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Amended Tax Return 2013

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Amended Tax Return 2013

Amended tax return 2013 4. Amended tax return 2013   Unrelated Business Taxable Income Table of Contents IncomeExclusions Dues of Agricultural Organizations and Business Leagues DeductionsDirectly Connected Exploitation of Exempt Activity—Advertising Sales Modifications Partnership Income or Loss S Corporation Income or Loss Special Rules for Foreign Organizations Special Rules for Social Clubs, VEBAs, SUBs, and GLSOsIncome that is set aside. Amended tax return 2013 Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. Amended tax return 2013 Net unrelated income. Amended tax return 2013 Net unrelated loss. Amended tax return 2013 Control. Amended tax return 2013 Income from property financed with qualified 501(c)(3) bonds. Amended tax return 2013 Disposition of property received from taxable subsidiary and used in unrelated business. Amended tax return 2013 Income From Debt-Financed Property Debt-Financed PropertyAcquisition Indebtedness Computation of Debt-Financed Income Deductions for Debt-Financed Property Allocation Rules How to Get Tax Help The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. Amended tax return 2013 If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities. Amended tax return 2013 In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. Amended tax return 2013 Whether a particular item of income or expense falls within any of these modifications or special rules must be determined by all the facts and circumstances in each specific case. Amended tax return 2013 For example, if the organization received a payment termed rent that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained by the organization as a partner or joint venturer, the payment is not within the income exclusion for rents, discussed later under Exclusions. Amended tax return 2013 Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. Amended tax return 2013 Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. Amended tax return 2013 Dividends, interest, annuities and other investment income. Amended tax return 2013   All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income. Amended tax return 2013 Exception for insurance activity income of a controlled foreign corporation. Amended tax return 2013   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. Amended tax return 2013 The income is not excludable dividend income, but instead is unrelated business taxable income to the extent it would be so treated if the exempt organization had earned it directly. Amended tax return 2013 Certain exceptions to this rule apply. Amended tax return 2013 For more information, see section 512(b)(17). Amended tax return 2013 Other exceptions. Amended tax return 2013   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), to interest or annuities received from a controlled corporation (discussed under Income From Controlled Organizations, later). Amended tax return 2013 Income from lending securities. Amended tax return 2013   Payments received with respect to a security loan are excluded in computing unrelated business taxable income only if the loan is made under an agreement that:    Provides for the return to the exempt organization of securities identical to the securities loaned, Requires payments to the organization of amounts equivalent to all interest, dividends, and other distributions that the owner of the securities is entitled to receive during the period of the loan, Does not reduce the organization's risk of loss or opportunity for gain on the securities, Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a fair market value each business day during the period of the loan in an amount not less than the fair market value of the securities at the close of the preceding business day, and Permits the organization to terminate the loan upon notice of not more than 5 business days. Amended tax return 2013   Payments with respect to securities loans include: Amounts in respect of dividends, interest, and other distributions, Fees based on the period of time the loan is in effect and the fair market value of the security during that period, Income from collateral security for the loan, and Income from the investment of collateral security. Amended tax return 2013 The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. Amended tax return 2013 Any deductions that are directly connected with collateral security for the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned. Amended tax return 2013 Royalties. Amended tax return 2013   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. Amended tax return 2013   To be considered a royalty, a payment must relate to the use of a valuable right. Amended tax return 2013 Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. Amended tax return 2013 Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. Amended tax return 2013 However, royalties do not include payments for personal services. Amended tax return 2013 Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. Amended tax return 2013   Unrelated business taxable income does not include royalty income received from licensees by an exempt organization that is the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties. Amended tax return 2013   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. Amended tax return 2013 However, the exclusion does not apply to royalties that stem from an arrangement whereby the organization owns a working interest in a mineral property and is liable for its share of the development and operating costs under the terms of its agreement with the operator of the property. Amended tax return 2013 To the extent they are not treated as loans under section 636 (relating to income tax treatment of mineral production payments), payments for mineral production are treated in the same manner as royalty payments for the purpose of computing unrelated business taxable income. Amended tax return 2013 To the extent they are treated as loans, any payments for production that are the equivalent of interest are treated as interest and are excluded. Amended tax return 2013 Exceptions. Amended tax return 2013   This exclusion does not apply to debt-financed income (discussed under Income From Debt-Financed Property, later) or to royalties received from a controlled corporation (discussed under Income From Controlled Organizations, later). Amended tax return 2013 Rents. Amended tax return 2013   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Amended tax return 2013 Rents from personal property are not excluded. Amended tax return 2013 However, special rules apply to “mixed leases” of both real and personal property. Amended tax return 2013 Mixed leases. Amended tax return 2013   In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. Amended tax return 2013 If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. Amended tax return 2013 If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. Amended tax return 2013   Property is placed in service when the lessee first may use it under the terms of a lease. Amended tax return 2013 For example, property subject to a lease entered into on November 1, for a term starting on January 1 of the next year, is considered placed in service on January 1, regardless of when the lessee first actually uses it. Amended tax return 2013   If separate leases are entered into for real and personal property and the properties have an integrated use (for example, one or more leases for real property and another lease or leases for personal property to be used on the real property), all the leases will be considered as one lease. Amended tax return 2013   The rent attributable to the personal property must be recomputed, and the treatment of the rents must be redetermined, if: The rent attributable to all the leased personal property increases by 100% or more because additional or substitute personal property is placed in service, or The lease is modified to change the rent charged (whether or not the amount of rented personal property changes). Amended tax return 2013 Any change in the treatment of rents resulting from the recomputation is effective only for the period beginning with the event that caused the recomputation. Amended tax return 2013 Exception for rents based on net profit. Amended tax return 2013   The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales. Amended tax return 2013 Exception for income from personal services. Amended tax return 2013   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. Amended tax return 2013 Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses. Amended tax return 2013 Other exceptions. Amended tax return 2013   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc. Amended tax return 2013 ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). Amended tax return 2013 See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. Amended tax return 2013 Income from research. Amended tax return 2013   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. Amended tax return 2013 However, the extent of the exclusion depends on the nature of the organization and the type of research. Amended tax return 2013   Income from research for the United States, any of its agencies or instrumentalities, or a state or any of its political subdivisions is excluded when computing unrelated business taxable income. Amended tax return 2013   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. Amended tax return 2013   When an organization is operated primarily to conduct fundamental research (as distinguished from applied research) and the results are freely available to the general public, all income from research performed for any person is excluded in computing unrelated business taxable income. Amended tax return 2013   The term research, for this purpose, does not include activities of a type normally conducted as an incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment, buildings, etc. Amended tax return 2013 In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. Amended tax return 2013 Gains and losses from disposition of property. Amended tax return 2013   Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year, Property held primarily for sale to customers in the ordinary course of a trade or business, or Cutting of timber that an organization has elected to consider as a sale or exchange of the timber. Amended tax return 2013   It should be noted that the last exception relates only to cut timber. Amended tax return 2013 The sale, exchange, or other disposition of standing timber is excluded from the computation of unrelated business income, unless it constitutes property held for sale to customers in the ordinary course of business. Amended tax return 2013 Lapse or termination of options. Amended tax return 2013   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. Amended tax return 2013 The exclusion applies only if the option is written in connection with the exempt organization's investment activities. Amended tax return 2013 Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. Amended tax return 2013 Exception. Amended tax return 2013   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. Amended tax return 2013 Gain or loss on disposition of certain brownfield property. Amended tax return 2013   Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(19)(C)), which was acquired by the organization after December 31, 2005 and before January 1, 2011, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. Amended tax return 2013 See sections 512(b)(19) and 514(b)(1)(E). Amended tax return 2013 Income from services provided under federal license. Amended tax return 2013   There is a further exclusion from unrelated business taxable income of income from a trade or business conducted by a religious order or by an educational organization maintained by the order. Amended tax return 2013   This exclusion applies only if the following requirements are met. Amended tax return 2013 The trade or business must have been operated by the order or by the institution before May 27, 1959. Amended tax return 2013 The trade or business must provide services under a license issued by a federal regulatory agency. Amended tax return 2013 More than 90% of the net income from the business for the tax year must be devoted to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption. Amended tax return 2013 The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. Amended tax return 2013 Rates or other charges for these services will be considered as fully competitive if they are neither materially higher nor materially lower than the rates charged by similar businesses operating in the same general area. Amended tax return 2013 Exception. Amended tax return 2013    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). Amended tax return 2013 Member income of mutual or cooperative electric companies. Amended tax return 2013   Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income. Amended tax return 2013 Dues of Agricultural Organizations and Business Leagues Dues received from associate members by organizations exempt under section 501(c)(5) or section 501(c)(6) may be treated as gross income from an unrelated trade or business if the associate member category exists for the principal purpose of producing unrelated business income. Amended tax return 2013 For example, if an organization creates an associate member category solely to allow associate members to purchase insurance through the organization, the associate member dues may be unrelated business income. Amended tax return 2013 Exception. Amended tax return 2013   Associate member dues received by an agricultural or horticultural organization are not treated as gross income from an unrelated trade or business, regardless of their purpose, if they are not more than the annual limit. Amended tax return 2013 The limit on dues paid by an associate member is $148 for 2011. Amended tax return 2013   If the required annual dues are more than the limit, the entire amount is treated as income from an unrelated business unless the associate member category was formed or availed of for the principal purpose of furthering the organization's exempt purposes. Amended tax return 2013 Deductions To qualify as allowable deductions in computing unrelated business taxable income, the expenses, depreciation, and similar items generally must be allowable income tax deductions that are directly connected with carrying on an unrelated trade or business. Amended tax return 2013 They cannot be directly connected with excluded income. Amended tax return 2013 For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. Amended tax return 2013 Directly Connected To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business. Amended tax return 2013 For an exception, see Expenses attributable to exploitation of exempt activities, later. Amended tax return 2013 Expenses attributable solely to unrelated business. Amended tax return 2013   Expenses, depreciation, and similar items attributable solely to the conduct of an unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions. Amended tax return 2013   For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are deductible to the extent otherwise allowable. Amended tax return 2013 Expenses attributable to dual use of facilities or personnel. Amended tax return 2013   When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. Amended tax return 2013 The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction. Amended tax return 2013 Example 1. Amended tax return 2013 A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. Amended tax return 2013 The school provides the tennis courts, housing, and dining facilities. Amended tax return 2013 The contracted individual hires the instructors, recruits campers, and provides supervision. Amended tax return 2013 The income the school receives from this activity is from a dual use of the facilities and personnel. Amended tax return 2013 The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. Amended tax return 2013 Example 2. Amended tax return 2013 An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. Amended tax return 2013 The president devotes approximately 10% of his time to the unrelated business. Amended tax return 2013 To figure the organization's unrelated business taxable income, a deduction of $9,000 ($90,000 × 10%) is allowed for the salary paid to its president. Amended tax return 2013 Expenses attributable to exploitation of exempt activities. Amended tax return 2013   Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity are not deductible in computing unrelated business taxable income from an unrelated trade or business that exploits the exempt activity. Amended tax return 2013 (See Exploitation of exempt functions under Not substantially related in chapter 3. Amended tax return 2013 ) This is because they do not have a proximate and primary relationship to the unrelated trade or business, and therefore, they do not qualify as directly connected with that business. Amended tax return 2013 Exception. Amended tax return 2013   Expenses, depreciation, and similar items may be treated as directly connected with the conduct of the unrelated business if all the following statements are true. Amended tax return 2013 The unrelated business exploits the exempt activity. Amended tax return 2013 The unrelated business is a type normally conducted for profit by taxable organizations. Amended tax return 2013 The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. Amended tax return 2013 The amount treated as directly connected is the smaller of: The excess of these expenses, depreciation, and similar items over the income from, or attributable to, the exempt activity; or The gross unrelated business income reduced by all other expenses, depreciation, and other items that are actually directly connected. Amended tax return 2013   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. Amended tax return 2013 Exploitation of Exempt Activity—Advertising Sales The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. Amended tax return 2013 Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity. Amended tax return 2013 (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. Amended tax return 2013 ) Figuring unrelated business taxable income (UBTI). Amended tax return 2013   The UBTI of an advertising activity is the amount shown in the following chart. Amended tax return 2013 IF gross advertising income is . Amended tax return 2013 . Amended tax return 2013 . Amended tax return 2013 THEN UBTI is . Amended tax return 2013 . Amended tax return 2013 . Amended tax return 2013 More than direct advertising costs The excess advertising income, reduced (but not below zero) by the excess, if any, of readership costs over circulation income. Amended tax return 2013 Equal to or less than direct advertising costs Zero. Amended tax return 2013   • Circulation income and readership costs are not taken into account. Amended tax return 2013   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. Amended tax return 2013   The terms used in the chart are explained in the following discussions. Amended tax return 2013 Periodical Income Gross advertising income. Amended tax return 2013   This is all the income from the unrelated advertising activities of an exempt organization periodical. Amended tax return 2013 Circulation income. Amended tax return 2013   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). Amended tax return 2013 It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. Amended tax return 2013 It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. Amended tax return 2013 Allocable membership receipts. Amended tax return 2013   This is the part of membership receipts (dues, fees, or other charges associated with membership) equal to the amount that would have been charged and paid for the periodical if: The periodical was published by a taxable organization, The periodical was published for profit, and The member was an unrelated party dealing with the taxable organization at arm's length. Amended tax return 2013   The amount used to allocate membership receipts is the amount shown in the following chart. Amended tax return 2013   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. Amended tax return 2013 The cost of other exempt activities means the total expenses incurred by the organization in connection with its other exempt activities, not offset by any income earned by the organization from those activities. Amended tax return 2013 IF . Amended tax return 2013 . Amended tax return 2013 . Amended tax return 2013 THEN the amount used to allocate membership receipts is . Amended tax return 2013 . Amended tax return 2013 . Amended tax return 2013 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. Amended tax return 2013 The above condition does not apply, and 20% or more of the members pay reduced dues because they do not receive the periodical The reduction in dues for a member not receiving the periodical. Amended tax return 2013 Neither of the above conditions applies The membership receipts multiplied by this fraction:   Total periodical costs Total periodical costs Plus Cost of other exempt activities Example 1. Amended tax return 2013 U is an exempt scientific organization with 10,000 members who pay annual dues of $15. Amended tax return 2013 One of U's activities is publishing a monthly periodical distributed to all of its members. Amended tax return 2013 U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. Amended tax return 2013 Since the nonmember circulation of U's periodical represents one-third (more than 20%) of its total circulation, the subscription price charged to nonmembers is used to determine the part of U's membership receipts allocable to the periodical. Amended tax return 2013 Thus, U's allocable membership receipts are $100,000 ($10 times 10,000 members), and U's total circulation income for the periodical is $150,000 ($100,000 from members plus $50,000 from sales to nonmembers). Amended tax return 2013 Example 2. Amended tax return 2013 Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. Amended tax return 2013 Assume also that U's members may elect not to receive the periodical, in which case their dues are reduced from $15 a year to $6 a year, and that only 3,000 members elect to receive the periodical and pay the full dues of $15 a year. Amended tax return 2013 U's stated subscription price of $9 to members consistently results in an excess of total income (including gross advertising income) attributable to the periodical over total costs of the periodical. Amended tax return 2013 Since the 500 copies of the periodical distributed to nonmembers represent only 14% of the 3,500 copies distributed, the $10 subscription price charged to nonmembers is not used to determine the part of membership receipts allocable to the periodical. Amended tax return 2013 Instead, since 70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 price is used to determine the subscription price charged to members. Amended tax return 2013 Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). Amended tax return 2013 U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). Amended tax return 2013 Periodical Costs Direct advertising costs. Amended tax return 2013   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. Amended tax return 2013   Examples of allowable deductions under this classification include agency commissions and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of advertising lineage in the periodical. Amended tax return 2013 Also included are other deductions commonly classified as advertising costs under standard account classifications, such as artwork and copy preparation, telephone, telegraph, postage, and similar costs directly connected with advertising. Amended tax return 2013   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. Amended tax return 2013 For this purpose, the general account classifications of items includable in mechanical and distribution costs ordinarily employed in business-paper and consumer-publication accounting provide a guide for the computation. Amended tax return 2013 Accordingly, the mechanical and distribution costs include the part of the costs and other expenses of composition, press work, binding, mailing (including paper and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the publication. Amended tax return 2013   In the absence of specific and detailed records, the part of mechanical and distribution costs attributable to the periodical's advertising lineage can be based on the ratio of advertising lineage to total lineage in the periodical, if this allocation is reasonable. Amended tax return 2013 Readership costs. Amended tax return 2013   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. Amended tax return 2013 Costs partly attributable to other activities. Amended tax return 2013   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. Amended tax return 2013 When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. Amended tax return 2013 The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. Amended tax return 2013 Allocations based on dollar receipts from various exempt activities generally are not reasonable since receipts usually do not accurately reflect the costs associated with specific activities that an exempt organization conducts. Amended tax return 2013 Consolidated Periodicals If an exempt organization publishes more than one periodical to produce income, it may treat all of them (but not less than all) as one in determining unrelated business taxable income from selling advertising. Amended tax return 2013 It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. Amended tax return 2013 Consolidated treatment, once adopted, must be followed consistently and is binding. Amended tax return 2013 This treatment can be changed only with the consent of the Internal Revenue Service. Amended tax return 2013 An exempt organization's periodical is published to produce income if: The periodical generates gross advertising income to the organization equal to at least 25% of its readership costs, and Publishing the periodical is an activity engaged in for profit. Amended tax return 2013 Whether the publication of a periodical is an activity engaged in for profit can be determined only by all the facts and circumstances in each case. Amended tax return 2013 The facts and circumstances must show that the organization carries on the activity for economic profit, although there may not be a profit in a particular year. Amended tax return 2013 For example, if an organization begins publishing a new periodical whose total costs exceed total income in the start-up years because of lack of advertising sales, that does not mean that the organization did not have as its objective an economic profit. Amended tax return 2013 The organization may establish that it had this objective by showing it can reasonably expect advertising sales to increase, so that total income will exceed costs within a reasonable time. Amended tax return 2013 Example. Amended tax return 2013 Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. Amended tax return 2013 Both the monthly magazine and the quarterly journal contain advertising that accounts for gross advertising income equal to more than 25% of their respective readership costs. Amended tax return 2013 Similarly, the total income attributable to each periodical has exceeded the total deductions attributable to each periodical for substantially all the years they have been published. Amended tax return 2013 The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. Amended tax return 2013 The newsletter is a service that Y distributes to all of its members in an effort to keep them informed of changes occurring in the business world. Amended tax return 2013 It is not engaged in for profit. Amended tax return 2013 Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. Amended tax return 2013 It may not consolidate the income and deductions from the newsletter with the income and deductions of its other periodicals, since the newsletter is not published for the production of income. Amended tax return 2013 Modifications Net operating loss deduction. Amended tax return 2013   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. Amended tax return 2013 However, the NOL for any tax year, the carrybacks and carryovers of NOLs, and the NOL deduction are determined without taking into account any amount of income or deduction that has been specifically excluded in computing unrelated business taxable income. Amended tax return 2013 For example, a loss from an unrelated trade or business is not diminished because dividend income was received. Amended tax return 2013   If this were not done, organizations would, in effect, be taxed on their exempt income, since unrelated business losses then would be offset by dividends, interest, and other excluded income. Amended tax return 2013 This would reduce the loss that could be applied against unrelated business income of prior or future tax years. Amended tax return 2013 Therefore, to preserve the immunity of exempt income, all NOL computations are limited to those items of income and deductions that affect the unrelated business taxable income. Amended tax return 2013   In line with this concept, an NOL carryback or carryover is allowed only from a tax year for which the organization is subject to tax on unrelated business income. Amended tax return 2013   For example, if an organization just became subject to the tax last year, its NOL for that year is not a carryback to a prior year when it had no unrelated business taxable income, nor is its NOL carryover to succeeding years reduced by the related income of those prior years. Amended tax return 2013   However, in determining the span of years for which an NOL may be carried back or forward, the tax years for which the organization is not subject to the tax on unrelated business income are counted. Amended tax return 2013 For example, if an organization was subject to the tax for 2009 and had an NOL for that year, the last tax year to which any part of that loss may be carried over is 2029, regardless of whether the organization was subject to the unrelated business income tax in any of the intervening years. Amended tax return 2013   For more details on the NOL deduction, including property eligible for an extended carryback period, see sections 172 and 1400N, Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Amended tax return 2013 Charitable contributions deduction. Amended tax return 2013   An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business. Amended tax return 2013   To be deductible, the contribution must be paid to another qualified organization. Amended tax return 2013 For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program. Amended tax return 2013   For purposes of the deduction, a distribution by a trust made under the trust instrument to a beneficiary, which itself is a qualified organization, is treated the same as a contribution. Amended tax return 2013 Deduction limits. Amended tax return 2013   An exempt organization that is subject to the unrelated business income tax at corporate rates is allowed a deduction for charitable contributions up to 10% of its unrelated business taxable income computed without regard to the deduction for contributions. Amended tax return 2013 See the Instructions for Form 990-T for more information. Amended tax return 2013    An exempt trust that is subject to the unrelated business income tax at trust rates generally is allowed a deduction for charitable contributions in the same amounts as allowed for individuals. Amended tax return 2013 However, the limit on the deduction is determined in relation to the trust's unrelated business taxable income computed without regard to the deduction, rather than in relation to adjusted gross income. Amended tax return 2013   Contributions in excess of the limits just described may be carried over to the next 5 tax years. Amended tax return 2013 A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. Amended tax return 2013 Suspension of deduction limits for farmers and ranchers. Amended tax return 2013   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. Amended tax return 2013 See the Instructions for Form 990-T for details. Amended tax return 2013 Specific deduction. Amended tax return 2013   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. Amended tax return 2013 However, the specific deduction is not allowed in computing an NOL or the NOL deduction. Amended tax return 2013   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. Amended tax return 2013 Exception. Amended tax return 2013   An exception is provided in the case of a diocese, province of a religious order, or a convention or association of churches that may claim a specific deduction for each parish, individual church, district, or other local unit. Amended tax return 2013 In these cases, the specific deduction for each local unit is limited to the lower of: $1,000, or Gross income derived from an unrelated trade or business regularly conducted by the local unit. Amended tax return 2013   This exception applies only to parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association) filing Form 990-T. Amended tax return 2013 The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that are not separate legal entities. Amended tax return 2013 The local units cannot file separate returns. Amended tax return 2013 However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. Amended tax return 2013 See Title-holding corporations in chapter 1 for a discussion of the only situation in which more than one legal entity may be included on the same Form 990-T. Amended tax return 2013 Example. Amended tax return 2013 X is an association of churches and is divided into local units A, B, C, and D. Amended tax return 2013 Last year, A, B, C, and D derived gross income of, respectively, $1,200, $800, $1,500, and $700 from unrelated businesses that they regularly conduct. Amended tax return 2013 X may claim a specific deduction of $1,000 with respect to A, $800 with respect to B, $1,000 with respect to C, and $700 with respect to D. Amended tax return 2013 Partnership Income or Loss An organization may have unrelated business income or loss as a member of a partnership, rather than through direct business dealings with the public. Amended tax return 2013 If so, it must treat its share of the partnership income or loss as if it had conducted the business activity in its own capacity as a corporation or trust. Amended tax return 2013 No distinction is made between limited and general partners. Amended tax return 2013 The organization is required to notify the partnership of its tax-exempt status. Amended tax return 2013 Thus, if an organization is a member of a partnership regularly engaged in a trade or business that is an unrelated trade or business with respect to the organization, the organization must include in its unrelated business taxable income its share of the partnership's gross income from the unrelated trade or business (whether or not distributed), and the deductions attributable to it. Amended tax return 2013 The partnership income and deductions to be included in the organization's unrelated business taxable income are figured the same way as any income and deductions from an unrelated trade or business conducted directly by the organization. Amended tax return 2013 The partnership is required to provide the organization this information on Schedule K-1. Amended tax return 2013 Example. Amended tax return 2013 An exempt educational organization is a partner in a partnership that operates a factory. Amended tax return 2013 The partnership also holds stock in a corporation. Amended tax return 2013 The exempt organization must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation. Amended tax return 2013 Different tax years. Amended tax return 2013   If the exempt organization and the partnership of which it is a member have different tax years, the partnership items that enter into the computation of the organization's unrelated business taxable income must be based on the income and deductions of the partnership for the partnership's tax year that ends within or with the organization's tax year. Amended tax return 2013 S Corporation Income or Loss An organization that owns S corporation stock must take into account its share of the S corporation's income, deductions, or losses in figuring unrelated business taxable income, regardless of the actual source or nature of the income, deductions, and losses. Amended tax return 2013 For example, the organization's share of the S corporation's interest and dividend income will be taxable, even though interest and dividends are normally excluded from unrelated business taxable income. Amended tax return 2013 The organization must also take into account its gain or loss on the sale or other disposition of the S corporation stock in figuring unrelated business taxable income. Amended tax return 2013 Special Rules for Foreign Organizations The unrelated business taxable income of a foreign organization exempt from tax under section 501(a) consists of the organization's: Unrelated business taxable income derived from sources within the United States but not effectively connected with the conduct of a trade or business within the United States, and Unrelated business taxable income effectively connected with the conduct of a trade or business within the United States, whether or not this income is derived from sources within the United States. Amended tax return 2013 To determine whether income realized by a foreign organization is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States, see sections 861 through 865 and the related regulations. Amended tax return 2013 Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs The following discussion applies to: Social clubs described in section 501(c)(7), Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9), Supplemental unemployment compensation benefit trusts (SUBs) described in section 501(c)(17), and Group legal services organizations (GLSOs) described in section 501(c)(20). Amended tax return 2013 These organizations must figure unrelated business taxable income under special rules. Amended tax return 2013 Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. Amended tax return 2013 ). Amended tax return 2013 (See Exclusions under Income, earlier. Amended tax return 2013 ) Therefore, they are generally subject to unrelated business income tax on this income. Amended tax return 2013 The unrelated business taxable income of these organizations includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. Amended tax return 2013 The dividends received by a corporation are not allowed in computing unrelated business taxable income because it is not an expense incurred in the production of income. Amended tax return 2013 Losses from nonexempt activities. Amended tax return 2013   Losses from nonexempt activities of these organizations cannot be used to offset investment income unless the activities were undertaken with the intent to make a profit. Amended tax return 2013 Example. Amended tax return 2013 A private golf and country club that is a qualified tax-exempt social club has nonexempt function income from interest and from the sale of food and beverages to nonmembers. Amended tax return 2013 The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. Amended tax return 2013 Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. Amended tax return 2013 Modifications. Amended tax return 2013   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). Amended tax return 2013 Exempt function income. Amended tax return 2013   This is gross income from dues, fees, charges or similar items paid by members for goods, facilities, or services to the members or their dependents or guests, to further the organization's exempt purposes. Amended tax return 2013 Exempt function income also includes income set aside for qualified purposes. Amended tax return 2013 Income that is set aside. Amended tax return 2013   This is income set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Amended tax return 2013 In addition, for a VEBA, SUB, or GLSO, it is income set aside to provide for the payment of life, sick, accident, or other benefits. Amended tax return 2013   However, any amounts set aside by a VEBA or SUB that exceed the organization's qualified asset account limit (determined under section 419A) are unrelated business income. Amended tax return 2013 Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. Amended tax return 2013 These rules are explained in section 512(a)(3)(E)(ii). Amended tax return 2013   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. Amended tax return 2013 In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. Amended tax return 2013   Set-aside income is generally excluded from gross income only if it is set aside in the tax year in which it is otherwise includible in gross income. Amended tax return 2013 However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside in the tax year for which the return was filed. Amended tax return 2013 The income set aside must have been includible in gross income for that earlier year. Amended tax return 2013 Nonrecognition of gain. Amended tax return 2013   If the organization sells property used directly in performing an exempt function and purchases other property used directly in performing an exempt function, any gain on the sale is recognized only to the extent that the sales price of the old property exceeds the cost of the new property. Amended tax return 2013 The purchase of the new property must be made within 1 year before the date of sale of the old property or within 3 years after the date of sale. Amended tax return 2013   This rule also applies to gain from an involuntary conversion of the property resulting from its destruction in whole or in part, theft, seizure, requisition, or condemnation. Amended tax return 2013 Special Rules for Veterans' Organizations Unrelated business taxable income of a veterans' organization that is exempt under section 501(c)(19) does not include the net income from insurance business that is properly set aside. Amended tax return 2013 The organization may set aside income from payments received for life, sick, accident, or health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals. Amended tax return 2013 For details, see section 512(a)(4) and the regulations under that section. Amended tax return 2013 Income From Controlled Organizations The exclusions for interest, annuities, royalties, and rents, explained earlier in this chapter under Income, may not apply to a payment of these items received by a controlling organization from its controlled organization. Amended tax return 2013 The payment is included in the controlling organization's unrelated business taxable income to the extent it reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. Amended tax return 2013 All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. Amended tax return 2013 Excess qualifying specified payments. Amended tax return 2013   Excess qualifying specified payments received or accrued from a controlled entity are included in a controlling exempt organization's unrelated business taxable income only on the amount that exceeds that which would have been paid or accrued if the payments had been determined under section 482. Amended tax return 2013 Qualifying specified payments means any payments of interest, annuities, royalties, or rents received or accrued from the controlled organization pursuant to a binding written contract in effect on August 17, 2006, or to a contract which is a renewal, under substantially similar terms of a binding written contract in effect on August 17, 2006, and the payments are received or accrued before January 1, 2012. Amended tax return 2013   If a controlled participant is not required to file a U. Amended tax return 2013 S. Amended tax return 2013 income tax return, the participant must ensure that the copy or copies of the Regulations section 1. Amended tax return 2013 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. Amended tax return 2013 S. Amended tax return 2013 Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. Amended tax return 2013 S. Amended tax return 2013 Corporation or a Foreign Corporation Engaged in a U. Amended tax return 2013 S. Amended tax return 2013 Trade or Business, or any Form 8865, Return of U. Amended tax return 2013 S. Amended tax return 2013 Persons With Respect to Certain Foreign Partnerships, filed for that participant. Amended tax return 2013 Addition to tax for valuation misstatements. Amended tax return 2013   Under section 512(b)(13)(E)(ii), the tax imposed on a controlling organization will be increased by 20 percent of the excess qualifying specified payments that are determined with or without any amendments or supplements, whichever is larger. Amended tax return 2013 See section 512(b)(13)(E)(ii) for more information. Amended tax return 2013 Net unrelated income. Amended tax return 2013   This is: For an exempt organization, its unrelated business taxable income, or For a nonexempt organization, the part of its taxable income that would be unrelated business taxable income if it were exempt and had the same exempt purposes as the controlling organization. Amended tax return 2013 Net unrelated loss. Amended tax return 2013   This is: For an exempt organization, its NOL, or For a nonexempt organization, the part of its NOL that would be its NOL if it were exempt and had the same exempt purposes as the controlling organization. Amended tax return 2013 Control. Amended tax return 2013   An organization is controlled if: For a corporation, the controlling organization owns (by vote or value) more than 50% of the stock, For a partnership, the controlling organization owns more than 50% of the profits or capital interests, or For any other organization, the controlling organization owns more than 50% of the beneficial interest. Amended tax return 2013 For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. Amended tax return 2013   As a result, an exempt parent organization is treated as controlling any subsidiary in which it holds more than 50% of the voting power or value, whether directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary). Amended tax return 2013 Income from property financed with qualified 501(c)(3) bonds. Amended tax return 2013 If any part of a 501(c)(3) organization's property financed with qualified 501(c)(3) bonds is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, and such use is not consistent with the requirements for qualified 501(c)(3) bonds under section 145, the section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. Amended tax return 2013 No deduction is allowed for interest on the private activity bond. Amended tax return 2013 See sections 150(b)(3) and (c) for more information. Amended tax return 2013 Disposition of property received from taxable subsidiary and used in unrelated business. Amended tax return 2013 A taxable 80%-owned subsidiary corporation of one or more tax-exempt entities is generally subject to tax on a distribution in liquidation of its assets to its exempt parent (or parents). Amended tax return 2013 The assets are treated as if sold at fair market value. Amended tax return 2013 Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. Amended tax return 2013 S. Amended tax return 2013 and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. Amended tax return 2013 A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the transaction as if it sold the assets at fair market value. Amended tax return 2013 However, such a transfer is not taxable if it qualifies as a like-kind exchange under section 1031 or an involuntary conversion under section 1033. Amended tax return 2013 In such a case the built-in appreciation is preserved in the replacement property received in the transaction. Amended tax return 2013 A corporation that changes status from taxable to tax-exempt is treated generally as if it transferred all of its assets to a tax-exempt entity immediately before the change in status (thus subjecting it to the tax on a deemed sale for fair market value). Amended tax return 2013 This rule does not apply where the taxable corporation becomes exempt within 3 years of formation, or had previously been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is to avoid the tax on the change in status. Amended tax return 2013 In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. Amended tax return 2013 If the parent later disposes of the property, then any gain (not in excess of the amount not recognized) is included in the parent's unrelated business taxable income. Amended tax return 2013 If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. Amended tax return 2013 Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. Amended tax return 2013 Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a principal purpose of recognizing losses. Amended tax return 2013 Income From Debt-Financed Property Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. Amended tax return 2013 The amount of income included is proportionate to the debt on the property. Amended tax return 2013 Debt-Financed Property In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). Amended tax return 2013 It includes rental real estate, tangible personal property, and corporate stock. Amended tax return 2013 Acquisition Indebtedness For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization: When acquiring or improving the property, Before acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement, and After acquiring or improving the property if: The debt would not have been incurred except for the acquisition or improvement, and Incurring the debt was reasonably foreseeable when the property was acquired or improved. Amended tax return 2013 The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. Amended tax return 2013 That an organization may not have foreseen the need to incur a debt before acquiring or improving the property does not necessarily mean that incurring the debt later was not reasonably foreseeable. Amended tax return 2013 Example 1. Amended tax return 2013 Y, an exempt scientific organization, mortgages its laboratory to replace working capital used in remodeling an office building that Y rents to an insurance company for nonexempt purposes. Amended tax return 2013 The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount necessary to continue current operations. Amended tax return 2013 Example 2. Amended tax return 2013 X, an exempt organization, forms a partnership with A and B. Amended tax return 2013 The partnership agreement provides that all three partners will share equally in the profits of the partnership, each will invest $3 million, and X will be a limited partner. Amended tax return 2013 X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. Amended tax return 2013 The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. Amended tax return 2013 The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. Amended tax return 2013 The loan is secured by a mortgage on the entire office building. Amended tax return 2013 By agreement with Y bank, X is not personally liable for payment of the mortgage. Amended tax return 2013 X has acquisition indebtedness of $7 million. Amended tax return 2013 This amount is the $2 million debt X incurred in acquiring the partnership interest, plus the $5 million that is X's allocable part of the partnership's debt incurred to buy the office building (one-third of $15 million). Amended tax return 2013 Example 3. Amended tax return 2013 A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. Amended tax return 2013 The subsidiary used the funds to pay a debt owed to a third party that was previously incurred in acquiring two income-producing office buildings. Amended tax return 2013 Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. Amended tax return 2013 The union has no outstanding debt on the property. Amended tax return 2013 The subsidiary's debt to the union is represented by a demand note on which the subsidiary makes payments whenever it has the available cash. Amended tax return 2013 The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. Amended tax return 2013 Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. Amended tax return 2013 In this situation, the very nature of the title-holding company and the parent-subsidiary relationship shows this debt to be merely a matter of accounting between the two organizations. Amended tax return 2013 Accordingly, the debt is not acquisition indebtedness. Amended tax return 2013 Change in use of property. Amended tax return 2013   If an organization converts property that is not debt-financed property to a use that results in its treatment as debt-financed property, the outstanding principal debt on the property is thereafter treated as acquisition indebtedness. Amended tax return 2013 Example. Amended tax return 2013 Four years ago a university borrowed funds to acquire an apartment building as housing for married students. Amended tax return 2013 Last year, the university rented the apartment building to the public for nonexempt purposes. Amended tax return 2013 The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. Amended tax return 2013 Continued debt. Amended tax return 2013   If an organization sells property and, without paying off debt that would be acquisition indebtedness if the property were debt-financed property, buys property that is otherwise debt-financed property, the unpaid debt is acquisition indebtedness for the new property. Amended tax return 2013 This is true even if the original property was not debt-financed property. Amended tax return 2013 Example. Amended tax return 2013 To house its administration offices, an exempt organization bought a building using $600,000 of its own funds and $400,000 of borrowed funds secured by a pledge of its securities. Amended tax return 2013 The office building was not debt-financed property. Amended tax return 2013 The organization later sold the building for $1 million without repaying the $400,000 loan. Amended tax return 2013 It used the sale proceeds to buy an apartment building it rents to the general public. Amended tax return 2013 The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. Amended tax return 2013 Property acquired subject to mortgage or lien. Amended tax return 2013   If property (other than certain gifts, bequests, and devises) is acquired subject to a mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even if the organization did not assume or agree to pay the debt. Amended tax return 2013 Example. Amended tax return 2013 An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. Amended tax return 2013 The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. Amended tax return 2013 Liens similar to a mortgage. Amended tax return 2013   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. Amended tax return 2013 A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. Amended tax return 2013 However, when state law provides that a lien for taxes or assessments attaches to property before the taxes or assessments become due and payable, the lien is not treated as a mortgage until after the taxes or assessments have become due and payable and the organization has had an opportunity to pay the lien in accordance with state law. Amended tax return 2013 Liens similar to mortgages include (but are not limited to): Deeds of trust, Conditional sales contracts, Chattel mortgages, Security interests under the Uniform Commercial Code, Pledges, Agreements to hold title in escrow, and Liens for taxes or assessments (other than those discussed earlier in this paragraph). Amended tax return 2013 Exception for property acquired by gift, bequest, or devise. Amended tax return 2013   If property subject to a mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property. Amended tax return 2013 However, this applies to a gift of property only if:    The mortgage was placed on the property more than 5 years before the date the organization received it, and The donor held the property for more than 5 years before the date the organization received it. Amended tax return 2013   This exception does not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than a payment under an annuity obligation excluded from the definition of acquisition indebtedness, discussed under Debt That Is Not Acquisition Indebtedness, later). Amended tax return 2013   Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation. Amended tax return 2013 Modifying existing debt. Amended tax return 2013   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. Amended tax return 2013 When the principal of the modified debt is more than the outstanding principal of the old debt, the excess is treated as a separate debt. Amended tax return 2013 Extension or renewal. Amended tax return 2013   In general, any modification or substitution of the terms of a debt by an organization is considered an extension or renewal of the original debt, rather than the start of a new one, to the extent that the outstanding principal of the debt does not increase. Amended tax return 2013   The following are examples of acts resulting in the extension or renewal of a debt: Substituting liens to secure the debt, Substituting obligees whether or not with the organization's consent, Renewing, extending, or accelerating the payment terms of the debt, and Adding, deleting, or substituting sureties or other primary or secondary obligors. Amended tax return 2013 Debt increase. Amended tax return 2013   If the outstanding principal of a modified debt is more than that of the unmodified debt, and only part of the refinanced debt is acquisition indebtedness, the payments on the refinanced debt must be allocated between the old debt and the excess. Amended tax return 2013 Example. Amended tax return 2013 An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. Amended tax return 2013 The organization borrows another $100,000, which is not acquisition indebtedness, from the same lender, resulting in a $600,000 note for the total obligation. Amended tax return 2013 A payment of $60,000 on the total obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x $500,000/$600,000) and the excess debt by $10,000. Amended tax return 2013 Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. Amended tax return 2013 These include the following. Amended tax return 2013 Debts incurred in performing an exempt purpose. Amended tax return 2013 Annuity obligations. Amended tax return 2013 Securities loans. Amended tax return 2013 Real property debts of qualified organizations. Amended tax return 2013 Certain Federal financing. Amended tax return 2013 Debt incurred in performing exempt purpose. Amended tax return 2013   A debt incurred in performing an exempt purpose is not acquisition indebtedness. Amended tax return 2013 For example, acquisition indebtedness does not include the debt an exempt credit union incurs in accepting deposits from its members or the debt an exempt organization incurs in accepting payments from its members to provide them with insurance, retirement, or other benefits. Amended tax return 2013 Annuity obligation. Amended tax return 2013   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. Amended tax return 2013 It must be the sole consideration (other than a mortgage on property acquired by gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier in this chapter) issued in exchange for the property received. Amended tax return 2013 Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received. Amended tax return 2013 It must be payable over the lives of either one or two individuals living when issued. Amended tax return 2013 It must be payable under a contract that: Does not guarantee a minimum nor specify a maximum number of payments, and Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property. Amended tax return 2013 Example. Amended tax return 2013 X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. Amended tax return 2013 In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. Amended tax return 2013 The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. Amended tax return 2013 The present value of this annuity is $81,156, determined from IRS valuation tables. Amended tax return 2013 Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness. Amended tax return 2013 Securities loans. Amended tax return 2013   Acquisition indebtedness does not include an obligation of the exempt organization to return collateral security provided by the borrower of the exempt organization's securities under a securities loan agreement (discussed under Exclusions earlier in this chapter). Amended tax return 2013 This transaction is not treated as the borrowing by the exempt organization of the collateral furnished by the borrower (usually a broker) of the securities. Amended tax return 2013   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from

The Amended Tax Return 2013

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