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1040nr 9. 1040nr   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. 1040nr Repairs and Improvements Other Expenses Property Changed to Rental Use Renting Part of Property Not Rented for Profit Personal Use of Dwelling Unit (Including Vacation Home)Example. 1040nr Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. 1040nr Limits on Rental LossesAt-Risk Rules Passive Activity Limits How To Report Rental Income and ExpensesSchedule E (Form 1040) Introduction This chapter discusses rental income and expenses. 1040nr It also covers the following topics. 1040nr Personal use of dwelling unit (including vacation home). 1040nr Depreciation. 1040nr Limits on rental losses. 1040nr How to report your rental income and expenses. 1040nr If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. 1040nr If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. 1040nr If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. 1040nr See Publication 527, Residential Rental Property, for more information. 1040nr Useful Items - You may want to see: Publication 527 Residential Rental Property 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 6251 Alternative Minimum Tax—Individuals 8582 Passive Activity Loss Limitations Schedule E (Form 1040) Supplemental Income and Loss Rental Income In most cases, you must include in your gross income all amounts you receive as rent. 1040nr Rental income is any payment you receive for the use or occupation of property. 1040nr In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. 1040nr When to report. 1040nr   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. 1040nr You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. 1040nr You constructively receive income when it is made available to you, for example, by being credited to your bank account. 1040nr   For more information about when you constructively receive income, see Accounting Methods in chapter 1. 1040nr Advance rent. 1040nr   Advance rent is any amount you receive before the period that it covers. 1040nr Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. 1040nr Example. 1040nr You sign a 10-year lease to rent your property. 1040nr In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. 1040nr You must include $10,000 in your income in the first year. 1040nr Canceling a lease. 1040nr   If your tenant pays you to cancel a lease, the amount you receive is rent. 1040nr Include the payment in your income in the year you receive it regardless of your method of accounting. 1040nr Expenses paid by tenant. 1040nr   If your tenant pays any of your expenses, the payments are rental income. 1040nr Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. 1040nr See Rental Expenses , later, for more information. 1040nr Property or services. 1040nr   If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. 1040nr   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. 1040nr Security deposits. 1040nr   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. 1040nr But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. 1040nr   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. 1040nr Include it in your income when you receive it. 1040nr Part interest. 1040nr   If you own a part interest in rental property, you must report your part of the rental income from the property. 1040nr Rental of property also used as your home. 1040nr   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. 1040nr However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. 1040nr See Personal Use of Dwelling Unit (Including Vacation Home) , later. 1040nr Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. 1040nr It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. 1040nr Depreciation , which you can also deduct from your rental income, is discussed later. 1040nr Personal use of rental property. 1040nr   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. 1040nr Also, your rental expense deductions may be limited. 1040nr See Personal Use of Dwelling Unit (Including Vacation Home) , later. 1040nr Part interest. 1040nr   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. 1040nr When to deduct. 1040nr   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. 1040nr Depreciation. 1040nr   You can begin to depreciate rental property when it is ready and available for rent. 1040nr See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. 1040nr Pre-rental expenses. 1040nr   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. 1040nr Uncollected rent. 1040nr   If you are a cash-basis taxpayer, do not deduct uncollected rent. 1040nr Because you have not included it in your income, it is not deductible. 1040nr Vacant rental property. 1040nr   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. 1040nr However, you cannot deduct any loss of rental income for the period the property is vacant. 1040nr Vacant while listed for sale. 1040nr   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. 1040nr If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. 1040nr Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. 1040nr Improvements. 1040nr   You must capitalize any expense you pay to improve your rental property. 1040nr An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. 1040nr Betterments. 1040nr   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. 1040nr Restoration. 1040nr   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. 1040nr Adaptation. 1040nr   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. 1040nr Separate the costs of repairs and improvements, and keep accurate records. 1040nr You will need to know the cost of improvements when you sell or depreciate your property. 1040nr The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. 1040nr Other Expenses Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next. 1040nr Insurance premiums paid in advance. 1040nr   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. 1040nr You cannot deduct the total premium in the year you pay it. 1040nr Legal and other professional fees. 1040nr   You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. 1040nr For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. 1040nr You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. 1040nr Local benefit taxes. 1040nr   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. 1040nr These charges are nondepreciable capital expenditures, and must be added to the basis of your property. 1040nr However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. 1040nr Local transportation expenses. 1040nr    You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. 1040nr However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. 1040nr See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. 1040nr   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. 1040nr For 2013, the standard mileage rate for business use is 56. 1040nr 5 cents per mile. 1040nr For more information, see chapter 26. 1040nr    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. 1040nr In addition, you must complete Form 4562, Part V, and attach it to your tax return. 1040nr Rental of equipment. 1040nr   You can deduct the rent you pay for equipment that you use for rental purposes. 1040nr However, in some cases, lease contracts are actually purchase contracts. 1040nr If so, you cannot deduct these payments. 1040nr You can recover the cost of purchased equipment through depreciation. 1040nr Rental of property. 1040nr   You can deduct the rent you pay for property that you use for rental purposes. 1040nr If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. 1040nr Travel expenses. 1040nr   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. 1040nr You must properly allocate your expenses between rental and nonrental activities. 1040nr You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. 1040nr You recover the cost of improvements by taking depreciation. 1040nr For information on travel expenses, see chapter 26. 1040nr    To deduct travel expenses, you must keep records that follow the rules in chapter 26. 1040nr   See Rental Expenses in Publication 527 for more information. 1040nr Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. 1040nr You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. 1040nr You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. 1040nr However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). 1040nr Example. 1040nr Your tax year is the calendar year. 1040nr You moved from your home in May and started renting it out on June 1. 1040nr You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. 1040nr Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. 1040nr Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. 1040nr You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). 1040nr You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house. 1040nr There is no change in the types of expenses deductible for the personal-use part of your property. 1040nr Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). 1040nr You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. 1040nr You do not have to divide the expenses that belong only to the rental part of your property. 1040nr For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. 1040nr If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. 1040nr You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. 1040nr How to divide expenses. 1040nr   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between the rental use and the personal use. 1040nr You can use any reasonable method for dividing the expense. 1040nr It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. 1040nr The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home. 1040nr Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. 1040nr You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. 1040nr For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. 1040nr Where to report. 1040nr   Report your not-for-profit rental income on Form 1040, line 21. 1040nr For example, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. 1040nr   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Form 1040, Schedule A, line 23. 1040nr You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. 1040nr Personal Use of Dwelling Unit (Including Vacation Home) If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. 1040nr 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. 1040nr Only your rental expenses may be deducted on Schedule E (Form 1040). 1040nr Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). 1040nr You must also determine if the dwelling unit is considered a home. 1040nr The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. 1040nr Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. 1040nr 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. 1040nr Dwelling unit. 1040nr   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. 1040nr It also includes all structures or other property belonging to the dwelling unit. 1040nr A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. 1040nr   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. 1040nr 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. 1040nr Example. 1040nr   You rent a room in your home that is always available for short-term occupancy by paying customers. 1040nr You do not use the room yourself, and you allow only paying customers to use the room. 1040nr The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. 1040nr 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. 1040nr When dividing your expenses, follow these rules. 1040nr 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. 1040nr This rule does not apply when determining whether you used the unit as a home. 1040nr Any day that the unit is available for rent but not actually rented is not a day of rental use. 1040nr Example. 1040nr Your beach cottage was available for rent from June 1 through August 31 (92 days). 1040nr During that time, except for the first week in August (7 days) when you were unable to find a renter, you rented the cottage at a fair rental price. 1040nr 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. 1040nr Your family also used the cottage during the last 2 weeks of May (14 days). 1040nr The cottage was not used at all before May 17 or after August 31. 1040nr You figure the part of the cottage expenses to treat as rental expenses as follows. 1040nr The cottage was used for rental a total of 85 days (92 − 7). 1040nr The days it was available for rent but not rented (7 days) are not days of rental use. 1040nr The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. 1040nr You used the cottage for personal purposes for 14 days (the last 2 weeks in May). 1040nr The total use of the cottage was 99 days (14 days personal use + 85 days rental use). 1040nr Your rental expenses are 85/99 (86%) of the cottage expenses. 1040nr Note. 1040nr 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. 1040nr Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. 1040nr 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. 1040nr If you have a net loss, you may not be able to deduct all of the rental expenses. 1040nr See Dwelling Unit Used as a Home, next. 1040nr 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. 1040nr 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. 1040nr See What is a day of personal use , later. 1040nr Fair rental price. 1040nr   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. 1040nr 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. 1040nr   If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a day of rental use in applying (2) above. 1040nr Instead, count it as a day of personal use in applying both (1) and (2) above. 1040nr 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. 1040nr You or any other person who has an interest in the unit, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). 1040nr However, see Days used as a main home before or after renting , later. 1040nr A member of your family or a member of the family of any other person who owns an interest in the unit, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. 1040nr Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. 1040nr ), and lineal descendants (children, grandchildren, etc. 1040nr ). 1040nr Anyone under an arrangement that lets you use some other dwelling unit. 1040nr Anyone at less than a fair rental price. 1040nr Main home. 1040nr   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. 1040nr Shared equity financing agreement. 1040nr   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. 1040nr Donation of use of property. 1040nr   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. 1040nr Examples. 1040nr   The following examples show how to determine days of personal use. 1040nr Example 1. 1040nr You and your neighbor are co-owners of a condominium at the beach. 1040nr Last year, you rented the unit to vacationers whenever possible. 1040nr The unit was not used as a main home by anyone. 1040nr Your neighbor used the unit for 2 weeks last year; you did not use it at all. 1040nr 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. 1040nr Example 2. 1040nr You and your neighbors are co-owners of a house under a shared equity financing agreement. 1040nr Your neighbors live in the house and pay you a fair rental price. 1040nr 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. 1040nr This is because your neighbors rent the house as their main home under a shared equity financing agreement. 1040nr Example 3. 1040nr You own a rental property that you rent to your son. 1040nr Your son does not own any interest in this property. 1040nr He uses it as his main home and pays you a fair rental price. 1040nr 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. 1040nr Example 4. 1040nr You rent your beach house to Joshua. 1040nr Joshua rents his cabin in the mountains to you. 1040nr You each pay a fair rental price. 1040nr You are using your house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his house. 1040nr Days used for repairs and maintenance. 1040nr   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. 1040nr 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. 1040nr Days used as a main home before or after renting. 1040nr   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. 1040nr Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. 1040nr 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. 1040nr However, this special rule does not apply when dividing expenses between rental and personal use. 1040nr Examples. 1040nr   The following examples show how to determine whether you used your rental property as a home. 1040nr Example 1. 1040nr You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. 1040nr You rented the basement apartment at a fair rental price to college students during the regular school year. 1040nr You rented to them on a 9-month lease (273 days). 1040nr You figured 10% of the total days rented to others at a fair rental price is 27 days. 1040nr During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. 1040nr Your basement apartment was used as a home because you used it for personal purposes for 30 days. 1040nr Rent-free use by your brothers is considered personal use. 1040nr Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). 1040nr Example 2. 1040nr 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). 1040nr Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. 1040nr You figured 10% of the total days rented to others at a fair rental price is 3 days. 1040nr The room was used as a home because you used it for personal purposes for 21 days. 1040nr That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). 1040nr Example 3. 1040nr You own a condominium apartment in a resort area. 1040nr You rented it at a fair rental price for a total of 170 days during the year. 1040nr For 12 of those days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. 1040nr Your family actually used the apartment for 10 of those days. 1040nr Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. 1040nr You figured 10% of the total days rented to others at a fair rental price is 16 days. 1040nr Your family also used the apartment for 7 other days during the year. 1040nr You used the apartment as a home because you used it for personal purposes for 17 days. 1040nr That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). 1040nr Minimal rental use. 1040nr   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. 1040nr See Used as a home but rented less than 15 days , later, for more information. 1040nr Limit on deductions. 1040nr   Renting a dwelling unit that is considered a home is not a passive activity. 1040nr 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. 1040nr 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. 1040nr Any expenses carried forward to the next year will be subject to any limits that apply for that year. 1040nr 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. 1040nr   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. 1040nr Reporting Income and Deductions Property not used for personal purposes. 1040nr   If you do not use a dwelling unit for personal purposes, see How To Report Rental Income and Expenses , later, for how to report your rental income and expenses. 1040nr Property used for personal purposes. 1040nr   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. 1040nr Not used as a home. 1040nr   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. 1040nr Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . 1040nr The expenses for personal use are not deductible as rental expenses. 1040nr   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. 1040nr Used as a home but rented less than 15 days. 1040nr   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). 1040nr You are not required to report the rental income and rental expenses from this activity. 1040nr The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). 1040nr See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. 1040nr Used as a home and rented 15 days or more. 1040nr   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. 1040nr Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . 1040nr The expenses for personal use are not deductible as rental expenses. 1040nr   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. 1040nr You do not need to use Worksheet 9-1. 1040nr   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. 1040nr To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. 1040nr Depreciation You recover the cost of income-producing property through yearly tax deductions. 1040nr You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. 1040nr Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. 1040nr You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. 1040nr You can deduct depreciation only on the part of your property used for rental purposes. 1040nr Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. 1040nr You may have to use Form 4562 to figure and report your depreciation. 1040nr See How To Report Rental Income and Expenses , later. 1040nr Alternative minimum tax (AMT). 1040nr    If you use accelerated depreciation, you may be subject to the AMT. 1040nr Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). 1040nr Claiming the correct amount of depreciation. 1040nr   You should claim the correct amount of depreciation each tax year. 1040nr If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. 1040nr   If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. 1040nr S Individual Income Tax Return. 1040nr If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. 1040nr See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. 1040nr Changing your accounting method to deduct unclaimed depreciation. 1040nr   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. 1040nr In some instances, that consent is automatic. 1040nr For more information, see chapter 1 of Publication 946. 1040nr Land. 1040nr   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. 1040nr The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. 1040nr More information. 1040nr   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. 1040nr 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. 1040nr You must consider these rules in the order shown below. 1040nr At-risk rules. 1040nr These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. 1040nr This applies only if the real property was placed in service after 1986. 1040nr Passive activity limits. 1040nr 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. 1040nr However, there are exceptions. 1040nr 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. 1040nr Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. 1040nr 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. 1040nr 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. 1040nr See Publication 925 for more information. 1040nr Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. 1040nr 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. 1040nr Limits on passive activity deductions and credits. 1040nr    Deductions or losses from passive activities are limited. 1040nr You generally cannot offset income, other than passive income, with losses from passive activities. 1040nr Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. 1040nr Any excess loss or credit is carried forward to the next tax year. 1040nr   For a detailed discussion of these rules, see Publication 925. 1040nr    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. 1040nr Real estate professionals. 1040nr   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. 1040nr For a detailed discussion of the requirements, see Publication 527. 1040nr For a detailed discussion of material participation, see Publication 925. 1040nr 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. 1040nr Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. 1040nr Exception for Rental Real Estate Activities With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. 1040nr This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. 1040nr 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. 1040nr Active participation. 1040nr   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. 1040nr Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. 1040nr Maximum special allowance. 1040nr   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. 1040nr   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. 1040nr 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. 1040nr   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. 1040nr More information. 1040nr   See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity. 1040nr How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). 1040nr However, do not use that schedule to report a not-for-profit activity. 1040nr See Not Rented for Profit, earlier. 1040nr Providing substantial services. 1040nr   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship). 1040nr Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. 1040nr For information, see Publication 334, Tax Guide for Small Business. 1040nr You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. 1040nr   Use Form 1065, U. 1040nr S. 1040nr Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). 1040nr Qualified joint venture. 1040nr   If you and your spouse each materially participate as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. 1040nr 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. 1040nr For more information, see Publication 527. 1040nr Form 1098, Mortgage Interest Statement. 1040nr    If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, or similar statement showing the interest you paid for the year. 1040nr If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. 1040nr Attach a statement to your return showing the name and address of the other person. 1040nr In the left margin of Schedule E, next to line 13, enter “See attached. 1040nr ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. 1040nr , you normally report your rental income and expenses on Schedule E, Part I. 1040nr List your total income, expenses, and depreciation for each rental property. 1040nr Be sure to enter the number of fair rental and personal use days on line 2. 1040nr If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. 1040nr Complete lines 1 and 2 for each property. 1040nr However, fill in lines 23a through 26 on only one Schedule E. 1040nr On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. 1040nr To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. 1040nr If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. 1040nr Form 6198, At-Risk Limitations. 1040nr See At-Risk Rules , earlier. 1040nr Also see Publication 925. 1040nr Form 8582, Passive Activity Loss Limitations. 1040nr See Passive Activity Limits , earlier. 1040nr Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. 1040nr 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. 1040nr Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). 1040nr Worksheet 9-1. 1040nr 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. 1040nr Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . 1040nr ) 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. 1040nr Rental Use Percentage A. 1040nr Total days available for rent at fair rental price A. 1040nr       B. 1040nr Total days available for rent (line A) but not rented B. 1040nr       C. 1040nr Total days of rental use. 1040nr Subtract line B from line A C. 1040nr       D. 1040nr Total days of personal use (including days rented at less than fair rental price) D. 1040nr       E. 1040nr Total days of rental and personal use. 1040nr Add lines C and D E. 1040nr       F. 1040nr Percentage of expenses allowed for rental. 1040nr Divide line C by line E     F. 1040nr   PART II. 1040nr Allowable Rental Expenses 1. 1040nr Enter rents received 1. 1040nr   2a. 1040nr Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. 1040nr       b. 1040nr Enter the rental portion of real estate taxes b. 1040nr       c. 1040nr Enter the rental portion of deductible casualty and theft losses (see instructions) c. 1040nr       d. 1040nr Enter direct rental expenses (see instructions) d. 1040nr       e. 1040nr Fully deductible rental expenses. 1040nr Add lines 2a–2d. 1040nr Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. 1040nr   3. 1040nr Subtract line 2e from line 1. 1040nr If zero or less, enter -0- 3. 1040nr   4a. 1040nr Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. 1040nr       b. 1040nr Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. 1040nr       c. 1040nr Carryover of operating expenses from 2012 worksheet c. 1040nr       d. 1040nr Add lines 4a–4c d. 1040nr       e. 1040nr Allowable expenses. 1040nr Enter the smaller of line 3 or line 4d (see instructions) 4e. 1040nr   5. 1040nr Subtract line 4e from line 3. 1040nr If zero or less, enter -0- 5. 1040nr   6a. 1040nr Enter the rental portion of excess casualty and theft losses (see instructions) 6a. 1040nr       b. 1040nr Enter the rental portion of depreciation of the dwelling unit b. 1040nr       c. 1040nr Carryover of excess casualty losses and depreciation from 2012 worksheet c. 1040nr       d. 1040nr Add lines 6a–6c d. 1040nr       e. 1040nr Allowable excess casualty and theft losses and depreciation. 1040nr Enter the smaller of  line 5 or line 6d (see instructions) 6e. 1040nr   PART III. 1040nr Carryover of Unallowed Expenses to Next Year 7a. 1040nr Operating expenses to be carried over to next year. 1040nr Subtract line 4e from line 4d 7a. 1040nr   b. 1040nr Excess casualty and theft losses and depreciation to be carried over to next year. 1040nr  Subtract line 6e from line 6d b. 1040nr   Worksheet 9-1 Instructions. 1040nr Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. 1040nr 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. 1040nr Line 2a. 1040nr Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. 1040nr Do not include interest on a loan that did not benefit the dwelling unit. 1040nr 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. 1040nr Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. 1040nr Include the rental portion of this interest in the total you enter on line 2a of the worksheet. 1040nr   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. 1040nr See the Schedule A instructions. 1040nr However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. 1040nr See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. 1040nr Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. 1040nr   Note. 1040nr Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. 1040nr Instead, figure the personal portion on a separate Schedule A. 1040nr 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. 1040nr           Line 2c. 1040nr 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. 1040nr To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. 1040nr If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. 1040nr On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. 1040nr Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. 1040nr   Note. 1040nr Do not file this Form 4684 or use it to figure your personal losses on Schedule A. 1040nr Instead, figure the personal portion on a separate Form 4684. 1040nr           Line 2d. 1040nr Enter the total of your rental expenses that are directly related only to the rental activity. 1040nr These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. 1040nr Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. 1040nr           Line 2e. 1040nr 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. 1040nr Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. 1040nr           Line 4b. 1040nr On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. 1040nr 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. 1040nr Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). 1040nr           Line 4e. 1040nr 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. 1040nr *           Line 6a. 1040nr To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. 1040nr   A. 1040nr Enter the amount from Form 4684, line 10       B. 1040nr Enter the rental portion of line A       C. 1040nr Enter the amount from line 2c of this worksheet       D. 1040nr Subtract line C from line B. 1040nr Enter the result here and on line 6a of this worksheet               Line 6e. 1040nr 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. 1040nr * *Allocating the limited deduction. 1040nr 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. 1040nr Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. 1040nr Prev  Up  Next   Home   More Online Publications
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1040nr 5. 1040nr   Business Income Table of Contents Introduction Kinds of IncomeBartering for Property or Services Real Estate Rents Personal Property Rents Interest and Dividend Income Canceled Debt Other Income Items That Are Not IncomeAmount you can exclude. 1040nr Short-term lease. 1040nr Retail space. 1040nr Qualified long-term real property. 1040nr Guidelines for Selected Occupations Accounting for Your Income Introduction This chapter primarily explains business income and how to account for it on your tax return, what items are not considered income, and gives guidelines for selected occupations. 1040nr If there is a connection between any income you receive and your business, the income is business income. 1040nr A connection exists if it is clear that the payment of income would not have been made if you did not have the business. 1040nr You can have business income even if you are not involved in the activity on a regular full-time basis. 1040nr Income from work you do on the side in addition to your regular job can be business income. 1040nr You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. 1040nr But you report the income from the sale of business assets, such as land and office buildings, on other forms instead of Schedule C or C-EZ. 1040nr For information on selling business assets, see chapter 3. 1040nr Nonemployee compensation. 1040nr Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. 1040nr This includes amounts reported as nonemployee compensation in box 7 of the form. 1040nr You can find more information in the instructions on the back of the Form 1099-MISC you received. 1040nr Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. 1040nr In most cases, your business income will be in the form of cash, checks, and credit card charges. 1040nr But business income can be in other forms, such as property or services. 1040nr These and other types of income are explained next. 1040nr If you are a U. 1040nr S. 1040nr citizen who has business income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt from tax under U. 1040nr S. 1040nr law. 1040nr If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. 1040nr For details, see Publication 54, Tax Guide for U. 1040nr S. 1040nr Citizens and Resident Aliens Abroad. 1040nr Bartering for Property or Services Bartering is an exchange of property or services. 1040nr You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. 1040nr If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise. 1040nr Example 1. 1040nr You are a self-employed lawyer. 1040nr You perform legal services for a client, a small corporation. 1040nr In payment for your services, you receive shares of stock in the corporation. 1040nr You must include the fair market value of the shares in income. 1040nr Example 2. 1040nr You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. 1040nr You must include the fair rental value of the apartment in your gross receipts. 1040nr Your landlord must include the fair market value of the work of art in his or her rental income. 1040nr Example 3. 1040nr You are a self-employed accountant. 1040nr Both you and a house painter are members of a barter club, an organization that each year gives its members a directory of members and the services each member provides. 1040nr Members get in touch with other members directly and bargain for the value of the services to be performed. 1040nr In return for accounting services you provided for the house painter's business, the house painter painted your home. 1040nr You must include in gross receipts the fair market value of the services you received from the house painter. 1040nr The house painter must include the fair market value of your accounting services in his or her gross receipts. 1040nr Example 4. 1040nr You are a member of a barter club that uses credit units to credit or debit members' accounts for goods or services provided or received. 1040nr As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members. 1040nr You must include the value of credit units you received in your gross receipts for the tax year in which the units are credited to your account. 1040nr The dollar value of units received for services by an employee of the club, who can use the units in the same manner as other members, must be included in the employee's gross income for the tax year in which received. 1040nr It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. 1040nr See Publication 15 (Circular E), Employer's Tax Guide. 1040nr Example 5. 1040nr You operate a plumbing business and use the cash method of accounting. 1040nr You join a barter club and agree to provide plumbing services to any member for a specified number of hours. 1040nr Each member has access to a directory that lists the members of the club and the services available. 1040nr Members contact each other directly and request services to be performed. 1040nr You are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee. 1040nr You must include the fair market value of any services you receive from club members in your gross receipts when you receive them even if you have not provided any services to club members. 1040nr Information returns. 1040nr   If you are involved in a bartering transaction, you may have to file either of the following forms. 1040nr Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. 1040nr Form 1099-MISC, Miscellaneous Income. 1040nr For information about these forms, see the General Instructions for Certain Information Returns. 1040nr Real Estate Rents If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc. 1040nr , who provides services (maid services, etc. 1040nr ) for guests, report the rental income and expenses on Schedule C or C-EZ. 1040nr If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. 1040nr For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). 1040nr Real estate dealer. 1040nr   You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. 1040nr Rent you receive from real estate held for sale to customers is subject to SE tax. 1040nr However, rent you receive from real estate held for speculation or investment is not subject to SE tax. 1040nr Trailer park owner. 1040nr   Rental income from a trailer park is subject to SE tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants. 1040nr    You generally are considered to provide substantial services for tenants if they are primarily for the tenants' convenience and normally are not provided to maintain the lots in a condition for occupancy. 1040nr Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. 1040nr   Examples of services that are not normally provided for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers. 1040nr   Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. 1040nr Hotels, boarding houses, and apartments. 1040nr   Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. 1040nr   Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. 1040nr An example of a service that is not normally provided for the convenience of the occupants is maid service. 1040nr However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. 1040nr Prepaid rent. 1040nr   Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. 1040nr This is true no matter what accounting method or period you use. 1040nr Lease bonus. 1040nr   A bonus you receive from a lessee for granting a lease is an addition to the rent. 1040nr Include it in your gross receipts in the year received. 1040nr Lease cancellation payments. 1040nr   Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. 1040nr Payments to third parties. 1040nr   If your lessee makes payments to someone else under an agreement to pay your debts or obligations, include the payments in your gross receipts when the lessee makes the payments. 1040nr A common example of this kind of income is a lessee's payment of your property taxes on leased real property. 1040nr Settlement payments. 1040nr   Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that the payments exceed the adjusted basis of the leasehold improvements destroyed, damaged, removed, or disconnected by the lessee. 1040nr Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. 1040nr ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. 1040nr Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. 1040nr If you receive any of those payments, include them in your gross receipts as explained in that discussion. 1040nr Interest and Dividend Income Interest and dividends may be considered business income. 1040nr Interest. 1040nr   Interest received on notes receivable that you have accepted in the ordinary course of business is business income. 1040nr Interest received on loans is business income if you are in the business of lending money. 1040nr Uncollectible loans. 1040nr   If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you must include in gross income interest accrued up to the time the loan became uncollectible. 1040nr If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. 1040nr See Bad Debts in chapter 8. 1040nr Unstated interest. 1040nr   If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. 1040nr See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. 1040nr Dividends. 1040nr   Generally, dividends are business income to dealers in securities. 1040nr For most sole proprietors and statutory employees, however, dividends are nonbusiness income. 1040nr If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. 1040nr   If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return. 1040nr To find out how much you have to report, see   Recovery of items previously deducted under Other Income, later. 1040nr Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. 1040nr General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. 1040nr Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. 1040nr If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. 1040nr Exceptions The following discussion covers some exceptions to the general rule for canceled debt. 1040nr Price reduced after purchase. 1040nr   If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. 1040nr Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. 1040nr Deductible debt. 1040nr   You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. 1040nr Example. 1040nr You get accounting services for your business on credit. 1040nr Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. 1040nr Your accountant forgives part of the amount you owe for the accounting services. 1040nr How you treat the canceled debt depends on your method of accounting. 1040nr Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. 1040nr Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. 1040nr   For information on the cash and accrual methods of accounting, see chapter 2. 1040nr Exclusions Do not include canceled debt in income in the following situations. 1040nr However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. 1040nr For more information, see Form 982. 1040nr The cancellation takes place in a bankruptcy case under title 11 of the U. 1040nr S. 1040nr Code (relating to bankruptcy). 1040nr See Publication 908, Bankruptcy Tax Guide. 1040nr The cancellation takes place when you are insolvent. 1040nr You can exclude the canceled debt to the extent you are insolvent. 1040nr See Publication 908. 1040nr The canceled debt is a qualified farm debt owed to a qualified person. 1040nr See chapter 3 in Publication 225, Farmer's Tax Guide. 1040nr The canceled debt is a qualified real property business debt. 1040nr This situation is explained later. 1040nr The canceled debt is qualified principal residence indebtedness which is discharged after 2006. 1040nr See Form 982. 1040nr If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations 2 through 5 do not apply. 1040nr If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. 1040nr Debt. 1040nr   For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. 1040nr Qualified real property business debt. 1040nr   You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. 1040nr If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. 1040nr Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. 1040nr However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. 1040nr Cancellation of qualified real property business debt. 1040nr   Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. 1040nr It was incurred or assumed in connection with real property used in a trade or business. 1040nr It was secured by such real property. 1040nr It was incurred or assumed at either of the following times. 1040nr Before January 1, 1993. 1040nr After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. 1040nr It is debt to which you choose to apply these rules. 1040nr   Qualified real property business debt includes refinancing of debt described in (3) earlier, but only to the extent it does not exceed the debt being refinanced. 1040nr   You cannot exclude more than either of the following amounts. 1040nr The excess (if any) of: The outstanding principal of qualified real property business debt (immediately before the cancellation), over The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation. 1040nr The total adjusted bases of depreciable real property held by you immediately before the cancellation. 1040nr These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. 1040nr Do not take into account depreciable real property acquired in contemplation of the cancellation. 1040nr Election. 1040nr   To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. 1040nr You must file your return by the due date (including extensions). 1040nr If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040nr For more information, see When To File in the form instructions. 1040nr Other Income The following discussion explains how to treat other types of business income you may receive. 1040nr Restricted property. 1040nr   Restricted property is property that has certain restrictions that affect its value. 1040nr If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C or C-EZ when the restriction is lifted. 1040nr However, you can choose to be taxed in the year you receive the property. 1040nr For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. 1040nr Gains and losses. 1040nr   Do not report on Schedule C or C-EZ a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. 1040nr Instead, you must report these gains and losses on other forms. 1040nr For more information, see chapter 3. 1040nr Promissory notes. 1040nr   Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C or C-EZ. 1040nr In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. 1040nr Lost income payments. 1040nr   If you reduce or stop your business activities, report on Schedule C or C-EZ any payment you receive for the lost income of your business from insurance or other sources. 1040nr Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. 1040nr Damages. 1040nr   You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business. 1040nr Patent infringement. 1040nr Breach of contract or fiduciary duty. 1040nr Antitrust injury. 1040nr Economic injury. 1040nr   You may be entitled to a deduction against the income if it compensates you for actual economic injury. 1040nr Your deduction is the smaller of the following amounts. 1040nr The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount. 1040nr Your loss from the injury that you have not yet deducted. 1040nr Punitive damages. 1040nr   You must also include punitive damages in income. 1040nr Kickbacks. 1040nr   If you receive any kickbacks, include them in your income on Schedule C or C-EZ. 1040nr However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold. 1040nr Recovery of items previously deducted. 1040nr   If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C or C-EZ. 1040nr However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. 1040nr If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. 1040nr Example. 1040nr Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. 1040nr He also had 2 personal exemptions for a total of $7,800. 1040nr He would not pay income tax even if he did not deduct the bad debt. 1040nr Therefore, he will not report as income any part of the $300 he may recover in any future year. 1040nr Exception for depreciation. 1040nr   This rule does not apply to depreciation. 1040nr You recover depreciation using the rules explained next. 1040nr Recapture of depreciation. 1040nr   In the following situations, you have to recapture the depreciation deduction. 1040nr This means you include in income part or all of the depreciation you deducted in previous years. 1040nr Listed property. 1040nr   If your business use of listed property (explained in chapter 8 under Depreciation ) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. 1040nr You do this by including in income on Schedule C part of the depreciation you deducted in previous years. 1040nr Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. 1040nr For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. 1040nr That chapter explains how to determine whether property is used more than 50% in your business. 1040nr Section 179 property. 1040nr   If you take a section 179 deduction (explained in chapter 8 under Depreciation ) for an asset and before the end of the asset's recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. 1040nr You do this by including in income on Schedule C part of the deduction you took. 1040nr Use Part IV of Form 4797 to figure the amount to include on Schedule C. 1040nr See chapter 2 in Publication 946 to find out when you recapture the deduction. 1040nr Sale or exchange of depreciable property. 1040nr   If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. 1040nr You figure the income due to depreciation recapture in Part III of Form 4797. 1040nr For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. 1040nr Items That Are Not Income In some cases the property or money you receive is not income. 1040nr Appreciation. 1040nr   Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. 1040nr Consignments. 1040nr   Consignments of merchandise to others to sell for you are not sales. 1040nr The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. 1040nr Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. 1040nr Merchandise you have shipped out on consignment is included in your inventory until it is sold. 1040nr   Do not include merchandise you receive on consignment in your inventory. 1040nr Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use. 1040nr Construction allowances. 1040nr   If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the following conditions. 1040nr Under a short-term lease of retail space. 1040nr For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. 1040nr Amount you can exclude. 1040nr   You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. 1040nr Short-term lease. 1040nr   A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. 1040nr The following rules apply in determining whether the lease is for 15 years or less. 1040nr Take into account options to renew when figuring whether the lease is for 15 years or less. 1040nr But do not take into account any option to renew at fair market value determined at the time of renewal. 1040nr Two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar retail space are treated as one lease. 1040nr Retail space. 1040nr   Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public. 1040nr Qualified long-term real property. 1040nr   Qualified long-term real property is nonresidential real property that is part of, or otherwise present at, your retail space and that reverts to the landlord when the lease ends. 1040nr Exchange of like-kind property. 1040nr   If you exchange your business property or property you hold for investment solely for property of a like kind to be used in your business or to be held for investment, no gain or loss is recognized. 1040nr This means that the gain is not taxable and the loss is not deductible. 1040nr A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. 1040nr For more information, see Form 8824. 1040nr Leasehold improvements. 1040nr   If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. 1040nr However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. 1040nr Loans. 1040nr   Money borrowed through a bona fide loan is not income. 1040nr Sales tax. 1040nr   State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income. 1040nr Guidelines for Selected Occupations This section provides information to determine whether your earnings should be reported on Schedule C (Form 1040) or C-EZ (Form 1040). 1040nr Direct seller. 1040nr   You must report all income you receive as a direct seller on Schedule C or C-EZ. 1040nr This includes any of the following. 1040nr Income from sales—payments you receive from customers for products they buy from you. 1040nr Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. 1040nr Prizes, awards, and gifts you receive from your selling business. 1040nr You must report this income regardless of whether it is reported to you on an information return. 1040nr   You are a direct seller if you meet all the following conditions. 1040nr You are engaged in one of the following trades or businesses. 1040nr Selling or soliciting the sale of consumer products either in a home or other place that is not a permanent retail establishment, or to any buyer on a buy-sell basis or a deposit-commission basis for resale in a home or other place of business that is not a permanent retail establishment. 1040nr Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). 1040nr Substantially all your pay (whether paid in cash or not) for services described above is directly related to sales or other output (including performance of services) rather than to the number of hours worked. 1040nr Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes. 1040nr Executor or administrator. 1040nr   If you administer a deceased person's estate, your fees are reported on Schedule C or C-EZ if you are one of the following: A professional fiduciary. 1040nr A nonprofessional fiduciary (personal representative) and both of the following apply. 1040nr The estate includes an active trade or business in which you actively participate. 1040nr Your fees are related to the operation of that trade or business. 1040nr A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business. 1040nr    If the fees do not meet the above requirements, report them on line 21 of Form 1040. 1040nr Fishing crew member. 1040nr    If you are a member of the crew that catches fish or other water life, your earnings are reported on Schedule C or C-EZ if you meet all the requirements shown in chapter 10 under Fishing crew member . 1040nr Insurance agent, former. 1040nr   Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are not reported on Schedule C or C-EZ if all the following conditions are met. 1040nr You received payments after your agreement to perform services for the company ended. 1040nr You did not perform any services for the company after your service agreement ended and before the end of the year in which you received the payment. 1040nr You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date your service agreement ended. 1040nr The amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement or the extent to which those policies remain in force for some period after your service agreement ended, or both. 1040nr The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payments depended on length of service). 1040nr Insurance agent, retired. 1040nr   Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C or C-EZ. 1040nr Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. 1040nr   However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. 1040nr Newspaper carrier or distributor. 1040nr   You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. 1040nr You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). 1040nr Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. 1040nr You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. 1040nr   This rule applies whether or not you hire others to help you make deliveries. 1040nr It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. 1040nr Newspaper or magazine vendor. 1040nr   If you are 18 or older and you sell newspapers or magazines, your earnings are reported on Schedule C or C-EZ if all the following conditions apply. 1040nr You sell newspapers or magazines to ultimate consumers. 1040nr You sell them at a fixed price. 1040nr Your earnings are based on the difference between the sales price and your cost of goods sold. 1040nr   This rule applies whether or not you are guaranteed a minimum amount of earnings. 1040nr It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. 1040nr Notary public. 1040nr   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. 1040nr These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). 1040nr Public official. 1040nr   Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. 1040nr This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. 1040nr Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these. 1040nr   Public officials of state or local governments report their fees on Schedule C or C-EZ if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement. 1040nr Real estate agent or direct seller. 1040nr   If you are a licensed real estate agent or a direct seller, your earnings are reported on Schedule C or C-EZ if both the following apply. 1040nr Substantially all your pay for services as a real estate agent or direct seller directly relates to your sales or other output rather than to the number of hours you work. 1040nr You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. 1040nr Securities dealer. 1040nr   If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are reported on Schedule C or C-EZ. 1040nr For more information, see sections 1256 and 1402(i). 1040nr Securities trader. 1040nr   You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. 1040nr As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. 1040nr However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. 1040nr For more information about securities traders, see Publication 550, Investment Income and Expenses. 1040nr Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. 1040nr This section discusses some of the more common differences that may affect business transactions. 1040nr Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). 1040nr If the sale of a product is an income-producing factor in your business, you usually have to use inventories to clearly show your income. 1040nr Dealers in real estate are not allowed to use inventories. 1040nr For more information on inventories, see chapter 2. 1040nr Income paid to a third party. 1040nr   All income you earn is taxable to you. 1040nr You cannot avoid tax by having the income paid to a third party. 1040nr Example. 1040nr You rent out your property and the rental agreement directs the lessee to pay the rent to your son. 1040nr The amount paid to your son is gross income to you. 1040nr Cash discounts. 1040nr   These are amounts the seller permits you to deduct from the invoice price for prompt payment. 1040nr For income tax purposes, you can use either of the following two methods to account for cash discounts. 1040nr Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). 1040nr Credit the cash discount to a discount income account. 1040nr You must use the chosen method every year for all your purchase discounts. 1040nr   If you use the second method, the credit balance in the account at the end of your tax year is business income. 1040nr Under this method, you do not reduce the cost of goods sold by the cash discounts you received. 1040nr When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise. 1040nr Trade discounts. 1040nr   These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. 1040nr Do not enter these discounts on your books of account. 1040nr Instead, use only the net amount as the cost of the merchandise purchased. 1040nr For more information, see Trade discounts in chapter 6. 1040nr Payment placed in escrow. 1040nr   If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. 1040nr However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you do not accept the money until the next year. 1040nr Sales returns and allowances. 1040nr   Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. 1040nr Advance payments. 1040nr   Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. 1040nr Insurance proceeds. 1040nr   If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. 1040nr You cannot deduct the reimbursed part of a casualty or theft loss. 1040nr   For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. 1040nr Prev  Up  Next   Home   More Online Publications