payments from the result in (2). H&r block military This is the OID you can deduct in the first year. H&r block military   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). H&r block military To get the adjusted issue price, add to the issue price any OID previously deducted. H&r block military Then follow steps (2) and (3) above. H&r block military   The yield to maturity is generally shown in the literature you receive from your lender. H&r block military If you do not have this information, consult your lender or tax advisor. H&r block military In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. H&r block military Example. H&r block military The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. H&r block military The yield to maturity on your loan is 10. H&r block military 2467%, compounded annually. H&r block military For 2013, you can deduct $93 [($98,500 × . H&r block military 102467) − $10,000]. H&r block military For 2014, you can deduct $103 [($98,593 × . H&r block military 102467) − $10,000]. H&r block military Loan or mortgage ends. H&r block military   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. H&r block military A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. H&r block military If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. H&r block military See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. H&r block military Points. H&r block military   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. H&r block military These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. H&r block military If any of these charges (points) are solely for the use of money, they are interest. H&r block military   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. H&r block military However, you can choose to fully deduct points in the year paid if you meet certain tests. H&r block military For exceptions to the general rule, see Publication 936. H&r block military The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. H&r block military Partial payments on a nontax debt. H&r block military   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. H&r block military You can deduct only the interest. H&r block military This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. H&r block military Installment purchase. H&r block military   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. H&r block military If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). H&r block military The amount recharacterized as interest reduces your basis in the property and increases your interest expense. H&r block military For more information on installment sales and unstated interest, see Publication 537. H&r block military Interest You Cannot Deduct Certain interest payments cannot be deducted. H&r block military In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. H&r block military You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. H&r block military Interest paid with funds borrowed from original lender. H&r block military   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. H&r block military You can deduct the interest expense once you start making payments on the new loan. H&r block military   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. H&r block military All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. H&r block military Capitalized interest. H&r block military   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. H&r block military See Capitalization of Interest, later. H&r block military In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. H&r block military Add this interest to the basis of the property. H&r block military Commitment fees or standby charges. H&r block military   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. H&r block military You may be able to deduct them as business expenses. H&r block military   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. H&r block military See Capitalization of Interest, later. H&r block military Interest on income tax. H&r block military   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. H&r block military Treat this interest as a business deduction only in figuring a net operating loss deduction. H&r block military Penalties. H&r block military   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. H&r block military You cannot deduct them. H&r block military Generally, you cannot deduct any fines or penalties. H&r block military Interest on loans with respect to life insurance policies. H&r block military   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. H&r block military   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. H&r block military However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. H&r block military Who is a key person?   A key person is an officer or 20% owner. H&r block military However, the number of individuals you can treat as key persons is limited to the greater of the following. H&r block military Five individuals. H&r block military The lesser of 5% of the total officers and employees of the company or 20 individuals. H&r block military Exceptions for pre-June 1997 contracts. H&r block military   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. H&r block military If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. H&r block military Interest allocated to unborrowed policy cash value. H&r block military   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. H&r block military This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. H&r block military For more information, see section 264(f) of the Internal Revenue Code. H&r block military Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. H&r block military The property must be produced by you for use in your trade or business or for sale to customers. H&r block military You cannot capitalize interest related to property that you acquire in any other manner. H&r block military Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. H&r block military Designated property is any of the following. H&r block military Real property. H&r block military Tangible personal property with a class life of 20 years or more. H&r block military Tangible personal property with an estimated production period of more than 2 years. H&r block military Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. H&r block military Property you produce. H&r block military   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. H&r block military Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. H&r block military Carrying charges. H&r block military   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. H&r block military You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. H&r block military For more information, see chapter 7. H&r block military Capitalized interest. H&r block military   Treat capitalized interest as a cost of the property produced. H&r block military You recover your interest when you sell or use the property. H&r block military If the property is inventory, recover capitalized interest through cost of goods sold. H&r block military If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. H&r block military Partnerships and S corporations. H&r block military   The interest capitalization rules are applied first at the partnership or S corporation level. H&r block military The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. H&r block military   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. H&r block military You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. H&r block military To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. H&r block military Additional information. H&r block military   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. H&r block military For more information, see sections 1. H&r block military 263A-8 through 1. H&r block military 263A-15 of the regulations and Notice 88-99. H&r block military Notice 88-99 is in Cumulative Bulletin 1988-2. H&r block military When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. H&r block military Cash method. H&r block military   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. H&r block military You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. H&r block military Prepaid interest. H&r block military   You generally cannot deduct any interest paid before the year it is due. H&r block military Interest paid in advance can be deducted only in the tax year in which it is due. H&r block military Discounted loan. H&r block military   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. H&r block military For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. H&r block military Refunds of interest. H&r block military   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. H&r block military If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. H&r block military Accrual method. H&r block military   Under an accrual method, you can deduct only interest that has accrued during the tax year. H&r block military Prepaid interest. H&r block military   See Prepaid interest, earlier. H&r block military Discounted loan. H&r block military   See Discounted loan, earlier. H&r block military Tax deficiency. H&r block military   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. H&r block military If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. H&r block military   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. H&r block military Related person. H&r block military   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. H&r block military The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. H&r block military See section 267 of the Internal Revenue Code for more information. H&r block military Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. H&r block military See Treatment of gift and demand loans, later, in this discussion. H&r block military A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. H&r block military A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. H&r block military A loan in exchange for a note that requires the payment of interest at the applicable federal rate. H&r block military An additional payment in an amount equal to the forgone interest. H&r block military The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. H&r block military Forgone interest. H&r block military   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. H&r block military Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. H&r block military Internal Revenue Bulletins are available on the IRS web site at www. H&r block military irs. H&r block military gov/irb. H&r block military You can also contact an IRS office to get these rates. H&r block military Loans subject to the rules. H&r block military   The rules for below-market loans apply to the following. H&r block military Gift loans (below-market loans where the forgone interest is in the nature of a gift). H&r block military Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). H&r block military Corporation-shareholder loans. H&r block military Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). H&r block military Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). H&r block military   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. H&r block military Treatment of gift and demand loans. H&r block military   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. H&r block military ) equal to the forgone interest on the loan. H&r block military You are then treated as transferring this amount back to the lender as interest. H&r block military These transfers are considered to occur annually, generally on December 31. H&r block military If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. H&r block military The lender must report it as interest income. H&r block military Limit on forgone interest for gift loans of $100,000 or less. H&r block military   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. H&r block military This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. H&r block military If the borrower's net investment income is $1,000 or less, it is treated as zero. H&r block military This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. H&r block military Treatment of term loans. H&r block military   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. H&r block military ) on the date the loan is made. H&r block military This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. H&r block military The same amount is treated as original issue discount on the loan. H&r block military See Original issue discount (OID) under Interest You Can Deduct, earlier. H&r block military Exceptions for loans of $10,000 or less. H&r block military   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. H&r block military This exception applies only to the following. H&r block military Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. H&r block military Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. H&r block military This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. H&r block military Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. H&r block military Exceptions for loans without significant tax effect. H&r block military   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. H&r block military Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. H&r block military Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. H&r block military Certain employee-relocation loans. H&r block military Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. H&r block military S. H&r block military trade or business and not exempt from U. H&r block military S. H&r block military tax under an income tax treaty. H&r block military Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. H&r block military Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. H&r block military Consider all the following factors. H&r block military Whether items of income and deduction generated by the loan offset each other. H&r block military The amount of the items. H&r block military The cost of complying with the below-market loan provisions if they were to apply. H&r block military Any reasons, other than taxes, for structuring the transaction as a below-market loan. H&r block military Exception for loans to qualified continuing care facilities. H&r block military   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. H&r block military A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. H&r block military Designed to provide services under continuing care contracts (defined below). H&r block military Includes an independent living unit, and either an assisted living or nursing facility, or both. H&r block military Substantially all of the independent living unit residents are covered by continuing care contracts. H&r block military A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. H&r block military The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. H&r block military The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. H&r block military The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. H&r block military For more information, see section 7872(h) of the Internal Revenue Code. H&r block military Sale or exchange of property. H&r block military   Different rules generally apply to a loan connected with the sale or exchange of property. H&r block military If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. H&r block military However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. H&r block military See Unstated Interest and Original Issue Discount (OID) in Publication 537. H&r block military More information. H&r block military   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. H&r block military 7872-5 of the regulations. H&r block military Prev  Up  Next   Home   More Online Publications
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Robo de Identidad y su Record Tributario

El IRS trabajará con víctimas del robo de identidad
El Servicio de Impuestos Internos, (Internal Revenue Service, IRS) no inicia comunicación con el contribuyente a través de correo electrónico. Antes de que sea robada su identidad, proteja su información.

¡Proteja su información personal! El IRS no inicia comunicación con los contribuyentes a través de correo electrónico
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Cómo enviar el encabezado de un correo electrónico de phishing
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Protéjase a usted mismo y reporte emails dudosos o estafas de phishing
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Page Last Reviewed or Updated: 12-Dec-2013

The H&r Block Military

H&r block military 3. H&r block military   Reporting Rental Income, Expenses, and Losses Table of Contents Which Forms To UseSchedule E (Form 1040) Schedule C (Form 1040), Profit or Loss From Business Qualified Joint Venture Limits on Rental LossesAt-Risk Rules Passive Activity Limits Casualties and Thefts Example Figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on Schedule E (Form 1040). H&r block military There are activities which do not qualify to use Schedule E, such as when the activity is not engaged in to make a profit or when you provide substantial services in conjunction with the property. H&r block military There are also the limitations which may need to be applied if you have a net loss on Schedule E. H&r block military There are two: (1) the limitation based on the amount of investment you have at risk in your rental activity, and (2) the special limits imposed on passive activities. H&r block military You may also have a gain or loss related to your rental property from a casualty or theft. H&r block military This is considered separately from the income and expense information you report on Schedule E. H&r block military Which Forms To Use The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). H&r block military However, do not use that schedule to report a not-for-profit activity. H&r block military See Not Rented for Profit , in chapter 4. H&r block military There are also other rental situations in which forms other than Schedule E would be used. H&r block military Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. H&r block military , you normally report your rental income and expenses on Schedule E, Part I. H&r block military List your total income, expenses, and depreciation for each rental property. H&r block military Be sure to enter the number of fair rental and personal use days on line 2. H&r block military If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. H&r block military Complete lines 1 and 2 for each property. H&r block military However, fill in lines 23a through 26 on only one Schedule E. H&r block military On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. H&r block military To find out if you need to attach Form 4562, see Form 4562 , later. H&r block military If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. H&r block military Form 6198, At-Risk Limitations. H&r block military See At-Risk Rules , later. H&r block military Also see Publication 925. H&r block military Form 8582, Passive Activity Loss Limitations. H&r block military See Passive Activity Limits , later. H&r block military Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. H&r block military If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. H&r block military Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). H&r block military Form 4562. H&r block military   You must complete and attach Form 4562 for rental activities only if you are claiming: Depreciation, including the special depreciation allowance, on property placed in service during 2013; Depreciation on listed property (such as a car), regardless of when it was placed in service; or Any other car expenses, including the standard mileage rate or lease expenses. H&r block military Otherwise, figure your depreciation on your own worksheet. H&r block military You do not have to attach these computations to your return, but you should keep them in your records for future reference. H&r block military   See Publication 946 for information on preparing Form 4562. H&r block military Schedule C (Form 1040), Profit or Loss From Business Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer. H&r block military Providing substantial services. H&r block military   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. H&r block military Use Form 1065, U. H&r block military S. H&r block military Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). H&r block military Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. H&r block military For information, see Publication 334, Tax Guide for Small Business. H&r block military Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. H&r block military For a discussion of “substantial services,” see Real Estate Rents in Publication 334, chapter 5. H&r block military Qualified Joint Venture If you and your spouse each materially participate (see Material participation under Passive Activity Limits, later) as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. H&r block military This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. H&r block military If you make this election, you must report rental real estate income on Schedule E (or Schedule C if you provide substantial services). H&r block military You will not be required to file Form 1065 for any year the election is in effect. H&r block military Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive activity limits. H&r block military If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect. H&r block military For more information on qualified joint ventures, go to IRS. H&r block military gov and enter “qualified joint venture” in the search box. H&r block military Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. H&r block military You must consider these rules in the order shown below. H&r block military Both are discussed in this section. H&r block military At-risk rules. H&r block military These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. H&r block military This applies only if the real property was placed in service after 1986. H&r block military Passive activity limits. H&r block military Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. H&r block military However, there are exceptions. H&r block military At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. H&r block military Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. H&r block military In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. H&r block military You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. H&r block military Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. H&r block military See Publication 925 for a discussion of the at-risk rules. H&r block military Form 6198. H&r block military   If you are subject to the at-risk rules, file Form 6198, At-Risk Limitations, with your tax return. H&r block military Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. H&r block military For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. H&r block military For a discussion of activities that are not considered rental activities, see Rental Activities in Publication 925. H&r block military Deductions or losses from passive activities are limited. H&r block military You generally cannot offset income, other than passive income, with losses from passive activities. H&r block military Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. H&r block military Any excess loss or credit is carried forward to the next tax year. H&r block military Exceptions to the rules for figuring passive activity limits for personal use of a dwelling unit and for rental real estate with active participation are discussed later. H&r block military For a detailed discussion of these rules, see Publication 925. H&r block military Real estate professionals. H&r block military   If you are a real estate professional, complete line 43 of Schedule E. H&r block military      You qualify as a real estate professional for the tax year if you meet both of the following requirements. H&r block military More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate. H&r block military You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. H&r block military If you qualify as a real estate professional, rental real estate activities in which you materially participated are not passive activities. H&r block military For purposes of determining whether you materially participated in your rental real estate activities, each interest in rental real estate is a separate activity unless you elect to treat all your interests in rental real estate as one activity. H&r block military   Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. H&r block military You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest. H&r block military   Do not count your spouse's personal services to determine whether you met the requirements listed earlier to qualify as a real estate professional. H&r block military However, you can count your spouse's participation in an activity in determining if you materially participated. H&r block military Real property trades or businesses. H&r block military   A real property trade or business is a trade or business that does any of the following with real property. H&r block military Develops or redevelops it. H&r block military Constructs or reconstructs it. H&r block military Acquires it. H&r block military Converts it. H&r block military Rents or leases it. H&r block military Operates or manages it. H&r block military Brokers it. H&r block military Choice to treat all interests as one activity. H&r block military   If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. H&r block military You can make this choice for any year that you qualify as a real estate professional. H&r block military If you forgo making the choice for one year, you can still make it for a later year. H&r block military   If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. H&r block military This is true even if you are not a real estate professional in any intervening year. H&r block military (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules. H&r block military )   See the Instructions for Schedule E for information about making this choice. H&r block military Material participation. H&r block military   Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. H&r block military For details, see Publication 925 or the Instructions for Schedule C. H&r block military Participating spouse. H&r block military   If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. H&r block military Do this even if your spouse owns no interest in the activity or files a separate return for the year. H&r block military Form 8582. H&r block military    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. H&r block military See Form 8582 not required , later in this chapter, to determine if you must complete Form 8582. H&r block military   If you are required to complete Form 8582 and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible loss) in column (b) of Form 8582, Worksheet 1 or 3, as required. H&r block military Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. H&r block military Instead, follow the rules explained in chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). H&r block military Exception for Rental Real Estate With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. H&r block military This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. H&r block military Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. H&r block military Example. H&r block military Jane is single and has $40,000 in wages, $2,000 of passive income from a limited partnership, and $3,500 of passive loss from a rental real estate activity in which she actively participated. H&r block military $2,000 of Jane's $3,500 loss offsets her passive income. H&r block military The remaining $1,500 loss can be deducted from her $40,000 wages. H&r block military The special allowance is not available if you were married, lived with your spouse at any time during the year, and are filing a separate return. H&r block military Active participation. H&r block military   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. H&r block military Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions. H&r block military Example. H&r block military Mike is single and had the following income and losses during the tax year:   Salary $42,300     Dividends 300     Interest 1,400     Rental loss (4,000)   The rental loss was from the rental of a house Mike owned. H&r block military Mike had advertised and rented the house to the current tenant himself. H&r block military He also collected the rents, which usually came by mail. H&r block military All repairs were either made or contracted out by Mike. H&r block military Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other income. H&r block military Maximum special allowance. H&r block military   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. H&r block military   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. H&r block military If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. H&r block military   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. H&r block military Modified adjusted gross income (MAGI). H&r block military   This is your adjusted gross income from Form 1040, U. H&r block military S. H&r block military Individual Income Tax Return, line 38, or Form 1040NR, U. H&r block military S. H&r block military Nonresident Alien Income Tax Return, line 37, figured without taking into account: The taxable amount of social security or equivalent tier 1 railroad retirement benefits, The deductible contributions to traditional individual retirement accounts (IRAs) and section 501(c)(18) pension plans, The exclusion from income of interest from Series EE and I U. H&r block military S. H&r block military savings bonds used to pay higher educational expenses, The exclusion of amounts received under an employer's adoption assistance program, Any passive activity income or loss included on Form 8582, Any rental real estate loss allowed to real estate professionals, Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582), The deduction allowed for one-half of self-employment tax, The deduction allowed for interest paid on student loans, The deduction for qualified tuition and related fees, and The domestic production activities deduction (see the Instructions for Form 8903). H&r block military Form 8582 not required. H&r block military   Do not complete Form 8582 if you meet all of the following conditions. H&r block military Your only passive activities were rental real estate activities in which you actively participated. H&r block military Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately and you lived apart from your spouse all year). H&r block military If married filing separately, you lived apart from your spouse all year. H&r block military You have no prior year unallowed losses from these (or any other passive) activities. H&r block military You have no current or prior year unallowed credits from passive activities. H&r block military Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year). H&r block military You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust. H&r block military   If you meet all of the conditions listed above, your rental real estate activities are not limited by the passive activity rules and you do not have to complete Form 8582. H&r block military On lines 23a through 23e of your Schedule E, enter the applicable amounts. H&r block military Casualties and Thefts As a result of a casualty or theft, you may have a loss related to your rental property. H&r block military You may be able to deduct the loss on your income tax return. H&r block military Casualty. H&r block military   This is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. H&r block military Such events include a storm, fire, or earthquake. H&r block military Theft. H&r block military   This is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it. H&r block military Gain from casualty or theft. H&r block military   It is also possible to have a gain from a casualty or theft if you receive money, including insurance, that is more than your adjusted basis in the property. H&r block military Generally, you must report this gain. H&r block military However, under certain circumstances, you may defer paying tax by choosing to postpone reporting the gain. H&r block military To do this, you generally must buy replacement property within 2 years after the close of the first tax year in which any part of your gain is realized. H&r block military In certain circumstances, the replacement period can be greater than 2 years; see Replacement Period in Publication 547 for more information. H&r block military The cost of the replacement property must be equal to or more than the net insurance or other payment you received. H&r block military More information. H&r block military   For information on business and nonbusiness casualty and theft losses, see Publication 547. H&r block military How to report. H&r block military    If you had a casualty or theft that involved property used in your rental activity, figure the net gain or loss in Section B of Form 4684, Casualties and Thefts. H&r block military Follow the Instructions for Form 4684 for where to carry your net gain or loss. H&r block military Example In February 2008, Marie Pfister bought a rental house for $135,000 (house $120,000 and land $15,000) and immediately began renting it out. H&r block military In 2013, she rented it all 12 months for a monthly rental fee of $1,125. H&r block military In addition to her rental income of $13,500 (12 x $1,125), Marie had the following expenses. H&r block military Mortgage interest $8,000 Fire insurance (1-year policy) 250 Miscellaneous repairs 400 Real estate taxes imposed and paid 500 Maintenance 200 Marie depreciates the residential rental property under MACRS GDS. H&r block military This means using the straight line method over a recovery period of 27. H&r block military 5 years. H&r block military She uses Table 2-2d to find her depreciation percentage. H&r block military Because she placed the property in service in February 2008, she continues to use that row of Table 2-2d. H&r block military For year 6, the rate is 3. H&r block military 636%. H&r block military Marie figures her net rental income or loss for the house as follows: Total rental income received  ($1,125 × 12) $13,500 Minus: Expenses     Mortgage interest $8,000   Fire insurance 250   Miscellaneous repairs 400   Real estate taxes 500   Maintenance 200   Total expenses 9,350 Balance $4,150 Minus: Depreciation ($120,000 x 3. H&r block military 636%) 4,363 Net rental (loss) for house ($213)       Marie had a net loss for the year. H&r block military Because she actively participated in her passive rental real estate activity and her loss was less than $25,000, she can deduct the loss on her return. H&r block military Marie also meets all of the requirements for not having to file Form 8582. H&r block military She uses Schedule E, Part I, to report her rental income and expenses. H&r block military She enters her income, expenses, and depreciation for the house in the column for Property A and enters her loss on line 22. H&r block military Form 4562 is not required. H&r block military Prev  Up  Next   Home   More Online Publications