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Late Tax

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Late Tax

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Page Last Reviewed or Updated: 14-Feb-2014

The Late Tax

Late tax 5. Late tax   Personal Use of Dwelling Unit (Including Vacation Home) Table of Contents Dividing Expenses Dwelling Unit Used as a HomeMain home. Late tax Shared equity financing agreement. Late tax Donation of use of the property. Late tax Examples. Late tax Days used for repairs and maintenance. Late tax Days used as a main home before or after renting. Late tax Reporting Income and DeductionsNot used as a home. Late tax Used as a home but rented less than 15 days. Late tax Used as a home and rented 15 days or more. Late tax If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. Late tax In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Late tax Only your rental expenses may deducted on Schedule E (Form 1040). Late tax Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Late tax You must also determine if the dwelling unit is considered a home. Late tax The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Late tax Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Late tax There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. Late tax Dwelling unit. Late tax   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Late tax It also includes all structures or other property belonging to the dwelling unit. Late tax A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Late tax   A dwelling unit does not include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment. Late tax Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. Late tax Example. Late tax You rent a room in your home that is always available for short-term occupancy by paying customers. Late tax You do not use the room yourself and you allow only paying customers to use the room. Late tax This room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Late tax Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Late tax When dividing your expenses, follow these rules. Late tax Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. Late tax (This rule does not apply when determining whether you used the unit as a home. Late tax ) Any day that the unit is available for rent but not actually rented is not a day of rental use. Late tax Fair rental price. Late tax   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. Late tax The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. Late tax   Ask yourself the following questions when comparing another property with yours. Late tax Is it used for the same purpose? Is it approximately the same size? Is it in approximately the same condition? Does it have similar furnishings? Is it in a similar location? If any of the answers are no, the properties probably are not similar. Late tax Example. Late tax Your beach cottage was available for rent from June 1 through August 31 (92 days). Late tax Except for the first week in August (7 days), when you were unable to find a renter, you rented the cottage at a fair rental price during that time. Late tax The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Late tax Your family also used the cottage during the last 2 weeks of May (14 days). Late tax The cottage was not used at all before May 17 or after August 31. Late tax You figure the part of the cottage expenses to treat as rental expenses as follows. Late tax The cottage was used for rental a total of 85 days (92 − 7). Late tax The days it was available for rent but not rented (7 days) are not days of rental use. Late tax The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Late tax You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Late tax The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Late tax Your rental expenses are 85/99 (86%) of the cottage expenses. Late tax Note. Late tax When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Late tax Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Late tax Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. Late tax If you have a net loss, you may not be able to deduct all of the rental expenses. Late tax See Dwelling Unit Used as a Home, next. Late tax Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. Late tax You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. Late tax See What is a day of personal use , later. Late tax If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price (discussed earlier), do not count that day as a day of rental use in applying (2) above. Late tax Instead, count it as a day of personal use in applying both (1) and (2) above. Late tax What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. Late tax You or any other person who owns an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). Late tax However, see Days used as a main home before or after renting , later. Late tax A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Late tax Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Late tax ), and lineal descendants (children, grandchildren, etc. Late tax ). Late tax Anyone under an arrangement that lets you use some other dwelling unit. Late tax Anyone at less than a fair rental price. Late tax Main home. Late tax   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. Late tax Shared equity financing agreement. Late tax   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. Late tax Donation of use of the property. Late tax   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. Late tax Examples. Late tax   The following examples show how to determine if you have days of personal use. Late tax Example 1. Late tax You and your neighbor are co-owners of a condominium at the beach. Late tax Last year, you rented the unit to vacationers whenever possible. Late tax The unit was not used as a main home by anyone. Late tax Your neighbor used the unit for 2 weeks last year; you did not use it at all. Late tax Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. Late tax Example 2. Late tax You and your neighbors are co-owners of a house under a shared equity financing agreement. Late tax Your neighbors live in the house and pay you a fair rental price. Late tax Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. Late tax This is because your neighbors rent the house as their main home under a shared equity financing agreement. Late tax Example 3. Late tax You own a rental property that you rent to your son. Late tax Your son does not own any interest in this property. Late tax He uses it as his main home and pays you a fair rental price. Late tax Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. Late tax Example 4. Late tax You rent your beach house to Rosa. Late tax Rosa rents her cabin in the mountains to you. Late tax You each pay a fair rental price. Late tax You are using your beach house for personal purposes on the days that Rosa uses it because your house is used by Rosa under an arrangement that allows you to use her cabin. Late tax Example 5. Late tax You rent an apartment to your mother at less than a fair rental price. Late tax You are using the apartment for personal purposes on the days that your mother rents it because you rent it for less than a fair rental price. Late tax Days used for repairs and maintenance. Late tax   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Late tax Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. Late tax Example. Late tax Corey owns a cabin in the mountains that he rents for most of the year. Late tax He spends a week at the cabin with family members. Late tax Corey works on maintenance of the cabin 3 or 4 hours each day during the week and spends the rest of the time fishing, hiking, and relaxing. Late tax Corey's family members, however, work substantially full time on the cabin each day during the week. Late tax The main purpose of being at the cabin that week is to do maintenance work. Late tax Therefore, the use of the cabin during the week by Corey and his family will not be considered personal use by Corey. Late tax Days used as a main home before or after renting. Late tax   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Late tax Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Late tax You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. Late tax However, this special rule does not apply when dividing expenses between rental and personal use. Late tax See Property Changed to Rental Use in chapter 4. Late tax Example 1. Late tax On February 29, 2012, you moved out of the house you had lived in for 6 years because you accepted a job in another town. Late tax You rented your house at a fair rental price from March 15, 2012, to May 14, 2013 (14 months). Late tax On June 1, 2013, you moved back into your old house. Late tax The days you used the house as your main home from January 1 to February 29, 2012, and from June 1 to December 31, 2013, are not counted as days of personal use. Late tax Therefore, you would use the rules in chapter 1 when figuring your rental income and expenses. Late tax Example 2. Late tax On January 31, you moved out of the condominium where you had lived for 3 years. Late tax You offered it for rent at a fair rental price beginning on February 1. Late tax You were unable to rent it until April. Late tax On September 15, you sold the condominium. Late tax The days you used the condominium as your main home from January 1 to January 31 are not counted as days of personal use when determining whether you used it as a home. Late tax Examples. Late tax   The following examples show how to determine whether you used your rental property as a home. Late tax Example 1. Late tax You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Late tax You rented the basement apartment at a fair rental price to college students during the regular school year. Late tax You rented to them on a 9-month lease (273 days). Late tax You figured 10% of the total days rented to others at a fair rental price is 27 days. Late tax During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Late tax Your basement apartment was used as a home because you used it for personal purposes for 30 days. Late tax Rent-free use by your brothers is considered personal use. Late tax Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Late tax Example 2. Late tax You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Late tax Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Late tax You figured 10% of the total days rented to others at a fair rental price is 3 days. Late tax The room was used as a home because you used it for personal purposes for 21 days. Late tax That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Late tax Example 3. Late tax You own a condominium apartment in a resort area. Late tax You rented it at a fair rental price for a total of 170 days during the year. Late tax For 12 of these days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Late tax Your family actually used the apartment for 10 of those days. Late tax Therefore, the apartment is treated as having been rented for 160 (170 – 10) days. Late tax You figured 10% of the total days rented to others at a fair rental price is 16 days. Late tax Your family also used the apartment for 7 other days during the year. Late tax You used the apartment as a home because you used it for personal purposes for 17 days. Late tax That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Late tax Minimal rental use. Late tax   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. Late tax See Used as a home but rented less than 15 days, later, for more information. Late tax Limit on deductions. Late tax   Renting a dwelling unit that is considered a home is not a passive activity. Late tax Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. Late tax The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Late tax Any expenses carried forward to the next year will be subject to any limits that apply for that year. Late tax This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. Late tax   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 5–1. Late tax Reporting Income and Deductions Property not used for personal purposes. Late tax   If you do not use a dwelling unit for personal purposes, see chapter 3 for how to report your rental income and expenses. Late tax Property used for personal purposes. Late tax   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. Late tax Not used as a home. Late tax   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Late tax Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in this chapter under Dividing Expenses . Late tax The expenses for personal use are not deductible as rental expenses. Late tax   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses in chapter 3. Late tax Used as a home but rented less than 15 days. Late tax   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). Late tax You are not required to report the rental income and rental expenses from this activity. Late tax The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Late tax See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Late tax Used as a home and rented 15 days or more. Late tax   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Late tax Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in this chapter under Dividing Expenses . Late tax The expenses for personal use are not deductible as rental expenses. Late tax   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. Late tax You do not need to use Worksheet 5-1. Late tax   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Late tax To figure your deductible rental expenses and any carryover to next year, use Worksheet 5–1. Late tax Worksheet 5-1. Late tax Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. Late tax Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Late tax ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. Late tax Rental Use Percentage A. Late tax Total days available for rent at fair rental price A. Late tax       B. Late tax Total days available for rent (line A) but not rented B. Late tax       C. Late tax Total days of rental use. Late tax Subtract line B from line A C. Late tax       D. Late tax Total days of personal use (including days rented at less than fair rental price) D. Late tax       E. Late tax Total days of rental and personal use. Late tax Add lines C and D E. Late tax       F. Late tax Percentage of expenses allowed for rental. Late tax Divide line C by line E     F. Late tax . Late tax PART II. Late tax Allowable Rental Expenses 1. Late tax Enter rents received 1. Late tax   2a. Late tax Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Late tax       b. Late tax Enter the rental portion of real estate taxes b. Late tax       c. Late tax Enter the rental portion of deductible casualty and theft losses (see instructions) c. Late tax       d. Late tax Enter direct rental expenses (see instructions) d. Late tax       e. Late tax Fully deductible rental expenses. Late tax Add lines 2a–2d. Late tax Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Late tax   3. Late tax Subtract line 2e from line 1. Late tax If zero or less, enter -0- 3. Late tax   4a. Late tax Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Late tax       b. Late tax Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Late tax       c. Late tax Carryover of operating expenses from 2012 worksheet c. Late tax       d. Late tax Add lines 4a–4c d. Late tax       e. Late tax Allowable expenses. Late tax Enter the smaller of line 3 or line 4d (see instructions) 4e. Late tax   5. Late tax Subtract line 4e from line 3. Late tax If zero or less, enter -0- 5. Late tax   6a. Late tax Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Late tax       b. Late tax Enter the rental portion of depreciation of the dwelling unit b. Late tax       c. Late tax Carryover of excess casualty losses and depreciation from 2012 worksheet c. Late tax       d. Late tax Add lines 6a–6c d. Late tax       e. Late tax Allowable excess casualty and theft losses and depreciation. Late tax Enter the smaller of  line 5 or line 6d (see instructions) 6e. Late tax   PART III. Late tax Carryover of Unallowed Expenses to Next Year 7a. Late tax Operating expenses to be carried over to next year. Late tax Subtract line 4e from line 4d 7a. Late tax   b. Late tax Excess casualty and theft losses and depreciation to be carried over to next year. Late tax  Subtract line 6e from line 6d b. Late tax   Worksheet 5-1 Instructions. Late tax Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Late tax Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. Late tax Line 2a. Late tax Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Late tax Do not include interest on a loan that did not benefit the dwelling unit. Late tax For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Late tax Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Late tax Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Late tax   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. Late tax See the Schedule A instructions. Late tax However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Late tax See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Late tax Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Late tax   Note. Late tax Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Late tax Instead, figure the personal portion on a separate Schedule A. Late tax If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. Late tax           Line 2c. Late tax Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. Late tax To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Late tax If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Late tax On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Late tax Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Late tax   Note. Late tax Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Late tax Instead, figure the personal portion on a separate Form 4684. Late tax           Line 2d. Late tax Enter the total of your rental expenses that are directly related only to the rental activity. Late tax These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Late tax Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Late tax           Line 2e. Late tax You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Late tax Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Late tax           Line 4b. Late tax On line 2a, you entered the rental portion of the mortgage interest or qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. Late tax If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Late tax Do not include interest on a loan that did not benefit the dwelling unit  (as explained in the line 2a instructions). Late tax           Line 4e. Late tax You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. Late tax *           Line 6a. Late tax To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Late tax   A. Late tax Enter the amount from Form 4684, line 10       B. Late tax Enter the rental portion of line A       C. Late tax Enter the amount from line 2c of this worksheet       D. Late tax Subtract line C from line B. Late tax Enter the result here and on line 6a of this worksheet               Line 6e. Late tax You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. Late tax * *Allocating the limited deduction. Late tax If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Late tax Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Late tax Prev  Up  Next   Home   More Online Publications