Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

2012 1040

Www Freetax ComForm 1040ez 2011Amended Tax Return 2011Where To Send 1040xWww Myfreetaxes Com TampaHow Do You File State Income TaxesCan I File 2011 Taxes In 2013File My 2011 Taxes For FreeFree Online Tax Filing Federal And StateFile State Taxes Only1040ez FormFree Tax Filing OnlineIrs 1040ez File OnlineAmended Tax Return Instructions2012 Irs Tax Forms2009 Tax SoftwareFree Federal And State Tax Filing Online2011 Amended ReturnWww Irs Gov Form 1040ezFree Irs FormsH & R Block Tax Software 20112013 Tax Form 1040ezAmendment Tax ReturnEfile Free Federal And StateTaxact Login Tax ReturnEz1040Filing 1040 EzE File ExtensionFederal Income Tax TableFree E File Tax ReturnFree 2013 Federal & State Tax Preparation On LineFree Irs Filing2009 1040 FormsEz Worksheet Line F1040a Tax Form For 2012Free TaxesE File Irs1040 State Tax Form1040ez Tax Form 20131040z

2012 1040

2012 1040 3. 2012 1040   Farm Income Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Schedule F (Form 1040) Sales of Farm ProductsSchedule F. 2012 1040 Form 4797. 2012 1040 Sales Caused by Weather-Related Conditions Rents (Including Crop Shares)Crop Shares Agricultural Program PaymentsCommodity Credit Corporation (CCC) Loans Conservation Reserve Program (CRP) Crop Insurance and Crop Disaster Payments Feed Assistance and Payments Cost-Sharing Exclusion (Improvements) Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 Tobacco Quota Buyout Program Payments Other Payments Payment to More Than One Person Income From CooperativesPatronage Dividends Per-Unit Retain Certificates Cancellation of DebtGeneral Rule Exceptions Exclusions Income From Other SourcesSod. 2012 1040 Granting the right to remove deposits. 2012 1040 Income Averaging for FarmersElected Farm Income (EFI) How To Figure the Tax Effect on Other Tax Determinations Tax for Certain Children Who Have Unearned Income Alternative Minimum Tax (AMT) Schedule J Introduction You may receive income from many sources. 2012 1040 You must report the income from all the different sources on your tax return, unless it is excluded by law. 2012 1040 Where you report the income on your tax return depends on its source. 2012 1040 This chapter discusses farm income you report on Schedule F (Form 1040), Profit or Loss From Farming. 2012 1040 For information on where to report other income, see the Instructions for Form 1040, U. 2012 1040 S. 2012 1040 Individual Income Tax Return. 2012 1040 Accounting method. 2012 1040   The rules discussed in this chapter assume you use the cash method of accounting. 2012 1040 Under the cash method, you generally include an item of income in gross income in the year you receive it. 2012 1040 See Cash Method in chapter 2. 2012 1040   If you use an accrual method of accounting, different rules may apply to your situation. 2012 1040 See Accrual Method in chapter 2. 2012 1040 Topics - This chapter discusses: Schedule F Sales of farm products Rents (including crop shares) Agricultural program payments Income from cooperatives Cancellation of debt Income from other sources Income averaging for farmers Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 550 Investment Income and Expenses 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness Sch E (Form 1040) Supplemental Income and Loss Sch J (Form 1040) Income Averaging for Farmers and Fishermen 1099-G Certain Government Payments 1099-PATR Taxable Distributions Received From Cooperatives 4797 Sales of Business Property 4835 Farm Rental Income and Expenses See chapter 16 for information about getting publications and forms. 2012 1040 Schedule F (Form 1040) Individuals, trusts, and partnerships report farm income on Schedule F (Form 1040), Profit or Loss From Farming. 2012 1040 Use this schedule to figure the net profit or loss from regular farming operations. 2012 1040 Income from farming reported on Schedule F includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. 2012 1040 This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. 2012 1040 It also includes income from the sale of crop shares if you materially participate in producing the crop. 2012 1040 See Rents (Including Crop Shares) , later. 2012 1040 Income received from operating a nursery, which specializes in growing ornamental plants, is considered to be income from farming. 2012 1040 Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets. 2012 1040 Land. 2012 1040 Depreciable farm equipment. 2012 1040 Buildings and structures. 2012 1040 Livestock held for draft, breeding, sport, or dairy purposes. 2012 1040 Gains and losses from most dispositions of farm assets are discussed in chapters 8 and 9. 2012 1040 Gains and losses from casualties, thefts, and condemnations are discussed in chapter 11. 2012 1040 Sales of Farm Products Where to report. 2012 1040    Table 3-1 shows where to report the sale of farm products on your tax return. 2012 1040 Schedule F. 2012 1040   Amounts received from the sales of products you raised on your farm for sale (or bought for resale), such as livestock, produce, or grains, are reported on Schedule F. 2012 1040 This includes money and the fair market value of any property or services you receive. 2012 1040 When you sell farm products bought for resale, your profit or loss is the difference between your selling price (money plus the fair market value of any property) and your basis in the item (usually the cost). 2012 1040 See chapter 6 for information on the basis of assets. 2012 1040 You generally report these amounts on Schedule F for the year you receive payment. 2012 1040 Example. 2012 1040 In 2012, you bought 20 feeder calves for $11,000 for resale. 2012 1040 You sold them in 2013 for $21,000. 2012 1040 You report the $21,000 sales price on Schedule F, line 1b, subtract your $11,000 basis on line 1d, and report the resulting $10,000 profit on line 1e. 2012 1040 Form 4797. 2012 1040   Sales of livestock held for draft, breeding, sport, or dairy purposes may result in ordinary or capital gains or losses, depending on the circumstances. 2012 1040 In either case, you should always report these sales on Form 4797 instead of Schedule F. 2012 1040 See Livestock under Ordinary or Capital Gain or Loss in chapter 8. 2012 1040 Animals you do not hold primarily for sale are considered business assets of your farm. 2012 1040 Table 3-1. 2012 1040 Where To Report Sales of Farm Products Item Sold Schedule F Form 4797 Farm products raised for sale X   Farm products bought for resale X   Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport, or dairy purposes (bought or raised)   X Sale by agent. 2012 1040   If your agent sells your farm products, you have constructive receipt of the income when your agent receives payment and you must include the net proceeds from the sale in gross income for the year the agent receives payment. 2012 1040 This applies even if your agent pays you in a later year. 2012 1040 For a discussion on constructive receipt of income, see Cash Method under Accounting Methods in chapter 2. 2012 1040 Sales Caused by Weather-Related Conditions If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. 2012 1040 You must meet all the following conditions to qualify. 2012 1040 Your principal trade or business is farming. 2012 1040 You use the cash method of accounting. 2012 1040 You can show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition. 2012 1040 The weather-related condition caused an area to be designated as eligible for assistance by the federal government. 2012 1040 Sales or exchanges made before an area became eligible for federal assistance qualify if the weather-related condition that caused the sale or exchange also caused the area to be designated as eligible for federal assistance. 2012 1040 The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal departments or agencies. 2012 1040 A weather-related sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes may be an involuntary conversion. 2012 1040 See Other Involuntary Conversions in chapter 11. 2012 1040 Usual business practice. 2012 1040   You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. 2012 1040 Do this by considering all the facts and circumstances, but do not take into account your sales in any earlier year for which you postponed the gain. 2012 1040 If you have not yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general region. 2012 1040 Connection with affected area. 2012 1040   The livestock does not have to be raised or sold in an area affected by a weather-related condition for the postponement to apply. 2012 1040 However, the sale must occur solely because of a weather-related condition that affected the water, grazing, or other requirements of the livestock. 2012 1040 This requirement generally will not be met if the costs of feed, water, or other requirements of the livestock affected by the weather-related condition are not substantial in relation to the total costs of holding the livestock. 2012 1040 Classes of livestock. 2012 1040   You must figure the amount to be postponed separately for each generic class of animals—for example, hogs, sheep, and cattle. 2012 1040 Do not separate animals into classes based on age, sex, or breed. 2012 1040 Amount to be postponed. 2012 1040   Follow these steps to figure the amount of gain to be postponed for each class of animals. 2012 1040 Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. 2012 1040 For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock. 2012 1040 Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions. 2012 1040 Example. 2012 1040 You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. 2012 1040 As a result of drought, you sold 135 head during 2012. 2012 1040 You realized $70,200 from the sale. 2012 1040 On August 9, 2012, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. 2012 1040 The income you can postpone until 2013 is $18,200 [($70,200 ÷ 135) × 35]. 2012 1040 How to postpone gain. 2012 1040   To postpone gain, attach a statement to your tax return for the year of the sale. 2012 1040 The statement must include your name and address and give the following information for each class of livestock for which you are postponing gain. 2012 1040 A statement that you are postponing gain under Internal Revenue Code (IRC) section 451(e). 2012 1040 Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions. 2012 1040 A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock. 2012 1040 The number of animals sold in each of the 3 preceding years. 2012 1040 The number of animals you would have sold in the tax year had you followed your normal business practice in the absence of weather-related conditions. 2012 1040 The total number of animals sold and the number sold because of weather-related conditions during the tax year. 2012 1040 A computation, as described above, of the income to be postponed for each class of livestock. 2012 1040   Generally, you must file the statement and the return by the due date of the return, including extensions. 2012 1040 However, for sales or exchanges treated as an involuntary conversion from weather-related sales of livestock in an area eligible for federal assistance (discussed in chapter 11), you can file this statement at any time during the replacement period. 2012 1040 For other sales or exchanges, if you timely filed your return for the year without postponing gain, you can still postpone gain by filing an amended return within 6 months of the due date of the return (excluding extensions). 2012 1040 Attach the statement to the amended return and write “Filed pursuant to section 301. 2012 1040 9100-2” at the top of the amended return. 2012 1040 File the amended return at the same address you filed the original return. 2012 1040 Once you have filed the statement, you can cancel your postponement of gain only with the approval of the IRS. 2012 1040 Rents (Including Crop Shares) The rent you receive for the use of your farmland is generally rental income, not farm income. 2012 1040 However, if you materially participate in farming operations on the land, the rent is farm income. 2012 1040 See Landlord Participation in Farming in chapter 12. 2012 1040 Pasture income and rental. 2012 1040   If you pasture someone else's livestock and take care of them for a fee, the income is from your farming business. 2012 1040 You must enter it as Other income on Schedule F. 2012 1040 If you simply rent your pasture for a flat cash amount without providing services, report the income as rent on Part I of Schedule E (Form 1040), Supplemental Income and Loss. 2012 1040 Crop Shares You must include rent you receive in the form of crop shares in income in the year you convert the shares to money or the equivalent of money. 2012 1040 It does not matter whether you use the cash method of accounting or an accrual method of accounting. 2012 1040 If you materially participate in operating a farm from which you receive rent in the form of crop shares or livestock, the rental income is included in self-employment income. 2012 1040 See Landlord Participation in Farming in chapter 12. 2012 1040 Report the rental income on Schedule F. 2012 1040 If you do not materially participate in operating the farm, report this income on Form 4835 and carry the net income or loss to Schedule E (Form 1040). 2012 1040 The income is not included in self-employment income. 2012 1040 Crop shares you use to feed livestock. 2012 1040   Crop shares you receive as a landlord and feed to your livestock are considered converted to money when fed to the livestock. 2012 1040 You must include the fair market value of the crop shares in income at that time. 2012 1040 You are entitled to a business expense deduction for the livestock feed in the same amount and at the same time you include the fair market value of the crop share as rental income. 2012 1040 Although these two transactions cancel each other for figuring adjusted gross income on Form 1040, they may be necessary to figure your self-employment tax. 2012 1040 See  chapter 12. 2012 1040 Crop shares you give to others (gift). 2012 1040   Crop shares you receive as a landlord and give to others are considered converted to money when you make the gift. 2012 1040 You must report the fair market value of the crop share as income, even though someone else receives payment for the crop share. 2012 1040 Example. 2012 1040 A tenant farmed part of your land under a crop-share arrangement. 2012 1040 The tenant harvested and delivered the crop in your name to an elevator company. 2012 1040 Before selling any of the crop, you instructed the elevator company to cancel your warehouse receipt and make out new warehouse receipts in equal amounts of the crop in the names of your children. 2012 1040 They sell their crop shares in the following year and the elevator company makes payments directly to your children. 2012 1040 In this situation, you are considered to have received rental income and then made a gift of that income. 2012 1040 You must include the fair market value of the crop shares in your income for the tax year you gave the crop shares to your children. 2012 1040 Crop share loss. 2012 1040   If you are involved in a rental or crop-share lease arrangement, any loss from these activities may be subject to the limits under the passive loss rules. 2012 1040 See Publication 925 for information on these rules. 2012 1040 Agricultural Program Payments You must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates. 2012 1040 However, you can exclude from income some payments you receive under certain cost-sharing conservation programs. 2012 1040 See Cost-Sharing Exclusion (Improvements) , later. 2012 1040 Report the agricultural program payment on the appropriate line of Schedule F, Part I. 2012 1040 Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Commodity Credit Corporation (CCC) loan. 2012 1040 However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. 2012 1040 Claim the deduction on Schedule F for the year of repayment or reduction. 2012 1040 Commodity Credit Corporation (CCC) Loans Generally, you do not report loans you receive as income. 2012 1040 However, if you pledge part or all of your production to secure a CCC loan, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. 2012 1040 You do not need approval from the IRS to adopt this method of reporting CCC loans. 2012 1040 Once you report a CCC loan as income for the year received, you generally must report all CCC loans in that year and later years in the same way. 2012 1040 However, you can obtain for your tax year an automatic consent to change your method of accounting for loans received from the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. 2012 1040 For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. 2012 1040 Revenue Procedure 2008-52, 2008-36 I. 2012 1040 R. 2012 1040 B. 2012 1040 587, is available at  www. 2012 1040 irs. 2012 1040 gov/irb/2008-36_IRB/ar09. 2012 1040 html. 2012 1040 You can request income tax withholding from CCC loan payments you receive. 2012 1040 Use Form W-4V, Voluntary Withholding Request. 2012 1040 See chapter 16 for information about ordering the form. 2012 1040 To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F, line 7a, for the year you receive it. 2012 1040 Attach a statement to your return showing the details of the loan. 2012 1040 You must file the statement and the return by the due date of the return, including extensions. 2012 1040 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). 2012 1040 Attach the statement to the amended return and write “Filed pursuant to section 301. 2012 1040 9100-2” at the top of the return. 2012 1040 File the amended return at the same address you filed the original return. 2012 1040 When you make this election, the amount you report as income becomes your basis in the commodity. 2012 1040 See chapter 6 for information on the basis of assets. 2012 1040 If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. 2012 1040 If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F. 2012 1040 If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. 2012 1040 If you did not report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture. 2012 1040 Form 1099-A. 2012 1040   If you forfeit pledged crops to the CCC in full payment of a loan, you may receive a Form 1099-A, Acquisition or Abandonment of Secured Property. 2012 1040 “CCC” should be shown in box 6. 2012 1040 The amount of any CCC loan outstanding when you forfeited your commodity should also be indicated on the form. 2012 1040 Market Gain Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. 2012 1040 If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. 2012 1040 Whether you use cash or CCC certificates to repay the loan, you will receive a Form 1099-G showing the market gain you realized. 2012 1040 Market gain should be reported as follows. 2012 1040 If you elected to include the CCC loan in income in the year you received it, do not include the market gain in income. 2012 1040 However, adjust the basis of the commodity for the amount of the market gain. 2012 1040 If you did not include the CCC loan in income in the year received, include the market gain in your income. 2012 1040 The following examples show how to report market gain. 2012 1040 Example 1. 2012 1040 Mike Green is a cotton farmer. 2012 1040 He uses the cash method of accounting and files his tax return on a calendar year basis. 2012 1040 He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. 2012 1040 In 2012, Mike pledged 1,000 pounds of cotton as collateral for a CCC loan of $2,000 (a loan rate of $2. 2012 1040 00 per pound). 2012 1040 In 2013, he repaid the loan and redeemed the cotton for $1,500 when the world price was $1. 2012 1040 50 per pound (lower than the loan amount). 2012 1040 Later in 2013, he sold the cotton for $2,500. 2012 1040 The market gain on the redemption was $. 2012 1040 50 ($2. 2012 1040 00 – $1. 2012 1040 50) per pound. 2012 1040 Mike realized total market gain of $500 ($. 2012 1040 50 x 1,000 pounds). 2012 1040 How he reports this market gain and figures his gain or loss from the sale of the cotton depends on whether he included CCC loans in income in 2012. 2012 1040 Included CCC loan. 2012 1040   Mike reported the $2,000 CCC loan as income for 2012 on Schedule F, line 1b, so he is treated as if he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when he redeemed it. 2012 1040 The $500 market gain is not recognized on the redemption. 2012 1040 He reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. 2012 1040   Mike's basis in the cotton after he redeemed it was $1,500, which is the redemption (repurchase) price paid for the cotton. 2012 1040 His gain from the sale is $1,000 ($2,500 – $1,500). 2012 1040 He reports the $1,000 gain as income for 2013 on Schedule F, line 1b. 2012 1040 Excluded CCC loan. 2012 1040   Mike has income of $500 from market gain in 2013. 2012 1040 He reports it on Schedule F, lines 4a and 4b. 2012 1040 His basis in the cotton is zero, so his gain from its sale is $2,500. 2012 1040 He reports the $2,500 gain as income for 2013 on Schedule F, line 1b. 2012 1040 Example 2. 2012 1040 The facts are the same as in Example 1 except that, instead of selling the cotton for $2,500 after redeeming it, Mike entered into an option-to-purchase contract with a cotton buyer before redeeming the cotton. 2012 1040 Under that contract, Mike authorized the cotton buyer to pay the CCC loan on Mike's behalf. 2012 1040 In 2013, the cotton buyer repaid the loan for $1,500 and immediately exercised his option, buying the cotton for $1,500. 2012 1040 How Mike reports the $500 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included CCC loans in income in 2012. 2012 1040 Included CCC loan. 2012 1040   As in Example 1, Mike is treated as though he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when the cotton buyer redeemed it for him. 2012 1040 The $500 market gain is not recognized on the redemption. 2012 1040 Mike reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. 2012 1040   Also, as in Example 1, Mike's basis in the cotton when the cotton buyer redeemed it for him was $1,500. 2012 1040 Mike has no gain or loss on its sale to the cotton buyer for that amount. 2012 1040 Excluded CCC loan. 2012 1040   As in Example 1, Mike has income of $500 from market gain in 2013. 2012 1040 He reports it on Schedule F, lines 4a and 4b. 2012 1040 His basis in the cotton is zero, so his gain from its sale is $1,500. 2012 1040 He reports the $1,500 gain as income for 2013 on Schedule F, line 1b. 2012 1040 Conservation Reserve Program (CRP) Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. 2012 1040 You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 4a and 4b. 2012 1040 Cost-share payments you receive may qualify for the cost-sharing exclusion. 2012 1040 See Cost-Sharing Exclusion (Improvements) , later. 2012 1040 CRP payments are reported to you on Form 1099-G. 2012 1040 Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. 2012 1040 See the instructions for Schedule SE (Form 1040). 2012 1040 Crop Insurance and Crop Disaster Payments You must include in income any crop insurance proceeds you receive as the result of physical crop damage or reduction of crop revenue, or both. 2012 1040 You generally include them in the year you receive them. 2012 1040 Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster. 2012 1040 You can request income tax withholding from crop disaster payments you receive from the federal government. 2012 1040 Use Form W-4V, Voluntary Withholding Request. 2012 1040 See chapter 16 for information about ordering the form. 2012 1040 Election to postpone reporting until the following year. 2012 1040   You can postpone reporting some or all crop insurance proceeds as income until the year following the year the physical damage occurred if you meet all the following conditions. 2012 1040 You use the cash method of accounting. 2012 1040 You receive the crop insurance proceeds in the same tax year the crops are damaged. 2012 1040 You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred. 2012 1040   Deferral is not permitted for proceeds received from revenue insurance policies. 2012 1040   To postpone reporting some or all crop insurance proceeds received in 2013, report the amount you received on Schedule F, line 6a, but do not include it as a taxable amount on line 6b. 2012 1040 Check the box on line 8c and attach a statement to your tax return. 2012 1040 The statement must include your name and address and contain the following information. 2012 1040 A statement that you are making an election under IRC section 451(d) and Regulations section 1. 2012 1040 451-6. 2012 1040 The specific crop or crops physically destroyed or damaged. 2012 1040 A statement that under your normal business practice you would have included income from some or all of the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged. 2012 1040 The cause of the physical destruction or damage and the date or dates it occurred. 2012 1040 The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment. 2012 1040 The name of each insurance carrier from whom you received payments. 2012 1040   One election covers all crops representing a single trade or business. 2012 1040 If you have more than one farming business, make a separate election for each one. 2012 1040 For example, if you operate two separate farms on which you grow different crops and you keep separate books for each farm, you should make two separate elections to postpone reporting insurance proceeds you receive for crops grown on each of your farms. 2012 1040   An election is binding for the year unless the IRS approves your request to change it. 2012 1040 To request IRS approval to change your election, write to the IRS at the following address giving your name, address, identification number, the year you made the election, and your reasons for wanting to change it. 2012 1040 Ogden Submission Processing Center P. 2012 1040 O. 2012 1040 Box 9941 Ogden, UT 84409 Feed Assistance and Payments The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. 2012 1040 These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. 2012 1040 They also include the donation or sale at a below-market price of feed owned by the Commodity Credit Corporation. 2012 1040 Include in income: The market value of donated feed, The difference between the market value and the price you paid for feed you buy at below-market prices, and Any cost reimbursement you receive. 2012 1040 You must include these benefits in income in the year you receive them. 2012 1040 You cannot postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. 2012 1040 Report the benefits on Schedule F, Part I, as agricultural program payments. 2012 1040 You can usually take a current deduction for the same amount as a feed expense. 2012 1040 Cost-Sharing Exclusion (Improvements) You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. 2012 1040 A payment is any economic benefit you get as a result of an improvement. 2012 1040 However, this exclusion applies only to that part of a payment that meets all three of the following tests. 2012 1040 It was for a capital expense. 2012 1040 You cannot exclude any part of a payment for an expense you can deduct in the year you pay or incur it. 2012 1040 You must include the payment for a deductible expense in income, and you can take any offsetting deduction. 2012 1040 See chapter 5 for information on deducting soil and water conservation expenses. 2012 1040 It does not substantially increase your annual income from the property for which it is made. 2012 1040 An increase in annual income is substantial if it is more than the greater of the following amounts. 2012 1040 10% of the average annual income derived from the affected property before receiving the improvement. 2012 1040 $2. 2012 1040 50 times the number of affected acres. 2012 1040 The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. 2012 1040 Qualifying programs. 2012 1040   If the three tests listed above are met, you can exclude part or all of the payments from the following programs. 2012 1040 The rural clean water program authorized by the Federal Water Pollution Control Act. 2012 1040 The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977. 2012 1040 The water bank program authorized by the Water Bank Act. 2012 1040 The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978. 2012 1040 The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act. 2012 1040 The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act. 2012 1040 The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act. 2012 1040 Certain small watershed programs, listed later. 2012 1040 Any program of a state, possession of the United States, a political subdivision of any of these, or of the District of Columbia under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. 2012 1040 Several state programs have been approved. 2012 1040 For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS). 2012 1040 Small watershed programs. 2012 1040   If the three tests listed earlier are met, you can exclude part or all of the payments you receive under the following programs for improvements made in connection with a watershed. 2012 1040 The programs under the Watershed Protection and Flood Prevention Act. 2012 1040 The flood prevention projects under the Flood Control Act of 1944. 2012 1040 The Emergency Watershed Protection Program under the Flood Control Act of 1950. 2012 1040 Certain programs under the Colorado River Basin Salinity Control Act. 2012 1040 The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996 and the Farm Security and Rural Investment Act of 2002. 2012 1040 The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. 2012 1040 The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. 2012 1040 The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000. 2012 1040 The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000. 2012 1040 The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996. 2012 1040 The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002. 2012 1040 The Conservation Security Program authorized by the Food Security Act of 1985. 2012 1040 The Forest Health Protection Program (FHPP) authorized by the Cooperative Forestry Assistance Act of 1978. 2012 1040 Income realized. 2012 1040   The gross income you realize upon getting an improvement under these cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any). 2012 1040 Value of the improvement. 2012 1040   You determine the value of the improvement by multiplying its fair market value (defined in chapter 6) by a fraction. 2012 1040 The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following items. 2012 1040 Any government payments under a program not listed earlier. 2012 1040 Any part of a government payment under a program listed earlier that the Secretary of Agriculture has not certified as primarily for conservation. 2012 1040 Any government payment to you for rent or for your services. 2012 1040 The denominator of the fraction is the total cost of the improvement. 2012 1040 Excludable portion. 2012 1040   The excludable portion is the present fair market value of the right to receive annual income from the affected acreage of the greater of the following amounts. 2012 1040 10% of the prior average annual income from the affected acreage. 2012 1040 The prior average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement. 2012 1040 $2. 2012 1040 50 times the number of affected acres. 2012 1040 The calculation of present fair market value of the right to receive annual income is too complex to discuss in this publication. 2012 1040 You may need to consult your tax advisor for assistance. 2012 1040 Example. 2012 1040 One hundred acres of your land was reclaimed under a rural abandoned mine program contract with the Natural Resources Conservation Service of the USDA. 2012 1040 The total cost of the improvement was $500,000. 2012 1040 The USDA paid $490,000. 2012 1040 You paid $10,000. 2012 1040 The value of the cost-sharing improvement is $15,000. 2012 1040 The present fair market value of the right to receive the annual income described in (1) above is $1,380, and the present fair market value of the right to receive the annual income described in (2) is $1,550. 2012 1040 The excludable portion is the greater amount, $1,550. 2012 1040 You figure the amount to include in gross income as follows: Value of cost-sharing improvement $15,000 Minus: Your share $10,000     Excludable portion 1,550 11,550 Amount included in income $ 3,450 Effects of the exclusion. 2012 1040   When you figure the basis of property you acquire or improve using cost-sharing payments excluded from income, subtract the excluded payments from your capital costs. 2012 1040 Any payment excluded from income is not part of your basis. 2012 1040 In the example above, the increase in basis is $500,000 – $490,000 + $3,450 = $13,450. 2012 1040   In addition, you cannot take depreciation, amortization, or depletion deductions for the part of the cost of the property for which you receive cost-sharing payments you exclude from income. 2012 1040 How to report the exclusion. 2012 1040   Attach a statement to your tax return (or amended return) for the tax year you receive the last government payment for the improvement. 2012 1040 The statement must include the following information. 2012 1040 The dollar amount of the cost funded by the government payment. 2012 1040 The value of the improvement. 2012 1040 The amount you are excluding. 2012 1040   Report the total cost-sharing payments you receive on Schedule F, line 4a, and the taxable amount on line 4b. 2012 1040 Recapture. 2012 1040   If you dispose of the property within 20 years after you received the excluded payments, you must treat as ordinary income part or all of the cost-sharing payments you excluded. 2012 1040 In the above example, if the 100 acres were sold within 20 years of the exclusion for a gain of $2,000, $1,550 of that amount would be included in ordinary income. 2012 1040 You must report the recapture on Form 4797. 2012 1040 See Section 1255 property under Other Gains in chapter 9. 2012 1040 Electing not to exclude payments. 2012 1040   You can elect not to exclude all or part of any payments you receive under these programs. 2012 1040 If you make this election for all of these payments, none of the above restrictions and rules apply. 2012 1040 You must make this election by the due date, including extensions, for filing your return. 2012 1040 In the example above, an election not to exclude payments results in $5,000 included in income and a $15,000 increase in basis. 2012 1040 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). 2012 1040 Write “Filed pursuant to section 301. 2012 1040 9100-2” at the top of the amended return and file it at the same address you filed the original return. 2012 1040 Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 The Farm Security and Rural Investment Act of 2002 created two new types of payments—direct and counter-cyclical payments. 2012 1040 You must include these payments on Schedule F, lines 4a and 4b. 2012 1040 The Food, Conservation, and Energy Act of 2008 provides for direct and counter-cyclical payments (DCP) as well as Average Crop Revenue Election (ACRE) payments. 2012 1040 You must include these payments on Schedule F, lines 6a and 6b. 2012 1040 The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, amends the Food, Conservation, and Energy Act of 2008 and provided a one-year extension for these payments. 2012 1040 Tobacco Quota Buyout Program Payments The Fair and Equitable Tobacco Reform Act of 2004, title VI of the American Jobs Creation Act of 2004, terminated the tobacco marketing quota program and the tobacco price support program. 2012 1040 As a result, the USDA offered to enter into contracts with eligible tobacco quota holders and growers to provide compensation for the lost value of the quotas and related price support. 2012 1040 If you are an eligible tobacco quota holder, your contract entitles you to receive total payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. 2012 1040 If you are an eligible tobacco grower, your contract entitles you to receive total payments of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. 2012 1040 Tobacco Quota Holders Contract payments you receive are considered proceeds from a sale of your tobacco quota as of the date on which you and the USDA enter into the contract. 2012 1040 Your taxable gain or loss is the total amount received for your quota reduced by any amount treated as interest (discussed below), over your adjusted basis. 2012 1040 The gain or loss is capital or ordinary depending on how you used the quota. 2012 1040 See Capital or ordinary gain or loss , later. 2012 1040 Report the entire gain on your income tax return for the tax year that includes the date you entered into the contract if you elect not to use the installment method. 2012 1040 Adjusted basis. 2012 1040   The adjusted basis of your quota is determined differently depending on how you obtained the quota. 2012 1040 The basis of a quota derived from an original grant by the federal government is zero. 2012 1040 The basis of a purchased quota is the purchase price. 2012 1040 The basis of a quota received as a gift is generally the same as the donor's basis. 2012 1040 However, under certain circumstances, the basis is increased by the amount of gift taxes paid. 2012 1040 If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is the fair market value. 2012 1040 The basis of an inherited quota is generally the fair market value of the quota at the time of the decedent's death. 2012 1040 Reduction of basis. 2012 1040   You are required to reduce the basis of your tobacco quota by the following amounts. 2012 1040 Deductions you took for amortization, depletion, or depreciation. 2012 1040 Amounts you previously deducted as a loss because of a reduction in the number of pounds of tobacco allowable under the quota. 2012 1040 The entire cost of a purchased quota you deducted in an earlier year (which reduces your basis to zero). 2012 1040 Amount treated as interest. 2012 1040   You must reduce your tobacco quota buyout program payment by the amount treated as interest. 2012 1040 The interest is reportable as ordinary income. 2012 1040 If payments total $3,000 or less, your total quota buyout program payment does not include any amount treated as interest and you are not required to reduce the total payment you receive. 2012 1040   In all other cases, a portion of each payment may be treated as interest for federal tax purposes. 2012 1040 You may be required to reduce your total quota buyout program payment before you calculate your gain or loss. 2012 1040 For more information, see Notice 2005-57, 2005-32 I. 2012 1040 R. 2012 1040 B. 2012 1040 267, available at www. 2012 1040 irs. 2012 1040 gov/irb/2005-32_IRB/ar13. 2012 1040 html. 2012 1040 Installment method. 2012 1040   You may use the installment method to report a gain if you receive at least one payment after the close of your tax year. 2012 1040 Under the installment method, a portion of the gain is taken into account in each year in which a payment is received. 2012 1040 See chapter 10 for more information. 2012 1040 Capital or ordinary gain or loss. 2012 1040   Whether your gain or loss is ordinary or capital depends on how you used the quota. 2012 1040 Quota used in the trade or business of farming. 2012 1040   If you used the quota in the trade or business of farming and you held it for more than one year, you report the transaction as a section 1231 transaction on Form 4797. 2012 1040 See Section 1231 transactions in the Instructions for Form 4797 for detailed information on reporting section 1231 transactions. 2012 1040 Quota held for investment. 2012 1040   If you held the quota for investment purposes, any gain or loss is capital gain or loss. 2012 1040 The same result also applies if you held the quota for the production of income, though not connected with a trade or business. 2012 1040 Gain treated as ordinary income. 2012 1040   If you previously deducted any of the following items, some or all of the capital gain must be recharacterized and reported as ordinary income. 2012 1040 Any resulting capital gain is taxed as ordinary income up to the amount previously deducted. 2012 1040 The cost of acquiring a quota. 2012 1040 Amounts for amortization, depletion, or depreciation. 2012 1040 Amounts to reflect a reduction in the quota pounds. 2012 1040   You should include the ordinary income on your return for the tax year even if you use the installment method to report the remainder of the gain. 2012 1040 Self-employment income. 2012 1040   The tobacco quota buyout payments are not self-employment income. 2012 1040 Income averaging for farmers. 2012 1040   The gain or loss resulting from the quota payments does not qualify for income averaging. 2012 1040 A tobacco quota is considered an interest in land. 2012 1040 Income averaging is not available for gain or loss arising from the sale or other disposition of land. 2012 1040 Involuntary conversion. 2012 1040   The buyout of the tobacco quota is not an involuntary conversion. 2012 1040 Form 1099-S. 2012 1040   A tobacco quota is considered an interest in land, so the USDA will generally report the total amount you receive under a contract on Form 1099-S, Proceeds From Real Estate Transactions, if the amount is $600 or more. 2012 1040 The USDA will generally report any portion of a payment treated as interest of $600 or more to you on Form 1099-INT, Interest Income, for the year in which the payment is made. 2012 1040 Like-kind exchange of quota. 2012 1040   You may postpone reporting the gain or loss from tobacco quota buyout payments by entering into a like-kind exchange if you comply with the requirements of section 1031 and the regulations thereunder. 2012 1040 See Notice 2005-57 for more information. 2012 1040 Tobacco Growers Contract payments you receive are determined by reference to the amount of quota under which you produced (or planted) quota tobacco during the 2002, 2003, and 2004 tobacco marketing years and are prorated based on the number of years that you produced (or planted) quota tobacco during those years. 2012 1040 Taxation of payments to tobacco growers. 2012 1040   Payments to growers replace ordinary income that would have been earned had the tobacco marketing quota and price support programs continued. 2012 1040 Individuals will generally report the payments as an Agricultural program payment on Schedule F. 2012 1040 If you are a landowner who does not materially participate in the operation or management of the farm and are receiving the grower payment because your farm rental income is based on the tobacco grown by a tenant, the grower payment should be reported on Form 4835. 2012 1040 Self-employment income. 2012 1040   Payments to growers generally represent self-employment income. 2012 1040 If the grower is an individual carrying on a trade or business and deriving income (other than farm rental income properly reported on Form 4835) from that trade or business, the payments are net earnings from self-employment. 2012 1040 Income averaging for farmers. 2012 1040   Payments to growers who are individuals qualify for farm income averaging. 2012 1040 Form 1099-G. 2012 1040   If the amount received in a taxable year is $600 or more, the amount will generally be reported by the USDA on a Form 1099-G. 2012 1040 Other Payments You must include most other government program payments in income. 2012 1040 Fertilizer and Lime Include in income the value of fertilizer or lime you receive under a government program. 2012 1040 How to claim the offsetting deduction is explained under Fertilizer and Lime in chapter 4. 2012 1040 Improvements If government payments are based on improvements, such as a pollution control facility, you must include them in income. 2012 1040 You must also capitalize the full cost of the improvement. 2012 1040 Since you have included the payments in income, they do not reduce your basis. 2012 1040 However, see Cost-Sharing Exclusion (Improvements) , earlier, for additional information. 2012 1040 National Tobacco Growers' Settlement Trust Fund Payments If you are a producer, landowner, or tobacco quota owner who receives money from the National Tobacco Growers' Settlement Trust Fund, you must report those payments as income. 2012 1040 You should receive a Form 1099-MISC, Miscellaneous Income, that shows the payment amount. 2012 1040 If you produce a tobacco crop, report the payments as income from farming on your Schedule F. 2012 1040 If you are a landowner or tobacco quota owner who leases tobacco-related property but you do not produce the crop, report the payments as farm rental income on Form 4835. 2012 1040 Payment to More Than One Person The USDA reports program payments to the IRS. 2012 1040 It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). 2012 1040 If you, as the payee of record, receive a program payment belonging to someone else, such as your landlord, the amount belonging to the other person is a nominee distribution. 2012 1040 You should file Form 1099-G to report the identity of the actual recipient to the IRS. 2012 1040 You should also give this information to the recipient. 2012 1040 You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form. 2012 1040 Report the total amount reported to you as the payee of record on Schedule F, line 4a or 6a. 2012 1040 However, do not report as a taxable amount on line 4b or 6b any amount belonging to someone else. 2012 1040 See chapter 16 for information about ordering Form 1099-G. 2012 1040 Income From Cooperatives If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). 2012 1040 If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative. 2012 1040 Form 1099-PATR. 2012 1040   The cooperative will report the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. 2012 1040 Form 1099-PATR may also show an alternative minimum tax adjustment that you must include on Form 6251, Alternative Minimum Tax—Individuals, if you are required to file the form. 2012 1040 For information on the alternative minimum tax, see the Instructions for Form 6251. 2012 1040 Patronage Dividends You generally report patronage dividends as income on Schedule F, lines 3a and 3b, for the tax year you receive them. 2012 1040 They include the following items. 2012 1040 Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative). 2012 1040 The stated dollar value of qualified written notices of allocation. 2012 1040 The fair market value of other property. 2012 1040 Do not report as income on line 3b any patronage dividends you receive from expenditures that were not deductible, such as buying personal or family items, capital assets, or depreciable property. 2012 1040 You must reduce the cost or other basis of these items by the amount of such patronage dividends received. 2012 1040 Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls. 2012 1040 If you cannot determine what the dividend is for, report it as income on lines 3a and 3b. 2012 1040 Qualified written notice of allocation. 2012 1040   If you receive a qualified written notice of allocation as part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F, lines 3a and 3b, in the year you receive it. 2012 1040 A written notice of allocation is qualified if at least 20% of the patronage dividend is paid in money or by qualified check and either of the following conditions is met. 2012 1040 The notice must be redeemable in cash for at least 90 days after it is issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation. 2012 1040 You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following. 2012 1040 Signing and giving a written agreement to the cooperative. 2012 1040 Getting or keeping membership in the cooperative after it adopted a bylaw providing that membership constitutes agreement. 2012 1040 The cooperative must notify you in writing of this bylaw and give you a copy. 2012 1040 Endorsing and cashing a qualified check paid as part of the same patronage dividend. 2012 1040 You must cash the check by the 90th day after the close of the payment period for the cooperative's tax year for which the patronage dividend was paid. 2012 1040 Qualified check. 2012 1040   A qualified check is any instrument that is redeemable in money and meets both of the following requirements. 2012 1040 It is part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2(c), above. 2012 1040 It is imprinted with a statement that endorsing and cashing it constitutes the payee's consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend. 2012 1040 Loss on redemption. 2012 1040   You can deduct on Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your farming business. 2012 1040 The loss is the difference between the stated dollar amount of the qualified written notice you included in income and the amount you received when you redeemed it. 2012 1040 Nonqualified notice of allocation. 2012 1040   Do not include the stated dollar value of any nonqualified notice of allocation in income when you receive it. 2012 1040 Your basis in the notice is zero. 2012 1040 You must include in income for the tax year of disposition any amount you receive from its sale, redemption, or other disposition. 2012 1040 Report that amount, up to the stated dollar value of the notice, on Schedule F, lines 3a and 3b. 2012 1040 However, do not include that amount in your income if the notice resulted from buying or selling capital assets or depreciable property or from buying personal items, as explained in the following discussions. 2012 1040   If the amount you receive is more than the stated dollar value of the notice, report the excess as the type of income it represents. 2012 1040 For example, if it represents interest income, report it on your return as interest. 2012 1040 Buying or selling capital assets or depreciable property. 2012 1040   Do not include in income patronage dividends from buying capital assets or depreciable property used in your business. 2012 1040 You must, however, reduce the basis of these assets by the dividends. 2012 1040 This reduction is taken into account as of the first day of the tax year in which the dividends are received. 2012 1040 If the dividends are more than your unrecovered basis, reduce the unrecovered basis to zero and include the difference on Schedule F, line 3a, for the tax year you receive them. 2012 1040   This rule and the exceptions explained below also apply to amounts you receive from the sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from buying or selling capital assets or depreciable property. 2012 1040 Example. 2012 1040 On July 1, 2012, Mr. 2012 1040 Brown, a patron of a cooperative association, bought a machine for his dairy farm business from the association for $2,900. 2012 1040 The machine has a life of 7 years under MACRS (as provided in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946, Depreciation and Amortization). 2012 1040 Mr. 2012 1040 Brown files his return on a calendar year basis. 2012 1040 For 2012, he claimed a depreciation deduction of $311, using the 10. 2012 1040 71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Publication 946). 2012 1040 On July 2, 2013, the cooperative association paid Mr. 2012 1040 Brown a $300 cash patronage dividend for buying the machine. 2012 1040 Mr. 2012 1040 Brown adjusts the basis of the machine and figures his depreciation deduction for 2013 (and later years) as follows. 2012 1040 Cost of machine on July 1, 2012 $2,900 Minus: 2012 depreciation $311     2013 cash dividend 300 611 Adjusted basis for  depreciation for 2013: $2,289 Depreciation rate: 1 ÷ 6½ (remaining recovery period as of 1/1/2012) = 15. 2012 1040 38% × 1. 2012 1040 5 = 23. 2012 1040 07% Depreciation deduction for 2013 ($2,289 × 23. 2012 1040 07%) $528 Exceptions. 2012 1040   If the dividends are for buying or selling capital assets or depreciable property you did not own at any time during the year you received the dividends, you must include them on Schedule F, lines 3a and 3b, unless one of the following rules applies. 2012 1040 If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year. 2012 1040 If the dividends relate to a capital asset for which a loss was not or would not have been deductible, do not report them as income (ordinary or capital gain). 2012 1040   If the dividends are for selling capital assets or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale. 2012 1040 Personal purchases. 2012 1040   Because you cannot deduct the cost of personal, living, or family items, such as supplies, equipment, or services not related to the production of farm income, you can omit from the taxable amount of patronage dividends on Schedule F, line 3b, any dividends from buying those items (and you must reduce the cost or other basis of those items by the amount of the dividends). 2012 1040 This rule also applies to amounts you receive from the sale, redemption, or other disposition of a nonqualified written notice of allocation resulting from these purchases. 2012 1040 Per-Unit Retain Certificates A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. 2012 1040 A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. 2012 1040 These allocations can be paid in money, other property, or qualified certificates. 2012 1040 Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier. 2012 1040 Qualified certificates. 2012 1040   Qualified per-unit retain certificates are those issued to patrons who have agreed to include the stated dollar amount of these certificates in income in the year of receipt. 2012 1040 The agreement may be made in writing or by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. 2012 1040 If you receive qualified per-unit retain certificates, include the stated dollar amount of the certificates in income on Schedule F, lines 3a and 3b, for the tax year you receive them. 2012 1040 Nonqualified certificates. 2012 1040   Do not include the stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. 2012 1040 Your basis in the certificate is zero. 2012 1040 You must include in income any amount you receive from its sale, redemption, or other disposition. 2012 1040 Report the amount you receive from the disposition as ordinary income on Schedule F, lines 3a and 3b, for the tax year of disposition. 2012 1040 Cancellation of Debt This section explains the general rule for including canceled debt in income and the exceptions to the general rule. 2012 1040 For more information on canceled debt, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. 2012 1040 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 gross income for tax purposes. 2012 1040 Discharge of qualified farm indebtedness (defined below) is one of the exceptions to the general rule. 2012 1040 It is excluded from taxable income (see Exclusions , later). 2012 1040 Report the canceled amount on Schedule F, line 8, if you incurred the debt in your farming business. 2012 1040 If the debt is a nonbusiness debt, report the canceled amount as other income on Form 1040, line 21. 2012 1040 Election to defer income from discharge of indebtedness. 2012 1040   You can elect to defer income from a discharge of business indebtedness that occurred after 2008 and before 2011. 2012 1040 Generally, if the election is made, the deferred income is included in gross income ratably over a 5-year period beginning in 2014 (for calendar year taxpayers) and the exclusions listed below do not apply. 2012 1040 See IRC section 108(i) and Publication 4681 for details. 2012 1040 Form 1099-C. 2012 1040   If a federal agency, financial institution, credit union, finance company, or credit card company cancels or forgives your debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. 2012 1040 The amount of debt canceled is shown in box 2. 2012 1040 Exceptions The following discussion covers some exceptions to the general rule for canceled debt. 2012 1040 These exceptions apply before the exclusions discussed below. 2012 1040 Price reduced after purchase. 2012 1040   If your purchase of property was financed by the seller and the seller reduces the amount of the debt at a time when you are not insolvent and the reduction does not occur in a chapter 11 bankruptcy case, the amount of the debt reduction will be treated as a reduction in the purchase price of the property. 2012 1040 Reduce your basis in the property by the amount of the reduction in the debt. 2012 1040 The rules that apply to bankruptcy and insolvency are explained below under Exclusions . 2012 1040 Deductible debt. 2012 1040   You do not realize income from a canceled debt to the extent the payment of the debt would have been a deductible expense. 2012 1040 This exception applies before the price reduction exception discussed above and the bankruptcy and insolvency exclusions discussed next. 2012 1040 Example. 2012 1040 You get accounting services for your farm on credit. 2012 1040 Later, you have trouble paying your farm debts, but you are not bankrupt or insolvent. 2012 1040 Your accountant forgives part of the amount you owe for the accounting services. 2012 1040 How you treat the canceled debt depends on your method of accounting. 2012 1040 Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. 2012 1040 Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. 2012 1040 Exclusions Do not include canceled debt in income in the following situations. 2012 1040 The cancellation takes place in a bankruptcy case under title 11 of the U. 2012 1040 S. 2012 1040 Code. 2012 1040 The cancellation takes place when you are insolvent. 2012 1040 The canceled debt is a qualified farm debt. 2012 1040 The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). 2012 1040 See Publication 334, Tax Guide for Small Business, chapter 5. 2012 1040 The canceled debt is qualified principal residence indebtedness which is discharged after 2006 and before 2014. 2012 1040 The exclusions do not apply in the following situations: If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations (2), (3), (4), and (5) do not apply. 2012 1040 If a canceled debt is excluded from income because it takes place when you are insolvent, the exclusions in situations (3) and (4) do not apply to the extent you are insolvent. 2012 1040 If a canceled debt is excluded from income because it is qualified principal residence indebtedness, the exclusion in situation (2) does not apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness. 2012 1040 See Form 982 , later, for information on how to claim an exclusion for a canceled debt. 2012 1040 Debt. 2012 1040   For this discussion, debt includes any debt for which you are liable or that attaches to property you hold. 2012 1040 Bankruptcy and Insolvency You can exclude a canceled debt from income if you are bankrupt or to the extent you are insolvent. 2012 1040 Bankruptcy. 2012 1040   A bankruptcy case is a case under title 11 of the U. 2012 1040 S. 2012 1040 Code if you are under the jurisdiction of the court and the cancellation of the debt is granted by the court or is the result of a plan approved by the court. 2012 1040   Do not include debt canceled in a bankruptcy case in your income in the year it is canceled. 2012 1040 Instead, you must use the amount canceled to reduce your tax attributes, explained below under Reduction of tax attributes . 2012 1040 Insolvency. 2012 1040   You are insolvent to the extent your liabilities are more than the fair market value of your assets immediately before the cancellation of debt. 2012 1040   You can exclude canceled debt from gross income up to the amount by which you are insolvent. 2012 1040 If the canceled debt is more than this amount and the debt qualifies, you can apply the rules for qualified farm debt or qualified real property business debt to the difference. 2012 1040 Otherwise, you include the difference in gross income. 2012 1040 Use the amount excluded because of insolvency to reduce any tax attributes, as explained below under Reduction of tax attributes . 2012 1040 You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt or for qualified real property business debt. 2012 1040 Example. 2012 1040 You had a $15,000 debt that was not qualified principal residence debt canceled outside of bankruptcy. 2012 1040 Immediately before the cancellation, your liabilities totaled $80,000 and your assets totaled $75,000. 2012 1040 Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − $75,000). 2012 1040 You can exclude this amount from income. 2012 1040 The remaining canceled debt ($10,000) may be subject to the qualified farm debt or qualified real property business debt rules. 2012 1040 If not, you must include it in income. 2012 1040 Reduction of tax attributes. 2012 1040   If you exclude canceled debt from income in a bankruptcy case or during insolvency, you must use the excluded debt to reduce certain tax attributes. 2012 1040 Order of reduction. 2012 1040   You must use the excluded canceled debt to reduce the following tax attributes in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. 2012 1040 Net operating loss (NOL). 2012 1040 Reduce any NOL for the tax year of the debt cancellation, and then any NOL carryover to that year. 2012 1040 Reduce the NOL or NOL carryover one dollar for each dollar of excluded canceled debt. 2012 1040 General business credit carryover. 2012 1040 Reduce the credit carryover to or from the tax year of the debt cancellation. 2012 1040 Reduce the carryover 331/3 cents for each dollar of excluded canceled debt. 2012 1040 Minimum tax credit. 2012 1040 Reduce the minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation. 2012 1040 Reduce the credit 331/3 cents for each dollar of excluded canceled debt. 2012 1040 Capital loss. 2012 1040 Reduce any net capital loss for the tax year of the debt cancellation, and then any capital loss carryover to that year. 2012 1040 Reduce the capital loss or loss carryover one dollar for each dollar of excluded canceled debt. 2012 1040 Basis. 2012 1040 Reduce the basis of the property you hold at the beginning of the tax year following the tax year of the debt cancellation in the following order. 2012 1040 Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt. 2012 1040 Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt. 2012 1040 Other property (except inventory and accounts and notes receivable) used in your trade or business or held for investment. 2012 1040 Inventory and accounts and notes receivable. 2012 1040 Other property. 2012 1040 Reduce the basis one dollar for each dollar of excluded canceled debt. 2012 1040 However, the reduction cannot be more than the total basis of property and the amount of money you hold immediately after the debt cancellation minus your total liabilities immediately after the cancellation. 2012 1040 For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1. 2012 1040 1017-1(b)(2). 2012 1040 Also see Electing to reduce the basis of depreciable property
Español

Consumer Protection Offices

City, county, regional, and state consumer offices offer a variety of important services. They might mediate complaints, conduct investigations, prosecute offenders of consumer laws, license and regulate professional service providers, provide educational materials and advocate for consumer rights. To save time, call before sending a written complaint. Ask if the office handles the type of complaint you have and if complaint forms are provided.

State Consumer Protection Offices

Office of the Attorney General

Website: Office of the Attorney General

Address: Office of the Attorney General
Consumer Protection Division
Government Center South, 5th Floor
302 W. Washington St.

Indianapolis, IN 46204

Phone Number: 317-232-6330

Toll-free: 1-800-382-5516 (Consumer Hotline)

Back to Top

Banking Authorities

The officials listed in this section regulate and supervise state-chartered banks. Many of them handle or refer problems and complaints about other types of financial institutions as well. Some also answer general questions about banking and consumer credit. If you are dealing with a federally chartered bank, check Federal Agencies.

Department of Financial Institutions

Website: Department of Financial Institutions

Address: Department of Financial Institutions
30 S. Meridian St., Suite 300
Indianapolis, IN 46204

Phone Number: 317-232-3955

Toll-free: 1-800-382-4880 (IN)

Back to Top

Insurance Regulators

Each state has its own laws and regulations for each type of insurance. The officials listed in this section enforce these laws. Many of these offices can also provide you with information to help you make informed insurance buying decisions.

Department of Insurance

Website: Department of Insurance

Address: Department of Insurance
Consumer Services Division
311 W. Washington St., Suite 300
Indianapolis, IN 46204-2787

Phone Number: 317-232-2395

Toll-free: 1-800-622-4461 (IN)

Back to Top

Securities Administrators

Each state has its own laws and regulations for securities brokers and securities - including stocks, mutual funds, commodities, real estate, etc. The officials and agencies listed in this section enforce these laws and regulations. Many of these offices can also provide information to help you make informed investment decisions.

Office of the Secretary of State

Website: Office of the Secretary of State

Address: Office of the Secretary of State
Securities Division
302 W. Washington St., Room E111
Indianapolis, IN 46204

Phone Number: 317-232-6681

Toll-free: 1-800-223-8791 (IN)

Back to Top

Utility Commissions

State Utility Commissions regulate services and rates for gas, electricity and telephones within your state. In some states, the utility commissions regulate other services such as water, transportation, and the moving of household goods. Many utility commissions handle consumer complaints. Sometimes, if a number of complaints are received about the same utility matter, they will conduct investigations.

Utility Regulatory Commission

Website: Utility Regulatory Commission

Address: Utility Regulatory Commission
Consumer Assistance Section
101 W. Washington St., Suite 1500E
Indianapolis, IN 46204

Phone Number: 317-232-2712

Toll-free: 1-800-851-4268 (IN)

TTY: 317-232-8556

Back to Top

The 2012 1040

2012 1040 9. 2012 1040   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. 2012 1040 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. 2012 1040 Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. 2012 1040 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. 2012 1040 It also covers the following topics. 2012 1040 Personal use of dwelling unit (including vacation home). 2012 1040 Depreciation. 2012 1040 Limits on rental losses. 2012 1040 How to report your rental income and expenses. 2012 1040 If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. 2012 1040 If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. 2012 1040 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. 2012 1040 See Publication 527, Residential Rental Property, for more information. 2012 1040 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. 2012 1040 Rental income is any payment you receive for the use or occupation of property. 2012 1040 In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. 2012 1040 When to report. 2012 1040   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. 2012 1040 You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. 2012 1040 You constructively receive income when it is made available to you, for example, by being credited to your bank account. 2012 1040   For more information about when you constructively receive income, see Accounting Methods in chapter 1. 2012 1040 Advance rent. 2012 1040   Advance rent is any amount you receive before the period that it covers. 2012 1040 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. 2012 1040 Example. 2012 1040 You sign a 10-year lease to rent your property. 2012 1040 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. 2012 1040 You must include $10,000 in your income in the first year. 2012 1040 Canceling a lease. 2012 1040   If your tenant pays you to cancel a lease, the amount you receive is rent. 2012 1040 Include the payment in your income in the year you receive it regardless of your method of accounting. 2012 1040 Expenses paid by tenant. 2012 1040   If your tenant pays any of your expenses, the payments are rental income. 2012 1040 Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. 2012 1040 See Rental Expenses , later, for more information. 2012 1040 Property or services. 2012 1040   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. 2012 1040   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. 2012 1040 Security deposits. 2012 1040   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. 2012 1040 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. 2012 1040   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. 2012 1040 Include it in your income when you receive it. 2012 1040 Part interest. 2012 1040   If you own a part interest in rental property, you must report your part of the rental income from the property. 2012 1040 Rental of property also used as your home. 2012 1040   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. 2012 1040 However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. 2012 1040 See Personal Use of Dwelling Unit (Including Vacation Home) , later. 2012 1040 Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. 2012 1040 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. 2012 1040 Depreciation , which you can also deduct from your rental income, is discussed later. 2012 1040 Personal use of rental property. 2012 1040   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. 2012 1040 Also, your rental expense deductions may be limited. 2012 1040 See Personal Use of Dwelling Unit (Including Vacation Home) , later. 2012 1040 Part interest. 2012 1040   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. 2012 1040 When to deduct. 2012 1040   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. 2012 1040 Depreciation. 2012 1040   You can begin to depreciate rental property when it is ready and available for rent. 2012 1040 See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. 2012 1040 Pre-rental expenses. 2012 1040   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. 2012 1040 Uncollected rent. 2012 1040   If you are a cash-basis taxpayer, do not deduct uncollected rent. 2012 1040 Because you have not included it in your income, it is not deductible. 2012 1040 Vacant rental property. 2012 1040   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. 2012 1040 However, you cannot deduct any loss of rental income for the period the property is vacant. 2012 1040 Vacant while listed for sale. 2012 1040   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. 2012 1040 If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. 2012 1040 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. 2012 1040 Improvements. 2012 1040   You must capitalize any expense you pay to improve your rental property. 2012 1040 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. 2012 1040 Betterments. 2012 1040   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. 2012 1040 Restoration. 2012 1040   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. 2012 1040 Adaptation. 2012 1040   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. 2012 1040 Separate the costs of repairs and improvements, and keep accurate records. 2012 1040 You will need to know the cost of improvements when you sell or depreciate your property. 2012 1040 The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. 2012 1040 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. 2012 1040 Insurance premiums paid in advance. 2012 1040   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. 2012 1040 You cannot deduct the total premium in the year you pay it. 2012 1040 Legal and other professional fees. 2012 1040   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. 2012 1040 For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. 2012 1040 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. 2012 1040 Local benefit taxes. 2012 1040   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. 2012 1040 These charges are nondepreciable capital expenditures, and must be added to the basis of your property. 2012 1040 However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. 2012 1040 Local transportation expenses. 2012 1040    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. 2012 1040 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. 2012 1040 See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. 2012 1040   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. 2012 1040 For 2013, the standard mileage rate for business use is 56. 2012 1040 5 cents per mile. 2012 1040 For more information, see chapter 26. 2012 1040    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. 2012 1040 In addition, you must complete Form 4562, Part V, and attach it to your tax return. 2012 1040 Rental of equipment. 2012 1040   You can deduct the rent you pay for equipment that you use for rental purposes. 2012 1040 However, in some cases, lease contracts are actually purchase contracts. 2012 1040 If so, you cannot deduct these payments. 2012 1040 You can recover the cost of purchased equipment through depreciation. 2012 1040 Rental of property. 2012 1040   You can deduct the rent you pay for property that you use for rental purposes. 2012 1040 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. 2012 1040 Travel expenses. 2012 1040   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. 2012 1040 You must properly allocate your expenses between rental and nonrental activities. 2012 1040 You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. 2012 1040 You recover the cost of improvements by taking depreciation. 2012 1040 For information on travel expenses, see chapter 26. 2012 1040    To deduct travel expenses, you must keep records that follow the rules in chapter 26. 2012 1040   See Rental Expenses in Publication 527 for more information. 2012 1040 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. 2012 1040 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. 2012 1040 You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. 2012 1040 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). 2012 1040 Example. 2012 1040 Your tax year is the calendar year. 2012 1040 You moved from your home in May and started renting it out on June 1. 2012 1040 You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. 2012 1040 Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. 2012 1040 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. 2012 1040 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). 2012 1040 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. 2012 1040 There is no change in the types of expenses deductible for the personal-use part of your property. 2012 1040 Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). 2012 1040 You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. 2012 1040 You do not have to divide the expenses that belong only to the rental part of your property. 2012 1040 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. 2012 1040 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. 2012 1040 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. 2012 1040 How to divide expenses. 2012 1040   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. 2012 1040 You can use any reasonable method for dividing the expense. 2012 1040 It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. 2012 1040 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. 2012 1040 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. 2012 1040 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. 2012 1040 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. 2012 1040 Where to report. 2012 1040   Report your not-for-profit rental income on Form 1040, line 21. 2012 1040 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. 2012 1040   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. 2012 1040 You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. 2012 1040 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. 2012 1040 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. 2012 1040 Only your rental expenses may be deducted on Schedule E (Form 1040). 2012 1040 Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). 2012 1040 You must also determine if the dwelling unit is considered a home. 2012 1040 The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. 2012 1040 Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. 2012 1040 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. 2012 1040 Dwelling unit. 2012 1040   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. 2012 1040 It also includes all structures or other property belonging to the dwelling unit. 2012 1040 A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. 2012 1040   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. 2012 1040 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. 2012 1040 Example. 2012 1040   You rent a room in your home that is always available for short-term occupancy by paying customers. 2012 1040 You do not use the room yourself, and you allow only paying customers to use the room. 2012 1040 The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. 2012 1040 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. 2012 1040 When dividing your expenses, follow these rules. 2012 1040 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. 2012 1040 This rule does not apply when determining whether you used the unit as a home. 2012 1040 Any day that the unit is available for rent but not actually rented is not a day of rental use. 2012 1040 Example. 2012 1040 Your beach cottage was available for rent from June 1 through August 31 (92 days). 2012 1040 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. 2012 1040 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. 2012 1040 Your family also used the cottage during the last 2 weeks of May (14 days). 2012 1040 The cottage was not used at all before May 17 or after August 31. 2012 1040 You figure the part of the cottage expenses to treat as rental expenses as follows. 2012 1040 The cottage was used for rental a total of 85 days (92 − 7). 2012 1040 The days it was available for rent but not rented (7 days) are not days of rental use. 2012 1040 The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. 2012 1040 You used the cottage for personal purposes for 14 days (the last 2 weeks in May). 2012 1040 The total use of the cottage was 99 days (14 days personal use + 85 days rental use). 2012 1040 Your rental expenses are 85/99 (86%) of the cottage expenses. 2012 1040 Note. 2012 1040 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. 2012 1040 Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. 2012 1040 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. 2012 1040 If you have a net loss, you may not be able to deduct all of the rental expenses. 2012 1040 See Dwelling Unit Used as a Home, next. 2012 1040 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. 2012 1040 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. 2012 1040 See What is a day of personal use , later. 2012 1040 Fair rental price. 2012 1040   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. 2012 1040 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. 2012 1040   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. 2012 1040 Instead, count it as a day of personal use in applying both (1) and (2) above. 2012 1040 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. 2012 1040 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). 2012 1040 However, see Days used as a main home before or after renting , later. 2012 1040 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. 2012 1040 Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. 2012 1040 ), and lineal descendants (children, grandchildren, etc. 2012 1040 ). 2012 1040 Anyone under an arrangement that lets you use some other dwelling unit. 2012 1040 Anyone at less than a fair rental price. 2012 1040 Main home. 2012 1040   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. 2012 1040 Shared equity financing agreement. 2012 1040   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. 2012 1040 Donation of use of property. 2012 1040   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. 2012 1040 Examples. 2012 1040   The following examples show how to determine days of personal use. 2012 1040 Example 1. 2012 1040 You and your neighbor are co-owners of a condominium at the beach. 2012 1040 Last year, you rented the unit to vacationers whenever possible. 2012 1040 The unit was not used as a main home by anyone. 2012 1040 Your neighbor used the unit for 2 weeks last year; you did not use it at all. 2012 1040 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. 2012 1040 Example 2. 2012 1040 You and your neighbors are co-owners of a house under a shared equity financing agreement. 2012 1040 Your neighbors live in the house and pay you a fair rental price. 2012 1040 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. 2012 1040 This is because your neighbors rent the house as their main home under a shared equity financing agreement. 2012 1040 Example 3. 2012 1040 You own a rental property that you rent to your son. 2012 1040 Your son does not own any interest in this property. 2012 1040 He uses it as his main home and pays you a fair rental price. 2012 1040 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. 2012 1040 Example 4. 2012 1040 You rent your beach house to Joshua. 2012 1040 Joshua rents his cabin in the mountains to you. 2012 1040 You each pay a fair rental price. 2012 1040 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. 2012 1040 Days used for repairs and maintenance. 2012 1040   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. 2012 1040 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. 2012 1040 Days used as a main home before or after renting. 2012 1040   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. 2012 1040 Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. 2012 1040 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. 2012 1040 However, this special rule does not apply when dividing expenses between rental and personal use. 2012 1040 Examples. 2012 1040   The following examples show how to determine whether you used your rental property as a home. 2012 1040 Example 1. 2012 1040 You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. 2012 1040 You rented the basement apartment at a fair rental price to college students during the regular school year. 2012 1040 You rented to them on a 9-month lease (273 days). 2012 1040 You figured 10% of the total days rented to others at a fair rental price is 27 days. 2012 1040 During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. 2012 1040 Your basement apartment was used as a home because you used it for personal purposes for 30 days. 2012 1040 Rent-free use by your brothers is considered personal use. 2012 1040 Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). 2012 1040 Example 2. 2012 1040 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). 2012 1040 Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. 2012 1040 You figured 10% of the total days rented to others at a fair rental price is 3 days. 2012 1040 The room was used as a home because you used it for personal purposes for 21 days. 2012 1040 That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). 2012 1040 Example 3. 2012 1040 You own a condominium apartment in a resort area. 2012 1040 You rented it at a fair rental price for a total of 170 days during the year. 2012 1040 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. 2012 1040 Your family actually used the apartment for 10 of those days. 2012 1040 Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. 2012 1040 You figured 10% of the total days rented to others at a fair rental price is 16 days. 2012 1040 Your family also used the apartment for 7 other days during the year. 2012 1040 You used the apartment as a home because you used it for personal purposes for 17 days. 2012 1040 That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). 2012 1040 Minimal rental use. 2012 1040   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. 2012 1040 See Used as a home but rented less than 15 days , later, for more information. 2012 1040 Limit on deductions. 2012 1040   Renting a dwelling unit that is considered a home is not a passive activity. 2012 1040 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. 2012 1040 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. 2012 1040 Any expenses carried forward to the next year will be subject to any limits that apply for that year. 2012 1040 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. 2012 1040   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. 2012 1040 Reporting Income and Deductions Property not used for personal purposes. 2012 1040   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. 2012 1040 Property used for personal purposes. 2012 1040   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. 2012 1040 Not used as a home. 2012 1040   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. 2012 1040 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 . 2012 1040 The expenses for personal use are not deductible as rental expenses. 2012 1040   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. 2012 1040 Used as a home but rented less than 15 days. 2012 1040   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). 2012 1040 You are not required to report the rental income and rental expenses from this activity. 2012 1040 The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). 2012 1040 See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. 2012 1040 Used as a home and rented 15 days or more. 2012 1040   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. 2012 1040 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 . 2012 1040 The expenses for personal use are not deductible as rental expenses. 2012 1040   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. 2012 1040 You do not need to use Worksheet 9-1. 2012 1040   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. 2012 1040 To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. 2012 1040 Depreciation You recover the cost of income-producing property through yearly tax deductions. 2012 1040 You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. 2012 1040 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. 2012 1040 You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. 2012 1040 You can deduct depreciation only on the part of your property used for rental purposes. 2012 1040 Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. 2012 1040 You may have to use Form 4562 to figure and report your depreciation. 2012 1040 See How To Report Rental Income and Expenses , later. 2012 1040 Alternative minimum tax (AMT). 2012 1040    If you use accelerated depreciation, you may be subject to the AMT. 2012 1040 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). 2012 1040 Claiming the correct amount of depreciation. 2012 1040   You should claim the correct amount of depreciation each tax year. 2012 1040 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. 2012 1040   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. 2012 1040 S Individual Income Tax Return. 2012 1040 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. 2012 1040 See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. 2012 1040 Changing your accounting method to deduct unclaimed depreciation. 2012 1040   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. 2012 1040 In some instances, that consent is automatic. 2012 1040 For more information, see chapter 1 of Publication 946. 2012 1040 Land. 2012 1040   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. 2012 1040 The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. 2012 1040 More information. 2012 1040   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. 2012 1040 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. 2012 1040 You must consider these rules in the order shown below. 2012 1040 At-risk rules. 2012 1040 These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. 2012 1040 This applies only if the real property was placed in service after 1986. 2012 1040 Passive activity limits. 2012 1040 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. 2012 1040 However, there are exceptions. 2012 1040 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. 2012 1040 Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. 2012 1040 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. 2012 1040 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. 2012 1040 See Publication 925 for more information. 2012 1040 Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. 2012 1040 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. 2012 1040 Limits on passive activity deductions and credits. 2012 1040    Deductions or losses from passive activities are limited. 2012 1040 You generally cannot offset income, other than passive income, with losses from passive activities. 2012 1040 Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. 2012 1040 Any excess loss or credit is carried forward to the next tax year. 2012 1040   For a detailed discussion of these rules, see Publication 925. 2012 1040    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. 2012 1040 Real estate professionals. 2012 1040   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. 2012 1040 For a detailed discussion of the requirements, see Publication 527. 2012 1040 For a detailed discussion of material participation, see Publication 925. 2012 1040 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. 2012 1040 Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. 2012 1040 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. 2012 1040 This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. 2012 1040 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. 2012 1040 Active participation. 2012 1040   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. 2012 1040 Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. 2012 1040 Maximum special allowance. 2012 1040   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. 2012 1040   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. 2012 1040 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. 2012 1040   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. 2012 1040 More information. 2012 1040   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. 2012 1040 How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). 2012 1040 However, do not use that schedule to report a not-for-profit activity. 2012 1040 See Not Rented for Profit, earlier. 2012 1040 Providing substantial services. 2012 1040   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). 2012 1040 Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. 2012 1040 For information, see Publication 334, Tax Guide for Small Business. 2012 1040 You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. 2012 1040   Use Form 1065, U. 2012 1040 S. 2012 1040 Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). 2012 1040 Qualified joint venture. 2012 1040   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. 2012 1040 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. 2012 1040 For more information, see Publication 527. 2012 1040 Form 1098, Mortgage Interest Statement. 2012 1040    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. 2012 1040 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. 2012 1040 Attach a statement to your return showing the name and address of the other person. 2012 1040 In the left margin of Schedule E, next to line 13, enter “See attached. 2012 1040 ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. 2012 1040 , you normally report your rental income and expenses on Schedule E, Part I. 2012 1040 List your total income, expenses, and depreciation for each rental property. 2012 1040 Be sure to enter the number of fair rental and personal use days on line 2. 2012 1040 If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. 2012 1040 Complete lines 1 and 2 for each property. 2012 1040 However, fill in lines 23a through 26 on only one Schedule E. 2012 1040 On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. 2012 1040 To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. 2012 1040 If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. 2012 1040 Form 6198, At-Risk Limitations. 2012 1040 See At-Risk Rules , earlier. 2012 1040 Also see Publication 925. 2012 1040 Form 8582, Passive Activity Loss Limitations. 2012 1040 See Passive Activity Limits , earlier. 2012 1040 Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. 2012 1040 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. 2012 1040 Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). 2012 1040 Worksheet 9-1. 2012 1040 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. 2012 1040 Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . 2012 1040 ) 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. 2012 1040 Rental Use Percentage A. 2012 1040 Total days available for rent at fair rental price A. 2012 1040       B. 2012 1040 Total days available for rent (line A) but not rented B. 2012 1040       C. 2012 1040 Total days of rental use. 2012 1040 Subtract line B from line A C. 2012 1040       D. 2012 1040 Total days of personal use (including days rented at less than fair rental price) D. 2012 1040       E. 2012 1040 Total days of rental and personal use. 2012 1040 Add lines C and D E. 2012 1040       F. 2012 1040 Percentage of expenses allowed for rental. 2012 1040 Divide line C by line E     F. 2012 1040   PART II. 2012 1040 Allowable Rental Expenses 1. 2012 1040 Enter rents received 1. 2012 1040   2a. 2012 1040 Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. 2012 1040       b. 2012 1040 Enter the rental portion of real estate taxes b. 2012 1040       c. 2012 1040 Enter the rental portion of deductible casualty and theft losses (see instructions) c. 2012 1040       d. 2012 1040 Enter direct rental expenses (see instructions) d. 2012 1040       e. 2012 1040 Fully deductible rental expenses. 2012 1040 Add lines 2a–2d. 2012 1040 Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. 2012 1040   3. 2012 1040 Subtract line 2e from line 1. 2012 1040 If zero or less, enter -0- 3. 2012 1040   4a. 2012 1040 Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. 2012 1040       b. 2012 1040 Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. 2012 1040       c. 2012 1040 Carryover of operating expenses from 2012 worksheet c. 2012 1040       d. 2012 1040 Add lines 4a–4c d. 2012 1040       e. 2012 1040 Allowable expenses. 2012 1040 Enter the smaller of line 3 or line 4d (see instructions) 4e. 2012 1040   5. 2012 1040 Subtract line 4e from line 3. 2012 1040 If zero or less, enter -0- 5. 2012 1040   6a. 2012 1040 Enter the rental portion of excess casualty and theft losses (see instructions) 6a. 2012 1040       b. 2012 1040 Enter the rental portion of depreciation of the dwelling unit b. 2012 1040       c. 2012 1040 Carryover of excess casualty losses and depreciation from 2012 worksheet c. 2012 1040       d. 2012 1040 Add lines 6a–6c d. 2012 1040       e. 2012 1040 Allowable excess casualty and theft losses and depreciation. 2012 1040 Enter the smaller of  line 5 or line 6d (see instructions) 6e. 2012 1040   PART III. 2012 1040 Carryover of Unallowed Expenses to Next Year 7a. 2012 1040 Operating expenses to be carried over to next year. 2012 1040 Subtract line 4e from line 4d 7a. 2012 1040   b. 2012 1040 Excess casualty and theft losses and depreciation to be carried over to next year. 2012 1040  Subtract line 6e from line 6d b. 2012 1040   Worksheet 9-1 Instructions. 2012 1040 Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. 2012 1040 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. 2012 1040 Line 2a. 2012 1040 Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. 2012 1040 Do not include interest on a loan that did not benefit the dwelling unit. 2012 1040 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. 2012 1040 Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. 2012 1040 Include the rental portion of this interest in the total you enter on line 2a of the worksheet. 2012 1040   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. 2012 1040 See the Schedule A instructions. 2012 1040 However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. 2012 1040 See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. 2012 1040 Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. 2012 1040   Note. 2012 1040 Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. 2012 1040 Instead, figure the personal portion on a separate Schedule A. 2012 1040 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. 2012 1040           Line 2c. 2012 1040 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. 2012 1040 To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. 2012 1040 If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. 2012 1040 On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. 2012 1040 Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. 2012 1040   Note. 2012 1040 Do not file this Form 4684 or use it to figure your personal losses on Schedule A. 2012 1040 Instead, figure the personal portion on a separate Form 4684. 2012 1040           Line 2d. 2012 1040 Enter the total of your rental expenses that are directly related only to the rental activity. 2012 1040 These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. 2012 1040 Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. 2012 1040           Line 2e. 2012 1040 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. 2012 1040 Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. 2012 1040           Line 4b. 2012 1040 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. 2012 1040 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. 2012 1040 Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). 2012 1040           Line 4e. 2012 1040 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. 2012 1040 *           Line 6a. 2012 1040 To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. 2012 1040   A. 2012 1040 Enter the amount from Form 4684, line 10       B. 2012 1040 Enter the rental portion of line A       C. 2012 1040 Enter the amount from line 2c of this worksheet       D. 2012 1040 Subtract line C from line B. 2012 1040 Enter the result here and on line 6a of this worksheet               Line 6e. 2012 1040 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. 2012 1040 * *Allocating the limited deduction. 2012 1040 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. 2012 1040 Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. 2012 1040 Prev  Up  Next   Home   More Online Publications