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Amend Federal Tax Return

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Amend Federal Tax Return

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Commissioner's Comments, Statements and Remarks

Written Testimony of IRS Commissioner John A. Koskinen before the House Oversight and Government Reform Committee on IRS Operations
March 26, 2014 — Commissioner Koskinen's written testimony before the House Oversight and Government Reform Committee on IRS operations.

Remarks of Acting Commissioner Werfel to the American Institute of Certified Public Accountants in Washington, DC
Nov. 5, 2013 — Prepared remarks of Acting Commissioner Danny Werfel to the American Institute of Certified Public Accountants in Washington, DC.

Oral Statement of Danny Werfel, Principal Deputy Commissioner, on the Affordable Care Act Before the House Ways and Means Committee
Aug. 1, 2013 — Principal Deputy Commissioner Danny Werfel gives an opening statement on the Affordable Care Act to the House Ways and Means Committee.

Prepared Remarks of Danny Werfel, Principal Deputy Commissioner, Before the 2013 IRS Nationwide Tax Forum
July 30, 2013 — IRS Principal Deputy Commissioner Danny Werfel speaks at a 2013 Nationwide Tax Forum taking place in Dallas, Tex.

Page Last Reviewed or Updated: 27-Mar-2014

The Amend Federal Tax Return

Amend federal tax return 1. Amend federal tax return   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Amend federal tax return Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Amend federal tax return The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. Amend federal tax return If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Amend federal tax return Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Amend federal tax return Rental income is any payment you receive for the use or occupation of property. Amend federal tax return In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Amend federal tax return When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Amend federal tax return Most individual taxpayers use the cash method. Amend federal tax return Cash method. Amend federal tax return   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. Amend federal tax return You constructively receive income when it is made available to you, for example, by being credited to your bank account. Amend federal tax return Accrual method. Amend federal tax return    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Amend federal tax return You generally deduct your expenses when you incur them, rather than when you pay them. Amend federal tax return More information. Amend federal tax return   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Amend federal tax return Types of Income The following are common types of rental income. Amend federal tax return Advance rent. Amend federal tax return   Advance rent is any amount you receive before the period that it covers. Amend federal tax return 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. Amend federal tax return Example. Amend federal tax return On March 18, 2013, you signed a 10-year lease to rent your property. Amend federal tax return During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Amend federal tax return You must include $19,200 in your rental income in the first year. Amend federal tax return Canceling a lease. Amend federal tax return   If your tenant pays you to cancel a lease, the amount you receive is rent. Amend federal tax return Include the payment in your income in the year you receive it regardless of your method of accounting. Amend federal tax return Expenses paid by tenant. Amend federal tax return   If your tenant pays any of your expenses, those payments are rental income. Amend federal tax return Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Amend federal tax return For more information, see Rental Expenses , later. Amend federal tax return Example 1. Amend federal tax return Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Amend federal tax return Under the terms of the lease, your tenant does not have to pay this bill. Amend federal tax return Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Amend federal tax return You can deduct the utility payment made by your tenant as a rental expense. Amend federal tax return Example 2. Amend federal tax return While you are out of town, the furnace in your rental property stops working. Amend federal tax return Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Amend federal tax return Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Amend federal tax return You can deduct the repair payment made by your tenant as a rental expense. Amend federal tax return Property or services. Amend federal tax return   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. Amend federal tax return   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. Amend federal tax return Example. Amend federal tax return Your tenant is a house painter. Amend federal tax return He offers to paint your rental property instead of paying 2 months rent. Amend federal tax return You accept his offer. Amend federal tax return Include in your rental income the amount the tenant would have paid for 2 months rent. Amend federal tax return You can deduct that same amount as a rental expense for painting your property. Amend federal tax return Security deposits. Amend federal tax return   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. Amend federal tax return 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. Amend federal tax return    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Amend federal tax return Include it in your income when you receive it. Amend federal tax return Other Sources of Rental Income Lease with option to buy. Amend federal tax return   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. Amend federal tax return If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Amend federal tax return Part interest. Amend federal tax return   If you own a part interest in rental property, you must report your part of the rental income from the property. Amend federal tax return Rental of property also used as your home. Amend federal tax return   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. Amend federal tax return However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Amend federal tax return See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Amend federal tax return Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Amend federal tax return Personal use of rental property. Amend federal tax return   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Amend federal tax return Also, your rental expense deductions may be limited. Amend federal tax return See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Amend federal tax return Part interest. Amend federal tax return   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Amend federal tax return Example. Amend federal tax return Roger owns a one-half undivided interest in a rental house. Amend federal tax return Last year he paid $968 for necessary repairs on the property. Amend federal tax return Roger can deduct $484 (50% × $968) as a rental expense. Amend federal tax return He is entitled to reimbursement for the remaining half from the co-owner. Amend federal tax return When To Deduct You generally deduct your rental expenses in the year you pay them. Amend federal tax return If you use the accrual method, see Publication 538 for more information. Amend federal tax return Types of Expenses Listed below are the most common rental expenses. Amend federal tax return Advertising. Amend federal tax return Auto and travel expenses. Amend federal tax return Cleaning and maintenance. Amend federal tax return Commissions. Amend federal tax return Depreciation. Amend federal tax return Insurance. Amend federal tax return Interest (other). Amend federal tax return Legal and other professional fees. Amend federal tax return Local transportation expenses. Amend federal tax return Management fees. Amend federal tax return Mortgage interest paid to banks, etc. Amend federal tax return Points. Amend federal tax return Rental payments. Amend federal tax return Repairs. Amend federal tax return Taxes. Amend federal tax return Utilities. Amend federal tax return Some of these expenses, as well as other less common ones, are discussed below. Amend federal tax return Depreciation. Amend federal tax return   Depreciation is a capital expense. Amend federal tax return It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Amend federal tax return   You can begin to depreciate rental property when it is ready and available for rent. Amend federal tax return See Placed in Service under When Does Depreciation Begin and End in chapter 2. Amend federal tax return Insurance premiums paid in advance. Amend federal tax return   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. Amend federal tax return You cannot deduct the total premium in the year you pay it. Amend federal tax return See chapter 6 of Publication 535 for information on deductible premiums. Amend federal tax return Interest expense. Amend federal tax return   You can deduct mortgage interest you pay on your rental property. Amend federal tax return When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Amend federal tax return Chapter 4 of Publication 535 explains mortgage interest in detail. Amend federal tax return Expenses paid to obtain a mortgage. Amend federal tax return   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Amend federal tax return These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Amend federal tax return Form 1098, Mortgage Interest Statement. Amend federal tax return   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. Amend federal tax return 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. Amend federal tax return Attach a statement to your return showing the name and address of the other person. Amend federal tax return On the dotted line next to line 13, enter “See attached. Amend federal tax return ” Legal and other professional fees. Amend federal tax return   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. Amend federal tax return For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Amend federal tax return 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. Amend federal tax return Local benefit taxes. Amend federal tax return   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. Amend federal tax return These charges are nondepreciable capital expenditures and must be added to the basis of your property. Amend federal tax return However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Amend federal tax return Local transportation expenses. Amend federal tax return   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. Amend federal tax return 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. Amend federal tax return See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Amend federal tax return   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. Amend federal tax return For 2013, the standard mileage rate for business use is 56. Amend federal tax return 5 cents per mile. Amend federal tax return For more information, see chapter 4 of Publication 463. Amend federal tax return    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Amend federal tax return In addition, you must complete Form 4562, Part V, and attach it to your tax return. Amend federal tax return Pre-rental expenses. Amend federal tax return   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Amend federal tax return Rental of equipment. Amend federal tax return   You can deduct the rent you pay for equipment that you use for rental purposes. Amend federal tax return However, in some cases, lease contracts are actually purchase contracts. Amend federal tax return If so, you cannot deduct these payments. Amend federal tax return You can recover the cost of purchased equipment through depreciation. Amend federal tax return Rental of property. Amend federal tax return   You can deduct the rent you pay for property that you use for rental purposes. Amend federal tax return 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. Amend federal tax return Travel expenses. Amend federal tax return   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. Amend federal tax return You must properly allocate your expenses between rental and nonrental activities. Amend federal tax return You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Amend federal tax return The cost of improvements is recovered by taking depreciation. Amend federal tax return For information on travel expenses, see chapter 1 of Publication 463. Amend federal tax return    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Amend federal tax return Uncollected rent. Amend federal tax return   If you are a cash basis taxpayer, do not deduct uncollected rent. Amend federal tax return Because you have not included it in your income, it is not deductible. Amend federal tax return   If you use an accrual method, report income when you earn it. Amend federal tax return If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Amend federal tax return See chapter 10 of Publication 535 for more information about business bad debts. Amend federal tax return Vacant rental property. Amend federal tax return   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. Amend federal tax return However, you cannot deduct any loss of rental income for the period the property is vacant. Amend federal tax return Vacant while listed for sale. Amend federal tax return   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. Amend federal tax return If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Amend federal tax return Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. Amend federal tax return These charges are also called loan origination fees, maximum loan charges, or premium charges. Amend federal tax return Any of these charges (points) that are solely for the use of money are interest. Amend federal tax return Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. Amend federal tax return The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Amend federal tax return In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). Amend federal tax return The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. Amend federal tax return If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Amend federal tax return De minimis OID. Amend federal tax return   The OID is de minimis if it is less than one-fourth of 1% (. Amend federal tax return 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). Amend federal tax return   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. Amend federal tax return On a constant-yield basis over the term of the loan. Amend federal tax return On a straight line basis over the term of the loan. Amend federal tax return In proportion to stated interest payments. Amend federal tax return In its entirety at maturity of the loan. Amend federal tax return You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Amend federal tax return Example. Amend federal tax return Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. Amend federal tax return The loan is to be repaid over 30 years. Amend federal tax return During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Amend federal tax return When the loan was made, she paid $1,500 in points to the lender. Amend federal tax return The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Amend federal tax return Carol determines that the points (OID) she paid are de minimis based on the following computation. Amend federal tax return Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Amend federal tax return 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Amend federal tax return Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Amend federal tax return Under the straight line method, she can deduct $50 each year for 30 years. Amend federal tax return Constant-yield method. Amend federal tax return   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Amend federal tax return   You figure your deduction for the first year in the following manner. Amend federal tax return Determine the issue price of the loan. Amend federal tax return If you paid points on the loan, the issue price generally is the difference between the principal and the points. Amend federal tax return Multiply the result in (1) by the yield to maturity (defined later). Amend federal tax return Subtract any qualified stated interest payments (defined later) from the result in (2). Amend federal tax return This is the OID you can deduct in the first year. Amend federal tax return Yield to maturity (YTM). Amend federal tax return   This rate is generally shown in the literature you receive from your lender. Amend federal tax return If you do not have this information, consult your lender or tax advisor. Amend federal tax return In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Amend federal tax return Qualified stated interest (QSI). Amend federal tax return   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. Amend federal tax return Example—Year 1. Amend federal tax return The facts are the same as in the previous example. Amend federal tax return The yield to maturity on Carol's loan is 10. Amend federal tax return 2467%, compounded annually. Amend federal tax return She figured the amount of points (OID) she could deduct in 2013 as follows. Amend federal tax return Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Amend federal tax return 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. Amend federal tax return To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Amend federal tax return Then follow steps (2) and (3), earlier. Amend federal tax return Example—Year 2. Amend federal tax return Carol figured the deduction for 2014 as follows. Amend federal tax return Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Amend federal tax return 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Amend federal tax return    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. Amend federal tax return A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Amend federal tax return However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. Amend federal tax return Points when loan refinance is more than the previous outstanding balance. Amend federal tax return   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Amend federal tax return For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. Amend federal tax return 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. Amend federal tax return Improvements. Amend federal tax return   You must capitalize any expense you pay to improve your rental property. Amend federal tax return 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. Amend federal tax return Betterments. Amend federal tax return   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. Amend federal tax return Restoration. Amend federal tax return   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. Amend federal tax return Adaptation. Amend federal tax return   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. Amend federal tax return Separate the costs of repairs and improvements, and keep accurate records. Amend federal tax return You will need to know the cost of improvements when you sell or depreciate your property. Amend federal tax return The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Amend federal tax return Table 1-1. Amend federal tax return Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications