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E File 2012 Taxes For Free

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E File 2012 Taxes For Free

E file 2012 taxes for free 23. E file 2012 taxes for free   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. E file 2012 taxes for free Mortgage proceeds used for business or investment. E file 2012 taxes for free Introduction This chapter discusses what interest expenses you can deduct. E file 2012 taxes for free Interest is the amount you pay for the use of borrowed money. E file 2012 taxes for free The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). E file 2012 taxes for free Home mortgage interest, including certain points and mortgage insurance premiums. E file 2012 taxes for free Investment interest. E file 2012 taxes for free This chapter explains these deductions. E file 2012 taxes for free It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. E file 2012 taxes for free Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. E file 2012 taxes for free Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). E file 2012 taxes for free The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. E file 2012 taxes for free You can deduct home mortgage interest if all the following conditions are met. E file 2012 taxes for free You file Form 1040 and itemize deductions on Schedule A (Form 1040). E file 2012 taxes for free The mortgage is a secured debt on a qualified home in which you have an ownership interest. E file 2012 taxes for free (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. E file 2012 taxes for free The term “qualified home” means your main home or second home. E file 2012 taxes for free For details, see Publication 936. E file 2012 taxes for free )  Both you and the lender must intend that the loan be repaid. E file 2012 taxes for free Amount Deductible In most cases, you can deduct all of your home mortgage interest. E file 2012 taxes for free How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. E file 2012 taxes for free Fully deductible interest. E file 2012 taxes for free   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. E file 2012 taxes for free (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. E file 2012 taxes for free )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). E file 2012 taxes for free Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). E file 2012 taxes for free Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). E file 2012 taxes for free The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. E file 2012 taxes for free   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. E file 2012 taxes for free    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. E file 2012 taxes for free Figure 23-A. E file 2012 taxes for free Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. E file 2012 taxes for free Figure 23-A. E file 2012 taxes for free Is My Interest Fully Deductible? Limits on deduction. E file 2012 taxes for free   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. E file 2012 taxes for free If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. E file 2012 taxes for free Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. E file 2012 taxes for free It also describes certain special situations that may affect your deduction. E file 2012 taxes for free Late payment charge on mortgage payment. E file 2012 taxes for free   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. E file 2012 taxes for free Mortgage prepayment penalty. E file 2012 taxes for free   If you pay off your home mortgage early, you may have to pay a penalty. E file 2012 taxes for free You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. E file 2012 taxes for free Sale of home. E file 2012 taxes for free   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. E file 2012 taxes for free Example. E file 2012 taxes for free John and Peggy Harris sold their home on May 7. E file 2012 taxes for free Through April 30, they made home mortgage interest payments of $1,220. E file 2012 taxes for free The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. E file 2012 taxes for free Their mortgage interest deduction is $1,270 ($1,220 + $50). E file 2012 taxes for free Prepaid interest. E file 2012 taxes for free   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. E file 2012 taxes for free You can deduct in each year only the interest that qualifies as home mortgage interest for that year. E file 2012 taxes for free However, there is an exception that applies to points, discussed later. E file 2012 taxes for free Mortgage interest credit. E file 2012 taxes for free   You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. E file 2012 taxes for free Figure the credit on Form 8396, Mortgage Interest Credit. E file 2012 taxes for free If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. E file 2012 taxes for free   For more information on the credit, see chapter 37. E file 2012 taxes for free Ministers' and military housing allowance. E file 2012 taxes for free   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. E file 2012 taxes for free Hardest Hit Fund and Emergency Homeowners' Loan Programs. E file 2012 taxes for free   You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. E file 2012 taxes for free You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. E file 2012 taxes for free You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. E file 2012 taxes for free If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). E file 2012 taxes for free However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. E file 2012 taxes for free Mortgage assistance payments under section 235 of the National Housing Act. E file 2012 taxes for free   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. E file 2012 taxes for free You cannot deduct the interest that is paid for you. E file 2012 taxes for free No other effect on taxes. E file 2012 taxes for free   Do not include these mortgage assistance payments in your income. E file 2012 taxes for free Also, do not use these payments to reduce other deductions, such as real estate taxes. E file 2012 taxes for free Divorced or separated individuals. E file 2012 taxes for free   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. E file 2012 taxes for free See the discussion of Payments for jointly-owned home in chapter 18. E file 2012 taxes for free Redeemable ground rents. E file 2012 taxes for free   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. E file 2012 taxes for free   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. E file 2012 taxes for free For more information, see Publication 936. E file 2012 taxes for free Nonredeemable ground rents. E file 2012 taxes for free   Payments on a nonredeemable ground rent are not mortgage interest. E file 2012 taxes for free You can deduct them as rent if they are a business expense or if they are for rental property. E file 2012 taxes for free Reverse mortgages. E file 2012 taxes for free   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. E file 2012 taxes for free With a reverse mortgage, you retain title to your home. E file 2012 taxes for free Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. E file 2012 taxes for free Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. E file 2012 taxes for free Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. E file 2012 taxes for free Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. E file 2012 taxes for free Rental payments. E file 2012 taxes for free   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. E file 2012 taxes for free This is true even if the settlement papers call them interest. E file 2012 taxes for free You cannot deduct these payments as home mortgage interest. E file 2012 taxes for free Mortgage proceeds invested in tax-exempt securities. E file 2012 taxes for free   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. E file 2012 taxes for free “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. E file 2012 taxes for free Refunds of interest. E file 2012 taxes for free   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. E file 2012 taxes for free If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. E file 2012 taxes for free However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. E file 2012 taxes for free This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. E file 2012 taxes for free    If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. E file 2012 taxes for free For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. E file 2012 taxes for free   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. E file 2012 taxes for free Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. E file 2012 taxes for free Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. E file 2012 taxes for free A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. E file 2012 taxes for free See Points paid by the seller , later. E file 2012 taxes for free General Rule You generally cannot deduct the full amount of points in the year paid. E file 2012 taxes for free Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. E file 2012 taxes for free See Deduction Allowed Ratably , next. E file 2012 taxes for free For exceptions to the general rule, see Deduction Allowed in Year Paid , later. E file 2012 taxes for free Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. E file 2012 taxes for free You use the cash method of accounting. E file 2012 taxes for free This means you report income in the year you receive it and deduct expenses in the year you pay them. E file 2012 taxes for free Most individuals use this method. E file 2012 taxes for free Your loan is secured by a home. E file 2012 taxes for free (The home does not need to be your main home. E file 2012 taxes for free ) Your loan period is not more than 30 years. E file 2012 taxes for free If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. E file 2012 taxes for free Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. E file 2012 taxes for free Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. E file 2012 taxes for free (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. E file 2012 taxes for free ) Your loan is secured by your main home. E file 2012 taxes for free (Your main home is the one you ordinarily live in most of the time. E file 2012 taxes for free ) Paying points is an established business practice in the area where the loan was made. E file 2012 taxes for free The points paid were not more than the points generally charged in that area. E file 2012 taxes for free You use the cash method of accounting. E file 2012 taxes for free This means you report income in the year you receive it and deduct expenses in the year you pay them. E file 2012 taxes for free (If you want more information about this method, see Accounting Methods in chapter 1. E file 2012 taxes for free ) The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. E file 2012 taxes for free The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. E file 2012 taxes for free The funds you provided are not required to have been applied to the points. E file 2012 taxes for free They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. E file 2012 taxes for free You cannot have borrowed these funds from your lender or mortgage broker. E file 2012 taxes for free You use your loan to buy or build your main home. E file 2012 taxes for free The points were computed as a percentage of the principal amount of the mortgage. E file 2012 taxes for free The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. E file 2012 taxes for free The points may be shown as paid from either your funds or the seller's. E file 2012 taxes for free Figure 23-B. E file 2012 taxes for free Are My Points Fully Deductible This Year? Please click here for the text description of the image. E file 2012 taxes for free Figure 23-B. E file 2012 taxes for free Are My Points Fully Deductible This Year? Note. E file 2012 taxes for free If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. E file 2012 taxes for free Home improvement loan. E file 2012 taxes for free   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. E file 2012 taxes for free Second home. E file 2012 taxes for free You cannot fully deduct in the year paid points you pay on loans secured by your second home. E file 2012 taxes for free You can deduct these points only over the life of the loan. E file 2012 taxes for free Refinancing. E file 2012 taxes for free   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. E file 2012 taxes for free This is true even if the new mortgage is secured by your main home. E file 2012 taxes for free   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. E file 2012 taxes for free You can deduct the rest of the points over the life of the loan. E file 2012 taxes for free Example 1. E file 2012 taxes for free In 1998, Bill Fields got a mortgage to buy a home. E file 2012 taxes for free In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. E file 2012 taxes for free The mortgage is secured by his home. E file 2012 taxes for free To get the new loan, he had to pay three points ($3,000). E file 2012 taxes for free Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. E file 2012 taxes for free Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. E file 2012 taxes for free The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. E file 2012 taxes for free Bill's first payment on the new loan was due July 1. E file 2012 taxes for free He made six payments on the loan in 2013 and is a cash basis taxpayer. E file 2012 taxes for free Bill used the funds from the new mortgage to repay his existing mortgage. E file 2012 taxes for free Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. E file 2012 taxes for free He cannot deduct all of the points in 2013. E file 2012 taxes for free He can deduct two points ($2,000) ratably over the life of the loan. E file 2012 taxes for free He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. E file 2012 taxes for free The other point ($1,000) was a fee for services and is not deductible. E file 2012 taxes for free Example 2. E file 2012 taxes for free The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. E file 2012 taxes for free Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. E file 2012 taxes for free His deduction is $500 ($2,000 × 25%). E file 2012 taxes for free Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. E file 2012 taxes for free This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. E file 2012 taxes for free The total amount Bill deducts in 2013 is $550 ($500 + $50). E file 2012 taxes for free Special Situations This section describes certain special situations that may affect your deduction of points. E file 2012 taxes for free Original issue discount. E file 2012 taxes for free   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. E file 2012 taxes for free This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. E file 2012 taxes for free Amounts charged for services. E file 2012 taxes for free   Amounts charged by the lender for specific services connected to the loan are not interest. E file 2012 taxes for free Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. E file 2012 taxes for free You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. E file 2012 taxes for free Points paid by the seller. E file 2012 taxes for free   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. E file 2012 taxes for free Treatment by seller. E file 2012 taxes for free   The seller cannot deduct these fees as interest. E file 2012 taxes for free But they are a selling expense that reduces the amount realized by the seller. E file 2012 taxes for free See chapter 15 for information on selling your home. E file 2012 taxes for free Treatment by buyer. E file 2012 taxes for free    The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. E file 2012 taxes for free If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. E file 2012 taxes for free If any of those tests are not met, the buyer deducts the points over the life of the loan. E file 2012 taxes for free   For information about basis, see chapter 13. E file 2012 taxes for free Funds provided are less than points. E file 2012 taxes for free   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. E file 2012 taxes for free In addition, you can deduct any points paid by the seller. E file 2012 taxes for free Example 1. E file 2012 taxes for free When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). E file 2012 taxes for free You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. E file 2012 taxes for free Of the $1,000 charged for points, you can deduct $750 in the year paid. E file 2012 taxes for free You spread the remaining $250 over the life of the mortgage. E file 2012 taxes for free Example 2. E file 2012 taxes for free The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. E file 2012 taxes for free In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). E file 2012 taxes for free You spread the remaining $250 over the life of the mortgage. E file 2012 taxes for free You must reduce the basis of your home by the $1,000 paid by the seller. E file 2012 taxes for free Excess points. E file 2012 taxes for free   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. E file 2012 taxes for free You must spread any additional points over the life of the mortgage. E file 2012 taxes for free Mortgage ending early. E file 2012 taxes for free   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. E file 2012 taxes for free However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. E file 2012 taxes for free Instead, deduct the remaining balance over the term of the new loan. E file 2012 taxes for free    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. E file 2012 taxes for free Example. E file 2012 taxes for free Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. E file 2012 taxes for free He deducts $200 points per year. E file 2012 taxes for free Through 2012, Dan has deducted $2,200 of the points. E file 2012 taxes for free Dan prepaid his mortgage in full in 2013. E file 2012 taxes for free He can deduct the remaining $800 of points in 2013. E file 2012 taxes for free Limits on deduction. E file 2012 taxes for free   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . E file 2012 taxes for free See Publication 936 for details. E file 2012 taxes for free Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. E file 2012 taxes for free The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. E file 2012 taxes for free Qualified mortgage insurance. E file 2012 taxes for free   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). E file 2012 taxes for free   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. E file 2012 taxes for free If provided by the Rural Housing Service, it is commonly known as a guarantee fee. E file 2012 taxes for free These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. E file 2012 taxes for free Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. E file 2012 taxes for free Special rules for prepaid mortgage insurance. E file 2012 taxes for free   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. E file 2012 taxes for free You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. E file 2012 taxes for free No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. E file 2012 taxes for free This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. E file 2012 taxes for free See the Example below. E file 2012 taxes for free Example. E file 2012 taxes for free Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. E file 2012 taxes for free Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. E file 2012 taxes for free Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. E file 2012 taxes for free Ryan's adjusted gross income (AGI) for 2012 is $76,000. E file 2012 taxes for free Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. E file 2012 taxes for free For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. E file 2012 taxes for free In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). E file 2012 taxes for free Limit on deduction. E file 2012 taxes for free   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. E file 2012 taxes for free See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. E file 2012 taxes for free If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. E file 2012 taxes for free Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. E file 2012 taxes for free You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. E file 2012 taxes for free A governmental unit is a person for purposes of furnishing the statement. E file 2012 taxes for free The statement for each year should be sent to you by January 31 of the following year. E file 2012 taxes for free A copy of this form will also be sent to the IRS. E file 2012 taxes for free The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. E file 2012 taxes for free However, it should not show any interest that was paid for you by a government agency. E file 2012 taxes for free As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. E file 2012 taxes for free However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. E file 2012 taxes for free See Points , earlier, to determine whether you can deduct points not shown on Form 1098. E file 2012 taxes for free Prepaid interest on Form 1098. E file 2012 taxes for free   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. E file 2012 taxes for free However, you cannot deduct the prepaid amount for January 2014 in 2013. E file 2012 taxes for free (See Prepaid interest , earlier. E file 2012 taxes for free ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. E file 2012 taxes for free You will include the interest for January 2014 with the other interest you pay for 2014. E file 2012 taxes for free See How To Report , later. E file 2012 taxes for free Refunded interest. E file 2012 taxes for free   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. E file 2012 taxes for free See Refunds of interest , earlier. E file 2012 taxes for free Mortgage insurance premiums. E file 2012 taxes for free   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. E file 2012 taxes for free See Mortgage Insurance Premiums, earlier. E file 2012 taxes for free Investment Interest This section discusses interest expenses you may be able to deduct as an investor. E file 2012 taxes for free If you borrow money to buy property you hold for investment, the interest you pay is investment interest. E file 2012 taxes for free You can deduct investment interest subject to the limit discussed later. E file 2012 taxes for free However, you cannot deduct interest you incurred to produce tax-exempt income. E file 2012 taxes for free Nor can you deduct interest expenses on straddles. E file 2012 taxes for free Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. E file 2012 taxes for free Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. E file 2012 taxes for free It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). E file 2012 taxes for free Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). E file 2012 taxes for free Partners, shareholders, and beneficiaries. E file 2012 taxes for free   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. E file 2012 taxes for free Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. E file 2012 taxes for free Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. E file 2012 taxes for free The allocation is not affected by the use of property that secures the debt. E file 2012 taxes for free Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. E file 2012 taxes for free You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. E file 2012 taxes for free The interest carried over is treated as investment interest paid or accrued in that next year. E file 2012 taxes for free You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. E file 2012 taxes for free Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. E file 2012 taxes for free Investment income. E file 2012 taxes for free    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). E file 2012 taxes for free Investment income does not include Alaska Permanent Fund dividends. E file 2012 taxes for free It also does not include qualified dividends or net capital gain unless you choose to include them. E file 2012 taxes for free Choosing to include qualified dividends. E file 2012 taxes for free   Investment income generally does not include qualified dividends, discussed in chapter 8. E file 2012 taxes for free However, you can choose to include all or part of your qualified dividends in investment income. E file 2012 taxes for free   You make this choice by completing Form 4952, line 4g, according to its instructions. E file 2012 taxes for free   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. E file 2012 taxes for free Choosing to include net capital gain. E file 2012 taxes for free   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). E file 2012 taxes for free However, you can choose to include all or part of your net capital gain in investment income. E file 2012 taxes for free    You make this choice by completing Form 4952, line 4g, according to its instructions. E file 2012 taxes for free   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. E file 2012 taxes for free    Before making either choice, consider the overall effect on your tax liability. E file 2012 taxes for free Compare your tax if you make one or both of these choices with your tax if you do not. E file 2012 taxes for free Investment income of child reported on parent's return. E file 2012 taxes for free    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. E file 2012 taxes for free If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. E file 2012 taxes for free Child's qualified dividends. E file 2012 taxes for free   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. E file 2012 taxes for free However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. E file 2012 taxes for free   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). E file 2012 taxes for free Child's Alaska Permanent Fund dividends. E file 2012 taxes for free   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. E file 2012 taxes for free To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. E file 2012 taxes for free Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. E file 2012 taxes for free Subtract the result from the amount on Form 8814, line 12. E file 2012 taxes for free Child's capital gain distributions. E file 2012 taxes for free    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. E file 2012 taxes for free However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. E file 2012 taxes for free   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). E file 2012 taxes for free Investment expenses. E file 2012 taxes for free   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. E file 2012 taxes for free Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. E file 2012 taxes for free Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. E file 2012 taxes for free Losses from passive activities. E file 2012 taxes for free   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). E file 2012 taxes for free See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. E file 2012 taxes for free Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. E file 2012 taxes for free Exception to use of Form 4952. E file 2012 taxes for free   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. E file 2012 taxes for free Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. E file 2012 taxes for free You do not have any other deductible investment expenses. E file 2012 taxes for free You have no carryover of investment interest expense from 2012. E file 2012 taxes for free If you meet all of these tests, you can deduct all of your investment interest. E file 2012 taxes for free More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. E file 2012 taxes for free Items You Cannot Deduct Some interest payments are not deductible. E file 2012 taxes for free Certain expenses similar to interest also are not deductible. E file 2012 taxes for free Nondeductible expenses include the following items. E file 2012 taxes for free Personal interest (discussed later). E file 2012 taxes for free Service charges (however, see Other Expenses (Line 23) in chapter 28). E file 2012 taxes for free Annual fees for credit cards. E file 2012 taxes for free Loan fees. E file 2012 taxes for free Credit investigation fees. E file 2012 taxes for free Interest to purchase or carry tax-exempt securities. E file 2012 taxes for free Penalties. E file 2012 taxes for free   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. E file 2012 taxes for free Personal Interest Personal interest is not deductible. E file 2012 taxes for free Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. E file 2012 taxes for free It includes the following items. E file 2012 taxes for free Interest on car loans (unless you use the car for business). E file 2012 taxes for free Interest on federal, state, or local income tax. E file 2012 taxes for free Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. E file 2012 taxes for free Late payment charges by a public utility. E file 2012 taxes for free You may be able to deduct interest you pay on a qualified student loan. E file 2012 taxes for free For details, see Publication 970, Tax Benefits for Education. E file 2012 taxes for free Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. E file 2012 taxes for free However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. E file 2012 taxes for free You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. E file 2012 taxes for free You do this by tracing disbursements of the debt proceeds to specific uses. E file 2012 taxes for free For details on how to do this, see chapter 4 of Publication 535. E file 2012 taxes for free How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. E file 2012 taxes for free Where you deduct your interest expense generally depends on how you use the loan proceeds. E file 2012 taxes for free See Table 23-1 for a summary of where to deduct your interest expense. E file 2012 taxes for free Home mortgage interest and points. E file 2012 taxes for free   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. E file 2012 taxes for free If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. E file 2012 taxes for free Attach a statement explaining the difference and print “See attached” next to line 10. E file 2012 taxes for free    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. E file 2012 taxes for free If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. E file 2012 taxes for free The seller must give you this number and you must give the seller your TIN. E file 2012 taxes for free A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. E file 2012 taxes for free Failure to meet any of these requirements may result in a $50 penalty for each failure. E file 2012 taxes for free The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. E file 2012 taxes for free See Social Security Number (SSN) in chapter 1 for more information about TINs. E file 2012 taxes for free    If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. E file 2012 taxes for free   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. E file 2012 taxes for free More than one borrower. E file 2012 taxes for free   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 a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. E file 2012 taxes for free Show how much of the interest each of you paid, and give the name and address of the person who received the form. E file 2012 taxes for free Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. E file 2012 taxes for free Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. E file 2012 taxes for free   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. E file 2012 taxes for free You should let each of the other borrowers know what his or her share is. E file 2012 taxes for free Mortgage proceeds used for business or investment. E file 2012 taxes for free    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. E file 2012 taxes for free It shows where to deduct the part of your excess interest that is for those activities. E file 2012 taxes for free Investment interest. E file 2012 taxes for free    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. E file 2012 taxes for free Amortization of bond premium. E file 2012 taxes for free   There are various ways to treat the premium you pay to buy taxable bonds. E file 2012 taxes for free See Bond Premium Amortization in Publication 550. E file 2012 taxes for free Income-producing rental or royalty interest. E file 2012 taxes for free   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). E file 2012 taxes for free Example. E file 2012 taxes for free You rent out part of your home and borrow money to make repairs. E file 2012 taxes for free You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). E file 2012 taxes for free Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. E file 2012 taxes for free Table 23-1. E file 2012 taxes for free Where To Deduct Your Interest Expense IF you have . E file 2012 taxes for free . E file 2012 taxes for free . E file 2012 taxes for free THEN deduct it on . E file 2012 taxes for free . E file 2012 taxes for free . E file 2012 taxes for free AND for more information go to . E file 2012 taxes for free . E file 2012 taxes for free . E file 2012 taxes for free deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. E file 2012 taxes for free deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. E file 2012 taxes for free deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. E file 2012 taxes for free deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. E file 2012 taxes for free deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. E file 2012 taxes for free deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. E file 2012 taxes for free deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. E file 2012 taxes for free deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. E file 2012 taxes for free deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. E file 2012 taxes for free personal interest not deductible. E file 2012 taxes for free Prev  Up  Next   Home   More Online Publications
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Market Segment Understandings (MSU)

The IRS, in a continuing effort to increase tax compliance and at the same time reduce taxpayer burden, has expanded its MSU Program into other industries. The newest additions are new voluntary compliance agreements for all industries where tipping is customary.

These voluntary compliance agreements are designed to enhance tax compliance among tipped employees through taxpayer education instead of through traditional enforcement actions, such as tip examinations.

Tip agreements available are:

EmTRAC - Employer-designed Tip Reporting Alternative Commitment (PDF). Taxpayers in the Food and beverage industry designing their own tip compliance program in conjunction with the IRS.

Page Last Reviewed or Updated: 27-Dec-2013

The E File 2012 Taxes For Free

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