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Prior Year Tax Return

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Prior Year Tax Return

Prior year tax return 5. Prior year tax return   Personal Use of Dwelling Unit (Including Vacation Home) Table of Contents Dividing Expenses Dwelling Unit Used as a HomeMain home. Prior year tax return Shared equity financing agreement. Prior year tax return Donation of use of the property. Prior year tax return Examples. Prior year tax return Days used for repairs and maintenance. Prior year tax return Days used as a main home before or after renting. Prior year tax return Reporting Income and DeductionsNot used as a home. Prior year tax return Used as a home but rented less than 15 days. Prior year tax return Used as a home and rented 15 days or more. Prior year tax return 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. Prior year tax return 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. Prior year tax return Only your rental expenses may deducted on Schedule E (Form 1040). Prior year tax return Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Prior year tax return You must also determine if the dwelling unit is considered a home. Prior year tax return The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Prior year tax return Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Prior year tax return 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. Prior year tax return Dwelling unit. Prior year tax return   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Prior year tax return It also includes all structures or other property belonging to the dwelling unit. Prior year tax return A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Prior year tax return   A dwelling unit does not include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment. Prior year tax return 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. Prior year tax return Example. Prior year tax return You rent a room in your home that is always available for short-term occupancy by paying customers. Prior year tax return You do not use the room yourself and you allow only paying customers to use the room. Prior year tax return This room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Prior year tax return 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. Prior year tax return When dividing your expenses, follow these rules. Prior year tax return 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. Prior year tax return (This rule does not apply when determining whether you used the unit as a home. Prior year tax return ) Any day that the unit is available for rent but not actually rented is not a day of rental use. Prior year tax return Fair rental price. Prior year tax return   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. Prior year tax return 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. Prior year tax return   Ask yourself the following questions when comparing another property with yours. Prior year tax return 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. Prior year tax return Example. Prior year tax return Your beach cottage was available for rent from June 1 through August 31 (92 days). Prior year tax return 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. Prior year tax return 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. Prior year tax return Your family also used the cottage during the last 2 weeks of May (14 days). Prior year tax return The cottage was not used at all before May 17 or after August 31. Prior year tax return You figure the part of the cottage expenses to treat as rental expenses as follows. Prior year tax return The cottage was used for rental a total of 85 days (92 − 7). Prior year tax return The days it was available for rent but not rented (7 days) are not days of rental use. Prior year tax return The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Prior year tax return You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Prior year tax return The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Prior year tax return Your rental expenses are 85/99 (86%) of the cottage expenses. Prior year tax return Note. Prior year tax return 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. Prior year tax return Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Prior year tax return 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. Prior year tax return If you have a net loss, you may not be able to deduct all of the rental expenses. Prior year tax return See Dwelling Unit Used as a Home, next. Prior year tax return 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. Prior year tax return 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. Prior year tax return See What is a day of personal use , later. Prior year tax return 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. Prior year tax return Instead, count it as a day of personal use in applying both (1) and (2) above. Prior year tax return 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. Prior year tax return 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). Prior year tax return However, see Days used as a main home before or after renting , later. Prior year tax return 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. Prior year tax return Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Prior year tax return ), and lineal descendants (children, grandchildren, etc. Prior year tax return ). Prior year tax return Anyone under an arrangement that lets you use some other dwelling unit. Prior year tax return Anyone at less than a fair rental price. Prior year tax return Main home. Prior year tax return   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. Prior year tax return Shared equity financing agreement. Prior year tax return   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. Prior year tax return Donation of use of the property. Prior year tax return   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. Prior year tax return Examples. Prior year tax return   The following examples show how to determine if you have days of personal use. Prior year tax return Example 1. Prior year tax return You and your neighbor are co-owners of a condominium at the beach. Prior year tax return Last year, you rented the unit to vacationers whenever possible. Prior year tax return The unit was not used as a main home by anyone. Prior year tax return Your neighbor used the unit for 2 weeks last year; you did not use it at all. Prior year tax return 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. Prior year tax return Example 2. Prior year tax return You and your neighbors are co-owners of a house under a shared equity financing agreement. Prior year tax return Your neighbors live in the house and pay you a fair rental price. Prior year tax return 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. Prior year tax return This is because your neighbors rent the house as their main home under a shared equity financing agreement. Prior year tax return Example 3. Prior year tax return You own a rental property that you rent to your son. Prior year tax return Your son does not own any interest in this property. Prior year tax return He uses it as his main home and pays you a fair rental price. Prior year tax return 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. Prior year tax return Example 4. Prior year tax return You rent your beach house to Rosa. Prior year tax return Rosa rents her cabin in the mountains to you. Prior year tax return You each pay a fair rental price. Prior year tax return 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. Prior year tax return Example 5. Prior year tax return You rent an apartment to your mother at less than a fair rental price. Prior year tax return 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. Prior year tax return Days used for repairs and maintenance. Prior year tax return   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. Prior year tax return 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. Prior year tax return Example. Prior year tax return Corey owns a cabin in the mountains that he rents for most of the year. Prior year tax return He spends a week at the cabin with family members. Prior year tax return 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. Prior year tax return Corey's family members, however, work substantially full time on the cabin each day during the week. Prior year tax return The main purpose of being at the cabin that week is to do maintenance work. Prior year tax return Therefore, the use of the cabin during the week by Corey and his family will not be considered personal use by Corey. Prior year tax return Days used as a main home before or after renting. Prior year tax return   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. Prior year tax return Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Prior year tax return 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. Prior year tax return However, this special rule does not apply when dividing expenses between rental and personal use. Prior year tax return See Property Changed to Rental Use in chapter 4. Prior year tax return Example 1. Prior year tax return 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. Prior year tax return You rented your house at a fair rental price from March 15, 2012, to May 14, 2013 (14 months). Prior year tax return On June 1, 2013, you moved back into your old house. Prior year tax return 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. Prior year tax return Therefore, you would use the rules in chapter 1 when figuring your rental income and expenses. Prior year tax return Example 2. Prior year tax return On January 31, you moved out of the condominium where you had lived for 3 years. Prior year tax return You offered it for rent at a fair rental price beginning on February 1. Prior year tax return You were unable to rent it until April. Prior year tax return On September 15, you sold the condominium. Prior year tax return 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. Prior year tax return Examples. Prior year tax return   The following examples show how to determine whether you used your rental property as a home. Prior year tax return Example 1. Prior year tax return You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Prior year tax return You rented the basement apartment at a fair rental price to college students during the regular school year. Prior year tax return You rented to them on a 9-month lease (273 days). Prior year tax return You figured 10% of the total days rented to others at a fair rental price is 27 days. Prior year tax return During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Prior year tax return Your basement apartment was used as a home because you used it for personal purposes for 30 days. Prior year tax return Rent-free use by your brothers is considered personal use. Prior year tax return Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Prior year tax return Example 2. Prior year tax return 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). Prior year tax return Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Prior year tax return You figured 10% of the total days rented to others at a fair rental price is 3 days. Prior year tax return The room was used as a home because you used it for personal purposes for 21 days. Prior year tax return That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Prior year tax return Example 3. Prior year tax return You own a condominium apartment in a resort area. Prior year tax return You rented it at a fair rental price for a total of 170 days during the year. Prior year tax return 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. Prior year tax return Your family actually used the apartment for 10 of those days. Prior year tax return Therefore, the apartment is treated as having been rented for 160 (170 – 10) days. Prior year tax return You figured 10% of the total days rented to others at a fair rental price is 16 days. Prior year tax return Your family also used the apartment for 7 other days during the year. Prior year tax return You used the apartment as a home because you used it for personal purposes for 17 days. Prior year tax return That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Prior year tax return Minimal rental use. Prior year tax return   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. Prior year tax return See Used as a home but rented less than 15 days, later, for more information. Prior year tax return Limit on deductions. Prior year tax return   Renting a dwelling unit that is considered a home is not a passive activity. Prior year tax return 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. Prior year tax return 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. Prior year tax return Any expenses carried forward to the next year will be subject to any limits that apply for that year. Prior year tax return 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. Prior year tax return   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 5–1. Prior year tax return Reporting Income and Deductions Property not used for personal purposes. Prior year tax return   If you do not use a dwelling unit for personal purposes, see chapter 3 for how to report your rental income and expenses. Prior year tax return Property used for personal purposes. Prior year tax return   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. Prior year tax return Not used as a home. Prior year tax return   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Prior year tax return 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 . Prior year tax return The expenses for personal use are not deductible as rental expenses. Prior year tax return   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses in chapter 3. Prior year tax return Used as a home but rented less than 15 days. Prior year tax return   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). Prior year tax return You are not required to report the rental income and rental expenses from this activity. Prior year tax return The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Prior year tax return See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Prior year tax return Used as a home and rented 15 days or more. Prior year tax return   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. Prior year tax return 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 . Prior year tax return The expenses for personal use are not deductible as rental expenses. Prior year tax return   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. Prior year tax return You do not need to use Worksheet 5-1. Prior year tax return   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Prior year tax return To figure your deductible rental expenses and any carryover to next year, use Worksheet 5–1. Prior year tax return Worksheet 5-1. Prior year tax return 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. Prior year tax return Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Prior year tax return ) 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. Prior year tax return Rental Use Percentage A. Prior year tax return Total days available for rent at fair rental price A. Prior year tax return       B. Prior year tax return Total days available for rent (line A) but not rented B. Prior year tax return       C. Prior year tax return Total days of rental use. Prior year tax return Subtract line B from line A C. Prior year tax return       D. Prior year tax return Total days of personal use (including days rented at less than fair rental price) D. Prior year tax return       E. Prior year tax return Total days of rental and personal use. Prior year tax return Add lines C and D E. Prior year tax return       F. Prior year tax return Percentage of expenses allowed for rental. Prior year tax return Divide line C by line E     F. Prior year tax return . Prior year tax return PART II. Prior year tax return Allowable Rental Expenses 1. Prior year tax return Enter rents received 1. Prior year tax return   2a. Prior year tax return Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Prior year tax return       b. Prior year tax return Enter the rental portion of real estate taxes b. Prior year tax return       c. Prior year tax return Enter the rental portion of deductible casualty and theft losses (see instructions) c. Prior year tax return       d. Prior year tax return Enter direct rental expenses (see instructions) d. Prior year tax return       e. Prior year tax return Fully deductible rental expenses. Prior year tax return Add lines 2a–2d. Prior year tax return Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Prior year tax return   3. Prior year tax return Subtract line 2e from line 1. Prior year tax return If zero or less, enter -0- 3. Prior year tax return   4a. Prior year tax return Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Prior year tax return       b. Prior year tax return Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Prior year tax return       c. Prior year tax return Carryover of operating expenses from 2012 worksheet c. Prior year tax return       d. Prior year tax return Add lines 4a–4c d. Prior year tax return       e. Prior year tax return Allowable expenses. Prior year tax return Enter the smaller of line 3 or line 4d (see instructions) 4e. Prior year tax return   5. Prior year tax return Subtract line 4e from line 3. Prior year tax return If zero or less, enter -0- 5. Prior year tax return   6a. Prior year tax return Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Prior year tax return       b. Prior year tax return Enter the rental portion of depreciation of the dwelling unit b. Prior year tax return       c. Prior year tax return Carryover of excess casualty losses and depreciation from 2012 worksheet c. Prior year tax return       d. Prior year tax return Add lines 6a–6c d. Prior year tax return       e. Prior year tax return Allowable excess casualty and theft losses and depreciation. Prior year tax return Enter the smaller of  line 5 or line 6d (see instructions) 6e. Prior year tax return   PART III. Prior year tax return Carryover of Unallowed Expenses to Next Year 7a. Prior year tax return Operating expenses to be carried over to next year. Prior year tax return Subtract line 4e from line 4d 7a. Prior year tax return   b. Prior year tax return Excess casualty and theft losses and depreciation to be carried over to next year. Prior year tax return  Subtract line 6e from line 6d b. Prior year tax return   Worksheet 5-1 Instructions. Prior year tax return Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Prior year tax return 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. Prior year tax return Line 2a. Prior year tax return Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Prior year tax return Do not include interest on a loan that did not benefit the dwelling unit. Prior year tax return 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. Prior year tax return Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Prior year tax return Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Prior year tax return   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. Prior year tax return See the Schedule A instructions. Prior year tax return However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Prior year tax return See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Prior year tax return Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Prior year tax return   Note. Prior year tax return Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Prior year tax return Instead, figure the personal portion on a separate Schedule A. Prior year tax return 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. Prior year tax return           Line 2c. Prior year tax return 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. Prior year tax return To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Prior year tax return If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Prior year tax return On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Prior year tax return Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Prior year tax return   Note. Prior year tax return Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Prior year tax return Instead, figure the personal portion on a separate Form 4684. Prior year tax return           Line 2d. Prior year tax return Enter the total of your rental expenses that are directly related only to the rental activity. Prior year tax return These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Prior year tax return Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Prior year tax return           Line 2e. Prior year tax return 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. Prior year tax return Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Prior year tax return           Line 4b. Prior year tax return 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. Prior year tax return 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. Prior year tax return Do not include interest on a loan that did not benefit the dwelling unit  (as explained in the line 2a instructions). Prior year tax return           Line 4e. Prior year tax return 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. Prior year tax return *           Line 6a. Prior year tax return To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Prior year tax return   A. Prior year tax return Enter the amount from Form 4684, line 10       B. Prior year tax return Enter the rental portion of line A       C. Prior year tax return Enter the amount from line 2c of this worksheet       D. Prior year tax return Subtract line C from line B. Prior year tax return Enter the result here and on line 6a of this worksheet               Line 6e. Prior year tax return 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. Prior year tax return * *Allocating the limited deduction. Prior year tax return 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. Prior year tax return Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Prior year tax return Prev  Up  Next   Home   More Online Publications
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Offshore Voluntary Disclosure Initiative: Passive Foreign Income Company Investment Computations

September 2010

A significant number of Offshore Voluntary Disclosure Practice (VDP) cases involve Passive Foreign Investment Company (PFIC) investments.  A lack of historical information on the cost basis and holding period of many PFIC investments makes it difficult for taxpayers to prepare statutory PFIC computations and for the Service to verify them.  As a result, resolution of many VDP cases is being unduly delayed.  Therefore, for purposes of this initiative, the Service is offering taxpayers an alternative to the statutory PFIC computation that will resolve PFIC issues on a basis that is consistent with the Mark to Market (MTM) methodology authorized in Internal Revenue Code section 1296 but will not require complete reconstruction of historical data.

The terms of this alternative resolution are as follows:

  • If elected, the alternative resolution will apply to all PFIC investments in cases that have been accepted into the VDP and that qualify for the special civil penalty framework announced by the IRS on March 23, 2009.  The initial MTM computation of gain or loss under this methodology will be for the first year of the VDP application but could be made after 2003 depending on when the first PFIC investment was made.  Generally, under the terms of the March 23, 2009 framework, the first year of the VDP application will be for the calendar year ending December 31, 2003.   This will require a determination of the basis for every PFIC investment, which should be agreed between the taxpayer and the Service based on the best available evidence. 


  • A tax rate of 20% will be applied to the MTM gain(s), MTM net gain(s) and gains from all PFIC dispositions during the VDP period, in lieu of the rate contained in section 1291(a)(1)(B) for the amount allocable to the current year and section 1291(c)(2) for the deferred tax amount(s) allocable to any other taxable year.

  • A rate of 7% of the tax computed for PFIC investments marked to market in the first year of the VDP application will be added to the tax for that year, in lieu of the interest charge mechanism described in sections 1291(c) and 1296(j).

  • MTM losses will be limited to unreversed inclusions (generally, previously reported MTM gains less allowed MTM losses) on an investment-by-investment basis in the same manner as section 1296. During the VDP period, these MTM losses will be treated as  ordinary losses (IRC 1296[c][1][B]) and the tax benefit is limited to the tax rate applicable to the MTM gains derived during the VDP period (20%).  This limitation is accomplished by multiplying the MTM loss by 20% and applying the result as a credit against the tax liability for the year.
     
  • Regular and Alternative Minimum Tax are both to be computed without the PFIC dispositions or MTM gains and losses.  The tax from the PFIC transactions (20% plus the 7% for 2003, if applicable) is added to (or subtracted from) the applicable total tax (either regular or AMT, whichever is higher).  The tax and interest (i.e., the 7% for the first year of the VDP) computed under the VDP alternative MTM can be added to the applicable total tax (either regular or AMT, whichever is higher) and placed on the amended return in the margin, with a supporting schedule.

  • Underpayment interest and penalties on the deficiency are computed in accordance with the Internal Revenue Code and the terms of the VDP.

  • For any PFIC investment retained beyond 12/31/2008, the taxpayer must continue using the MTM method, but will apply the normal statutory rules of section 1296 as well as the provisions of sections 1291-1298, as applicable.

Taxpayers should direct questions regarding PFICs and how the alternative resolution will affect their cases to the examiners assigned to their cases.  Before electing the alternative PFIC resolution, taxpayers with PFIC investments should consult their tax advisors to ensure that the issue is material in their cases and that the alternative is in fact preferable to the statutory computation in their situation.  If the taxpayer does not elect to use the alternative PFIC computation, then the PFIC provisions of section 1291-1298 apply. 

Page Last Reviewed or Updated: 09-Jan-2014

The Prior Year Tax Return

Prior year tax return 6. Prior year tax return   Estimated Tax Table of Contents Who Must Make Estimated Tax Payments Estimated tax is a method used to pay tax on income that is not subject to withholding. Prior year tax return This income includes self-employment income, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. Prior year tax return Income tax generally is withheld from pensions and annuity payments you receive. Prior year tax return However, if the tax withheld from your pension (or other) income is not enough, you may have to pay estimated tax. Prior year tax return If you do not pay enough tax through withholding, by making estimated tax payments, or both, you may be charged a penalty. Prior year tax return Who Must Make Estimated Tax Payments If you had a tax liability for 2013, you may have to pay estimated tax for 2014. Prior year tax return In most cases, you must pay estimated tax for 2014 if both of the following apply. Prior year tax return You expect to owe at least $1,000 in tax for 2014, after subtracting your withholding and refundable credits. Prior year tax return You expect your withholding and refundable credits to be less than the smaller of: 90% of the tax to be shown on your 2014 tax return, or 100% of the tax shown on your 2013 tax return. Prior year tax return The 2013 tax return must cover all 12 months. Prior year tax return If all of your income will be subject to income tax withholding, you probably do not need to make estimated tax payments. Prior year tax return For more information on estimated tax, see Publication 505. Prior year tax return Prev  Up  Next   Home   More Online Publications