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Free online tax Publication 523 - Main Content Table of Contents Main HomeVacant land. Free online tax Factors used to determine main home. Free online tax Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining BasisCost As Basis Basis Other Than Cost Adjusted Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Nonqualified Use Business Use or Rental of HomeUnrecaptured section 1250 gain. Free online tax Property Used Partly for Business or Rental Reporting the SaleSeller-financed mortgage. Free online tax Individual taxpayer identification number (ITIN). Free online tax More information. Free online tax Comprehensive Examples Special SituationsException for sales to related persons. Free online tax Deducting Taxes in the Year of SaleForm 1099-S. Free online tax More information. Free online tax Recapturing (Paying Back) a Federal Mortgage Subsidy Recapture of First-Time Homebuyer CreditExample. Free online tax Worksheets How To Get Tax HelpLow Income Taxpayer Clinics Main Home This section explains the term “main home. Free online tax ” Usually, the home you live in most of the time is your main home and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Free online tax To exclude gain under the rules in this publication, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Free online tax Land. Free online tax   If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. Free online tax Example. Free online tax You buy a piece of land and move your main home to it. Free online tax Then, you sell the land on which your main home was located. Free online tax This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. Free online tax Vacant land. Free online tax   The sale of vacant land is not a sale of your main home unless: The vacant land is adjacent to land containing your home, You owned and used the vacant land as part of your main home, The separate sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land, and The other requirements for excluding gain from the sale of a main home have been satisfied with respect to the vacant land. Free online tax If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale and only one maximum exclusion can be applied to any gain. Free online tax See Excluding the Gain , later. Free online tax The destruction of your home is treated as a sale of your home. Free online tax As a result, you may be able to meet these requirements if you sell vacant land used as a part of your main home within 2 years from the date of the destruction of your main home. Free online tax For information, see Publication 547. Free online tax More than one home. Free online tax   If you have more than one home, you can exclude gain only from the sale of your main home. Free online tax You must include in income the gain from the sale of any other home. Free online tax If you have two homes and live in each of them, your main home is ordinarily the one you live in most of the time during the year. Free online tax Example 1. Free online tax You own two homes, one in New York and one in Florida. Free online tax From 2009 through 2013, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. Free online tax In the absence of facts and circumstances indicating otherwise, the New York home is your main home. Free online tax You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. Free online tax Example 2. Free online tax You own a house, but you live in another house that you rent. Free online tax The rented house is your main home. Free online tax Example 3. Free online tax You own two homes, one in Virginia and one in New Hampshire. Free online tax In 2009 and 2010, you lived in the Virginia home. Free online tax In 2011 and 2012, you lived in the New Hampshire home. Free online tax In 2013, you lived again in the Virginia home. Free online tax Your main home in 2009, 2010, and 2013 is the Virginia home. Free online tax Your main home in 2011 and 2012 is the New Hampshire home. Free online tax You would be eligible to exclude gain from the sale of either home (but not both) in 2013. Free online tax Factors used to determine main home. Free online tax   In addition to the amount of time you live in each home, other factors are relevant in determining which home is your main home. Free online tax Those factors include the following. Free online tax Your place of employment. Free online tax The location of your family members' main home. Free online tax Your mailing address for bills and correspondence. Free online tax The address listed on your: Federal and state tax returns, Driver's license, Car registration, and Voter registration card. Free online tax The location of the banks you use. Free online tax The location of recreational clubs and religious organizations of which you are a member. Free online tax Property used partly as your main home. Free online tax   If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. Free online tax For details, see Business Use or Rental of Home , later. Free online tax Figuring Gain or Loss To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Free online tax Subtract the adjusted basis from the amount realized to get your gain or loss. Free online tax     Selling price     − Selling expenses       Amount realized     − Adjusted basis       Gain or loss   Gain. Free online tax   Gain is the excess of the amount realized over the adjusted basis of the property. Free online tax Loss. Free online tax   Loss is the excess of the adjusted basis over the amount realized for the property. Free online tax Selling Price The selling price is the total amount you receive for your home. Free online tax It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale. Free online tax Personal property. Free online tax   The selling price of your home does not include amounts you received for personal property sold with your home. Free online tax Personal property is property that is not a permanent part of the home. Free online tax Examples are furniture, draperies, rugs, a washer and dryer, and lawn equipment. Free online tax Separately stated amounts you received for these items should not be shown on Form 1099-S (discussed later). Free online tax Any gains from sales of personal property must be included in your income, but not as part of the sale of your home. Free online tax Payment by employer. Free online tax   You may have to sell your home because of a job transfer. Free online tax If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. Free online tax Your employer will include it as wages in box 1 of your Form W-2 and you will include it in your income on Form 1040, line 7, or on Form 1040NR, line 8. Free online tax Option to buy. Free online tax   If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. Free online tax If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Free online tax Report this amount on Form 1040, line 21, or on Form 1040NR, line 21. Free online tax Form 1099-S. Free online tax   If you received Form 1099-S, box 2 (gross proceeds) should show the total amount you received for your home. Free online tax   However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. Free online tax Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. Free online tax Amount Realized The amount realized is the selling price minus selling expenses. Free online tax Selling expenses. Free online tax   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. Free online tax ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. Free online tax This adjusted basis must be determined before you can figure gain or loss on the sale of your home. Free online tax For information on how to figure your home's adjusted basis, see Determining Basis , later. Free online tax Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. Free online tax Gain on sale. Free online tax   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, generally is taxable. Free online tax Loss on sale. Free online tax   If the amount realized is less than the adjusted basis, the difference is a loss. Free online tax Generally, a loss on the sale of your main home cannot be deducted. Free online tax Jointly owned home. Free online tax   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Free online tax Separate returns. Free online tax   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Free online tax Your ownership interest is generally determined by state law. Free online tax Joint owners not married. Free online tax   If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. Free online tax Each of you applies the rules discussed in this publication on an individual basis. Free online tax Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. Free online tax Foreclosure or repossession. Free online tax   If your home was foreclosed on or repossessed, you have a disposition. Free online tax See Publication 4681 to determine if you have ordinary income, gain, or loss. Free online tax More information. Free online tax   If part of a home is used for business or rental purposes, see Foreclosures and Repossessions in chapter 1 of Publication 544 for more information. Free online tax Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession. Free online tax Abandonment. Free online tax   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. Free online tax Trading (exchanging) homes. Free online tax   If you trade your home for another home, treat the trade as a sale and a purchase. Free online tax Example. Free online tax You owned and lived in a home with an adjusted basis of $41,000. Free online tax A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. Free online tax This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 − $41,000). Free online tax If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). Free online tax Transfer to spouse. Free online tax   If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss (unless the Exception, discussed next, applies). Free online tax This is true even if you receive cash or other consideration for the home. Free online tax As a result, the rules explained in this publication do not apply. Free online tax   If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. Free online tax You have no gain or loss. Free online tax Exception. Free online tax   These transfer rules do not apply if your spouse or former spouse is a nonresident alien. Free online tax In that case, you generally will have a gain or loss. Free online tax More information. Free online tax    See Property Settlements in Publication 504, Divorced or Separated Individuals, for more information. Free online tax Involuntary conversion. Free online tax   You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. Free online tax This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations (see Home destroyed or condemned ). Free online tax Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. Free online tax Your basis in your home is determined by how you got the home. Free online tax Generally, your basis is its cost if you bought it or built it. Free online tax If you got it in some other way (inheritance, gift, etc. Free online tax ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. Free online tax While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. Free online tax The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. Free online tax To figure your adjusted basis, you can use Worksheet 1, near the end of this publication. Free online tax Filled-in examples of that worksheet are included in the Comprehensive Examples , later. Free online tax Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. Free online tax Purchase. Free online tax   If you bought your home, your basis is its cost to you. Free online tax This includes the purchase price and certain settlement or closing costs. Free online tax In most cases, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. Free online tax If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later. Free online tax Seller-paid points. Free online tax   If the person who sold you your home paid points on your loan, you may have to reduce your home's basis by the amount of the points, as shown in the following chart. Free online tax    IF you bought your home. Free online tax . Free online tax . Free online tax THEN reduce your home's basis by the seller-paid points. Free online tax . Free online tax . Free online tax after 1990 but before April 4, 1994 only if you deducted them as home mortgage interest in the year paid. Free online tax after April 3, 1994 even if you did not deduct them. Free online tax Settlement fees or closing costs. Free online tax   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. Free online tax You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. Free online tax A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing). Free online tax   Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Free online tax   Some of the settlement fees or closing costs that you can include in your basis are: Abstract fees (abstract of title fees), Charges for installing utility services, Legal fees (including fees for the title search and preparing the sales contract and deed), Recording fees, Survey fees, Transfer or stamp taxes, Owner's title insurance, and Any amounts the seller owes that you agree to pay, such as: Certain real estate taxes (discussed later), Back interest, Recording or mortgage fees, Charges for improvements or repairs, and Sales commissions. Free online tax   Some settlement fees and closing costs you cannot include in your basis are: Fire insurance premiums, Rent for occupancy of the house before closing, Charges for utilities or other services related to occupancy of the house before closing, Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994), Charges connected with getting a mortgage loan, such as: Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs), Loan assumption fees, Cost of a credit report, Fee for an appraisal required by a lender, and Fees for refinancing a mortgage. Free online tax Real estate taxes. Free online tax   Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart. Free online tax    IF. Free online tax . Free online tax . Free online tax AND. Free online tax . Free online tax . Free online tax THEN the taxes. Free online tax . Free online tax . Free online tax you pay taxes that the seller owed on the home up to the date of sale the seller does not reimburse you are added to the basis of your home. Free online tax the seller reimburses you do not affect the basis of your home. Free online tax the seller pays taxes for you (taxes owed beginning on the date of sale) you do not reimburse the seller are subtracted from the basis of your home. Free online tax you reimburse the seller do not affect the basis of your home. Free online tax Construction. Free online tax   If you contracted to have your house built on land you own, your basis is: The cost of the land, plus The amount it cost you to complete the house, including: The cost of labor and materials, Any amounts paid to a contractor, Any architect's fees, Building permit charges, Utility meter and connection charges, and Legal fees directly connected with building the house. Free online tax   Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. Free online tax It also includes certain settlement or closing costs. Free online tax You may have to reduce your basis by points the seller paid for you. Free online tax For more information, see Seller-paid points and Settlement fees or closing costs , earlier. Free online tax Built by you. Free online tax   If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Free online tax Do not include in the cost of the house: The value of your own labor, or The value of any other labor you did not pay for. Free online tax Temporary housing. Free online tax   If a builder gave you temporary housing while your home was being finished, you must reduce your basis by the part of the contract price that was for the temporary housing. Free online tax To figure the amount of the reduction, multiply the contract price by a fraction. Free online tax The numerator is the value of the temporary housing, and the denominator is the sum of the value of the temporary housing plus the value of the new home. Free online tax Cooperative apartment. Free online tax   If you are a tenant-stockholder in a cooperative housing corporation, your basis in the cooperative apartment used as your home is usually the cost of your stock in the corporation. Free online tax This may include your share of a mortgage on the apartment building. Free online tax Condominium. Free online tax   To determine your basis in a condominium apartment used as your home, use the same rules as for any other home. Free online tax Basis Other Than Cost You must use a basis other than cost, such as adjusted basis or fair market value, if you received your home as a gift, inheritance, a trade, or from your spouse. Free online tax These situations are discussed in the following pages. Free online tax Also, the instructions for Worksheet 1 (near the end of the publication) address each of these issues. Free online tax Other special rules may apply in certain situations. Free online tax If you converted the property, or some part of it, to business or rental use, see Property Changed to Business or Rental Use, in Publication 551. Free online tax Home received as gift. Free online tax   Use the following chart to find the basis of a home you received as a gift. Free online tax IF the donor's adjusted basis at the time of the gift was. Free online tax . Free online tax . Free online tax THEN your basis is. Free online tax . Free online tax . Free online tax more than the fair market value of the home at that time the same as the donor's adjusted basis at the time of the gift. Free online tax   Exception: If using the donor's adjusted basis results in a loss when you sell the home, you must use the fair market value of the home at the time of the gift as your basis. Free online tax If using the fair market value results in a gain, you have neither gain nor loss. Free online tax equal to or less than the fair market value at that time, and you received the gift before 1977 the smaller of the: • donor's adjusted basis, plus  any federal gift tax paid on  the gift, or • the home's fair market value  at the time of the gift. Free online tax equal to or less than the fair market value at that time, and you received the gift after 1976 the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home (explained next). Free online tax Fair market value. Free online tax   The fair market value of property at the time of the gift is the value of the property as appraised for purposes of the federal gift tax. Free online tax If the gift was not subject to the federal gift tax, the fair market value is the value as appraised for the purposes of a state gift tax. Free online tax Part of federal gift tax due to net increase in value. Free online tax   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Free online tax The numerator of the fraction is the net increase in the value of the home, and the denominator is the value of the home for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Free online tax The net increase in the value of the home is its fair market value minus the donor's adjusted basis immediately before the gift. Free online tax Home acquired from a decedent who died before or after 2010. Free online tax   If you inherited your home from a decedent who died before or after 2010, your basis is the fair market value of the property on the date of the decedent's death (or the later alternate valuation date chosen by the personal representative of the estate). Free online tax If an estate tax return was filed or required to be filed, the value of the property listed on the estate tax return is your basis. Free online tax If a federal estate tax return did not have to be filed, your basis in the home is the same as its appraised value at the date of death, for purposes of state inheritance or transmission taxes. Free online tax Surviving spouse. Free online tax   If you are a surviving spouse and you owned your home jointly, your basis in the home will change. Free online tax The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). Free online tax The basis in your interest will remain the same. Free online tax Your new basis in the home is the total of these two amounts. Free online tax   If you and your spouse owned the home either as tenants by the entirety or as joint tenants with right of survivorship, you will each be considered to have owned one-half of the home. Free online tax Example. Free online tax Your jointly owned home (owned as joint tenants with right of survivorship) had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Free online tax Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value). Free online tax Community property. Free online tax   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. Free online tax When either spouse dies, the total fair market value of the community property becomes the basis of the entire property, including the part belonging to the surviving spouse. Free online tax For this to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Free online tax   For more information about community property, see Publication 555, Community Property. Free online tax    If you are selling a home in which you acquired an interest from a decedent who died in 2010, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your basis. Free online tax Home received as trade. Free online tax   If you acquired your home as a trade for other property, in most cases, the basis of your home is the fair market value (at the time of the trade) of the property you gave up. Free online tax If you traded one home for another, you have made a sale and purchase. Free online tax In that case, you may have a gain. Free online tax See Trading (exchanging) homes under Dispositions Other Than Sales, earlier, for an example of figuring the gain. Free online tax Home received from spouse. Free online tax   If you received your home from your spouse or from your former spouse incident to your divorce, your basis in the home depends on the date of the transfer. Free online tax Transfers after July 18, 1984. Free online tax   If you received the home after July 18, 1984, there was no gain or loss on the transfer. Free online tax In most cases, your basis in this home is the same as your spouse's (or former spouse's) adjusted basis just before you received it. Free online tax This rule applies even if you received the home in exchange for cash, the release of marital rights, the assumption of liabilities, or other considerations. Free online tax   If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, in most cases, your basis in the half interest received from your spouse is the same as your spouse's adjusted basis just before the transfer. Free online tax This also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. Free online tax Your basis in the half interest you already owned does not change. Free online tax Your new basis in the home is the total of these two amounts. Free online tax Transfers before July 19, 1984. Free online tax   If you received your home before July 19, 1984, in exchange for your release of marital rights, in most cases, your basis in the home is generally its fair market value at the time you received it. Free online tax More information. Free online tax   For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504. Free online tax Involuntary conversion. Free online tax   If your home is destroyed or condemned, you may receive insurance proceeds or a condemnation award. Free online tax If you acquired a replacement home with these proceeds, the basis is its cost decreased by any gain not recognized on the conversion under the rules explained in: Publication 547, in the case of a home that was destroyed, or Chapter 1 of Publication 544, in the case of a home that was condemned. Free online tax Example. Free online tax A fire destroyed your home that you owned and used for only 6 months. Free online tax The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. Free online tax Your gain is $50,000 ($130,000 − $80,000). Free online tax You bought a replacement home for $100,000. Free online tax The part of your gain that is taxable is $30,000 ($130,000 − $100,000), the unspent part of the payment from the insurance company. Free online tax The rest of the gain ($20,000) is not taxable, so that amount reduces your basis in the new home. Free online tax The basis of the new home is figured as follows. Free online tax Cost of replacement home $100,000 Minus: Gain not recognized 20,000 Basis of the replacement home $80,000 More information. Free online tax   For more information about basis, see Publication 551. Free online tax Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. Free online tax To figure your adjusted basis, you can use Worksheet 1, found toward the end of this publication. Free online tax Filled-in examples of that worksheet are included in Comprehensive Examples , later. Free online tax Recordkeeping. Free online tax You should keep records to prove your home's adjusted basis. Free online tax Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. Free online tax But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Free online tax Keep records proving the basis of both homes as long as they are needed for tax purposes. Free online tax The records you should keep include: Proof of the home's purchase price and purchase expenses; Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis; Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain; Any Form 982 you filed to exclude any discharge of qualified principal residence indebtedness; Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997; and Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. Free online tax Increases to Basis These include the following. Free online tax Additions and other improvements that have a useful life of more than 1 year. Free online tax Special assessments for local improvements. Free online tax Amounts you spent after a casualty to restore damaged property. Free online tax Improvements. Free online tax   These add to the value of your home, prolong its useful life, or adapt it to new uses. Free online tax You add the cost of additions and other improvements to the basis of your property. Free online tax   The following chart lists some other examples of improvements. Free online tax Examples of Improvements That Increase Basis Additions Bedroom Bathroom Deck Garage Porch Patio Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Lawn & Grounds Landscaping Driveway Walkway Fence  Retaining wall Sprinkler system Swimming pool  Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system  Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances  Kitchen modernization  Flooring Wall-to-wall carpeting  Insulation Attic Walls Floors Pipes and duct work Improvements no longer part of home. Free online tax   Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Free online tax Example. Free online tax You put wall-to-wall carpeting in your home 15 years ago. Free online tax Later, you replaced that carpeting with new wall-to-wall carpeting. Free online tax The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Free online tax Repairs. Free online tax   These maintain your home in good condition but do not add to its value or prolong its life. Free online tax You do not add their cost to the basis of your property. Free online tax Examples. Free online tax Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs. Free online tax Exception. Free online tax   The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. Free online tax For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition. Free online tax Decreases to Basis These include the following. Free online tax Discharge of qualified principal residence indebtedness that was excluded from income (but not below zero). Free online tax For details, see Publication 4681. Free online tax Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. Free online tax For details, see Publication 4681. Free online tax Gain you postponed from the sale of a previous home before May 7, 1997. Free online tax Deductible casualty losses. Free online tax Insurance payments you received or expect to receive for casualty losses. Free online tax Payments you received for granting an easement or right-of-way. Free online tax Depreciation allowed or allowable if you used your home for business or rental purposes. Free online tax Energy-related credits allowed for expenditures made on the residence. Free online tax (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. Free online tax ) Adoption credit you claimed for improvements added to the basis of your home. Free online tax Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. Free online tax Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. Free online tax An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home. Free online tax District of Columbia first-time homebuyer credit allowed on the purchase of a principal residence in the District of Columbia. Free online tax General sales taxes claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. Free online tax Discharges of qualified principal residence indebtedness. Free online tax   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. Free online tax This exclusion applies to discharges made after 2006 and before 2014. Free online tax If you choose to exclude this income, you must reduce (but not below zero) the basis of your principal residence by the amount excluded from gross income. Free online tax   File Form 982 with your tax return. Free online tax See the form's instructions for detailed information. Free online tax    A decrease in basis due to a discharge of qualified principal residence indebtedness that is excluded from income occurs only if you retain ownership of the principal residence after a discharge. Free online tax In most cases, this would occur in a refinancing or a restructuring of the mortgage. Free online tax Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. Free online tax This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion , next. Free online tax To qualify, you must meet the ownership and use tests described later. Free online tax You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. Free online tax This choice can be made (or revoked) at any time before the expiration of a 3-year period beginning on the due date of your return (not including extensions) for the year of the sale. Free online tax You can use Worksheet 2 (near the end of this publication) to figure the amount of your exclusion and your taxable gain, if any. Free online tax If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. Free online tax See Publication 505, Tax Withholding and Estimated Tax. Free online tax Maximum Exclusion You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. Free online tax You meet the ownership test. Free online tax You meet the use test. Free online tax During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Free online tax For details on gain allocated to periods of nonqualified use, see Nonqualified Use , later. Free online tax If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed. Free online tax You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . Free online tax Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Free online tax This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). Free online tax Exception. Free online tax   If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. Free online tax However, the maximum amount you may be able to exclude will be reduced. Free online tax See Reduced Maximum Exclusion , later. Free online tax Example 1—home owned and occupied for at least 2 years. Free online tax Mya bought and moved into her main home in September 2011. Free online tax She sold the home at a gain in October 2013. Free online tax During the 5-year period ending on the date of sale in October 2013, she owned and lived in the home for more than 2 years. Free online tax She meets the ownership and use tests. Free online tax Example 2—ownership test met but use test not met. Free online tax Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. Free online tax He later sold the home for a gain in June 2013. Free online tax He owned the home during the entire 5-year period ending on the date of sale. Free online tax He meets the ownership test but not the use test. Free online tax He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). Free online tax Period of Ownership and Use The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time. Free online tax You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale. Free online tax Example. Free online tax Naomi bought and moved into a house in July 2009. Free online tax She lived there for 13 months and then moved in with a friend. Free online tax She later moved back into her house and lived there for 12 months until she sold it in August 2013. Free online tax Naomi meets the ownership and use tests because, during the 5-year period ending on the date of sale, she owned the house for more than 2 years and lived in it for a total of 25 (13 + 12) months. Free online tax Temporary absence. Free online tax   Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. Free online tax The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. Free online tax Example 1. Free online tax David Johnson, who is single, bought and moved into his home on February 1, 2011. Free online tax Each year during 2011 and 2012, David left his home for a 2-month summer vacation. Free online tax David sold the house on March 1, 2013. Free online tax Although the total time David lived in his home is less than 2 years (21 months), he meets the use requirement and may exclude gain. Free online tax The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years. Free online tax Example 2. Free online tax Professor Paul Beard, who is single, bought and moved into a house in December 2010, went abroad for a 1-year sabbatical leave in January 2012, returned to the house in January 2013, and sold it at a gain in February 2013. Free online tax Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. Free online tax He cannot exclude any part of his gain because he did not use the residence for the required 2 years. Free online tax Ownership and use tests met at different times. Free online tax   You can meet the ownership and use tests during different 2-year periods. Free online tax However, you must meet both tests during the 5-year period ending on the date of the sale. Free online tax Example. Free online tax Beginning in 2002, Helen Jones lived in a rented apartment. Free online tax The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. Free online tax In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. Free online tax On July 12, 2013, while still living in her daughter's home, she sold her condominium. Free online tax Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2008, to July 12, 2013, the date she sold the condominium. Free online tax She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). Free online tax She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). Free online tax The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use. Free online tax Cooperative apartment. Free online tax   If you sold stock as a tenant-shareholder in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitled you to occupy as your main home for at least 2 years. Free online tax Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. Free online tax Exception for individuals with a disability. Free online tax   There is an exception to the use test if: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home. Free online tax Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in your condition. Free online tax   If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Free online tax Previous home destroyed or condemned. Free online tax   For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the replacement home on whose sale you wish to exclude gain. Free online tax This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home (see Involuntary Conversions in Publication 551). Free online tax Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion. Free online tax Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. Free online tax   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty (defined later) as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. Free online tax You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on qualified official extended duty (defined later) or as an enrolled volunteer or volunteer leader of the Peace Corps. Free online tax This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. Free online tax   If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain. Free online tax Example. Free online tax John bought and moved into a home in 2005. Free online tax He lived in it as his main home for 2½ years. Free online tax For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. Free online tax He then sold the home at a gain in 2013. Free online tax To meet the use test, John chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. Free online tax This means he can disregard those 6 years. Free online tax Therefore, John's 5-year test period consists of the 5 years before he went on qualified official extended duty. Free online tax He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. Free online tax Period of suspension. Free online tax   The period of suspension cannot last more than 10 years. Free online tax Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. Free online tax You cannot suspend the 5-year period for more than one property at a time. Free online tax You can revoke your choice to suspend the 5-year period at any time. Free online tax Example. Free online tax Mary bought a home on April 1, 1997. Free online tax She used it as her main home until August 31, 2000. Free online tax On September 1, 2000, she went on qualified official extended duty with the Navy. Free online tax She did not live in the house again before selling it on July 31, 2013. Free online tax Mary chooses to use the entire 10-year suspension period. Free online tax Therefore, the suspension period would extend back from July 31, 2013, to August 1, 2003, and the 5-year test period would extend back to August 1, 1998. Free online tax During that period, Mary owned the house all 5 years and lived in it as her main home from August 1, 1998, until August 31, 2000, a period of more than 24 months. Free online tax She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period. Free online tax Uniformed services. Free online tax   The uniformed services are: The Armed Forces (the Army, Navy, Air Force, Marine Corps, and Coast Guard), The commissioned corps of the National Oceanic and Atmospheric Administration, and The commissioned corps of the Public Health Service. Free online tax Foreign Service member. Free online tax   For purposes of the choice to suspend the 5-year test period for ownership and use, you are a member of the Foreign Service if you are any of the following. Free online tax A Chief of mission. Free online tax An Ambassador at large. Free online tax A member of the Senior Foreign Service. Free online tax A Foreign Service officer. Free online tax Part of the Foreign Service personnel. Free online tax Employee of the intelligence community. Free online tax   For purposes of the choice to suspend the 5-year test period for ownership and use, you are an employee of the intelligence community if you are an employee of any of the following. Free online tax The Office of the Director of National Intelligence. Free online tax The Central Intelligence Agency. Free online tax The National Security Agency. Free online tax The Defense Intelligence Agency. Free online tax The National Geospatial-Intelligence Agency. Free online tax The National Reconnaissance Office and any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs. Free online tax Any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard. Free online tax The Bureau of Intelligence and Research of the Department of State. Free online tax Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information. Free online tax Qualified official extended duty. Free online tax   You are on qualified official extended duty if you are on extended duty while: Serving at a duty station at least 50 miles from your main home, or Living in Government quarters under Government orders. Free online tax   You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period. Free online tax Married Persons If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. Free online tax (But see Special rules for joint returns, next. Free online tax ) Special rules for joint returns. Free online tax   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Free online tax You are married and file a joint return for the year. Free online tax Either you or your spouse meets the ownership test. Free online tax Both you and your spouse meet the use test. Free online tax During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home. Free online tax If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. Free online tax For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. Free online tax Example 1—one spouse sells a home. Free online tax Emily sells her home in June 2013 for a gain of $300,000. Free online tax She marries Jamie later in the year. Free online tax She meets the ownership and use tests, but Jamie does not. Free online tax Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. Free online tax The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. Free online tax Example 2—each spouse sells a home. Free online tax The facts are the same as in Example 1 except that Jamie also sells a home in 2013 for a gain of $200,000 before he marries Emily. Free online tax He meets the ownership and use tests on his home, but Emily does not. Free online tax Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. Free online tax However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. Free online tax Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. Free online tax The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home. Free online tax Sale of main home by surviving spouse. Free online tax   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Free online tax   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. Free online tax The sale or exchange took place after 2008. Free online tax The sale or exchange took place no more than 2 years after the date of death of your spouse. Free online tax You have not remarried. Free online tax You and your spouse met the use test at the time of your spouse's death. Free online tax You or your spouse met the ownership test at the time of your spouse's death. Free online tax Neither you nor your spouse excluded gain from the sale of another home during the last 2 years before the date of death. Free online tax The ownership and use tests were described earlier. Free online tax Example. Free online tax Harry owned and used a house as his main home since 2009. Free online tax Harry and Wilma married on July 1, 2013, and from that date they used Harry's house as their main home. Free online tax Harry died on August 15, 2013, and Wilma inherited the property. Free online tax Wilma sold the property on September 1, 2013, at which time she had not remarried. Free online tax Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death. Free online tax Home transferred from spouse. Free online tax   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Free online tax Use of home after divorce. Free online tax   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. Free online tax Reduced Maximum Exclusion If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. Free online tax This applies to those who: Fail to meet the ownership and use tests, or Have used the exclusion within 2 years of selling their current home. Free online tax In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. Free online tax A change in place of employment. Free online tax Health. Free online tax Unforeseen circumstances. Free online tax Qualified individual. Free online tax   For purposes of the reduced maximum exclusion, a qualified individual is any of the following. Free online tax You. Free online tax Your spouse. Free online tax A co-owner of the home. Free online tax A person whose main home is the same as yours. Free online tax Primary reason for sale. Free online tax   One of the three reasons above will be considered to be the primary reason you sold your home if either (1) or (2) is true. Free online tax You qualify under a “safe harbor. Free online tax ” This is a specific set of facts and circumstances that, if applicable, qualifies you to claim a reduced maximum exclusion. Free online tax Safe harbors corresponding to the reasons listed above are described later. Free online tax A safe harbor does not apply, but you can establish, based on facts and circumstances, that the primary reason for the sale is a change in place of employment, health, or unforeseen circumstances. Free online tax  Factors that may be relevant in determining your primary reason for sale include whether: Your sale and the circumstances causing it were close in time, The circumstances causing your sale occurred during the time you owned and used the property as your main home, The circumstances causing your sale were not reasonably foreseeable when you began using the property as your main home, Your financial ability to maintain the property became materially impaired, The suitability of the property as your main home materially changed, and During the time you owned the property, you used it as your home. Free online tax Change in Place of Employment You may qualify for a reduced exclusion if the primary reason for the sale of your main home is a change in the location of employment of a qualified individual. Free online tax Employment. Free online tax   For this purpose, employment includes the start of work with a new employer or continuation of work with the same employer. Free online tax It also includes the start or continuation of self-employment. Free online tax Distance safe harbor. Free online tax   A change in place of employment is considered to be the reason you sold your home if: The change occurred during the period you owned and used the property as your main home, and The new place of employment is at least 50 miles farther from the home you sold than was the former place of employment (or, if there was no former place of employment, the distance between your new place of employment and the home sold is at least 50 miles). Free online tax Example. Free online tax Justin was unemployed and living in a townhouse in Florida he had owned and used as his main home since 2012. Free online tax He got a job in North Carolina and sold his townhouse in 2013. Free online tax Because the distance between Justin's new place of employment and the home he sold is at least 50 miles, the sale satisfies the conditions of the distance safe harbor. Free online tax Justin's sale of his home is considered to be because of a change in place of employment, and he is entitled to claim a reduced maximum exclusion of gain from the sale. Free online tax Health The sale of your main home is because of health if your primary reason for the sale is: To obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, or To obtain or provide medical or personal care for a qualified individual suffering from a disease, illness, or injury. Free online tax The sale of your home is not because of health if the sale merely benefits a qualified individual's general health or well-being. Free online tax For purposes of this reason, a qualified individual includes, in addition to the individuals listed earlier under Qualified individual , any of the following family members of these individuals. Free online tax Parent, grandparent, stepmother, stepfather. Free online tax Child, grandchild, stepchild, adopted child, eligible foster child. Free online tax Brother, sister, stepbrother, stepsister, half-brother, half-sister. Free online tax Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law. Free online tax Uncle, aunt, nephew, niece, or cousin. Free online tax Example. Free online tax In 2012, Chase and Lauren, spouses, bought a house that they used as their main home. Free online tax Lauren's father has a chronic disease and is unable to care for himself. Free online tax In 2013, Chase and Lauren sold their home in order to move into Lauren's father's house to provide care for him. Free online tax Because the primary reason for the sale of their home was to provide care for Lauren's father, Chase and Lauren are entitled to a reduced maximum exclusion. Free online tax Doctor's recommendation safe harbor. Free online tax   Health is considered to be the reason you sold your home if, for one or more of the reasons listed at the beginning of this discussion, a doctor recommends a change of residence. Free online tax Unforeseen Circumstances The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying that home. Free online tax You are not considered to have an unforeseen circumstance if the primary reason you sold your home was that you preferred to get a different home or because your finances improved. Free online tax Specific event safe harbors. Free online tax   Unforeseen circumstances are considered to be the reason for selling your home if any of the following events occurred while you owned and used the property as your main home. Free online tax An involuntary conversion of your home, such as when your home is destroyed or condemned. Free online tax Natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible. Free online tax In the case of qualified individuals (listed earlier under Qualified individual ): Death, Unemployment (if the individual is eligible for unemployment compensation), A change in employment or self-employment status that results in the individual's inability to pay reasonable basic living expenses (listed under Reasonable basic living expenses , later) for his or her household, Divorce or legal separation under a decree of divorce or separate maintenance, or Multiple births resulting from the same pregnancy. Free online tax An event the IRS determined to be an unforeseen circumstance in published guidance of general applicability. Free online tax For example, the IRS determined the September 11, 2001, terrorist attacks to be an unforeseen circumstance. Free online tax Reasonable basic living expenses. Free online tax   Reasonable basic living expenses for your household include the following. Free online tax Amounts spent for food. Free online tax Amounts spent for clothing. Free online tax Housing and related expenses. Free online tax Medical expenses. Free online tax Transportation expenses. Free online tax Tax payments. Free online tax Court-ordered payments. Free online tax Expenses reasonably necessary to produce income. Free online tax   Any of these amounts spent to maintain an affluent or luxurious standard of living are not reasonable basic living expenses. Free online tax Nonqualified Use Gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use. Free online tax Nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home, with certain exceptions (see next). Free online tax Exceptions. Free online tax   A period of nonqualified use does not include: Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home; Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty: As a member of the uniformed services; As a member of the Foreign Service of the United States; or As an employee of the intelligence community; and Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS. Free online tax Calculation. Free online tax   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain (net of any depreciation allowed or allowable on the property for periods after May 6, 1997) by the following fraction:   Total nonqualified use during the period of ownership after 2008     Total period of ownership     This calculation can be found in Worksheet 2, line 10, later in this publication. Free online tax   For examples of this calculation, see Business Use or Rental of Home , next. Free online tax Business Use or Rental of Home You may be able to exclude gain from the sale of a home you have used for business or to produce rental income if you meet the ownership and use tests. Free online tax Example 1. Free online tax On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. Free online tax She moved in on that date and lived in it until May 31, 2009, when she moved out of the house and put it up for rent. Free online tax The house was rented from June 1, 2009, to March 31, 2011. Free online tax Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. Free online tax Amy moved back into the house on April 1, 2011, and lived there until she sold it on January 31, 2013, for a gain of $200,000. Free online tax During the 5-year period ending on the date of the sale (January 31, 2008–January 31, 2013), Amy owned and lived in the house for more than 2 years as shown in the following table. Free online tax Five-Year Period Used as Home Used as Rental 1/31/08 – 5/31/09 16 months   6/01/09 – 3/31/11   22 months 4/01/11 – 1/31/13 22 months     38 months 22 months       During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. Free online tax Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain, as shown on Worksheet 2. Free online tax Example 2. Free online tax William owned and used a house as his main home from 2007 through 2010. Free online tax On January 1, 2011, he moved to another state. Free online tax He rented his house from that date until April 30, 2013, when he sold it. Free online tax During the 5-year period ending on the date of sale (May 1, 2008-April 30, 2013), William owned and lived in the house for more than 2 years. Free online tax Because it was rental property at the time of the sale, he must report the sale on Form 4797. Free online tax Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. Free online tax Because he met the ownership and use tests, he can exclude gain up to $250,000. Free online tax However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next. Free online tax Depreciation after May 6, 1997. Free online tax   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Free online tax If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. Free online tax Unrecaptured section 1250 gain. Free online tax   This is the part of any long-term capital gain from the sale of your home that is due to depreciation and cannot be excluded. Free online tax To figure the amount of unrecaptured section 1250 gain to be reported on Schedule D (Form 1040), you must also take into account certain gains or losses from the sale of property other than your home. Free online tax Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose. Free online tax Worksheet 2. Free online tax Taxable Gain on Sale of Home—Completed Example 1 for Amy Part 1. Free online tax Gain or (Loss) on Sale       1. Free online tax   Selling price of home 1. Free online tax     2. Free online tax   Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) 2. Free online tax     3. Free online tax   Subtract line 2 from line 1. Free online tax This is the amount realized 3. Free online tax     4. Free online tax   Adjusted basis of home sold (from Worksheet 1, line 13) 4. Free online tax     5. Free online tax   Gain or (loss) on the sale. Free online tax Subtract line 4 from line 3. Free online tax If this is a loss, stop here 5. Free online tax 200,000   Part 2. Free online tax Exclusion and Taxable Gain       6. Free online tax   Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. Free online tax If none, enter -0- 6. Free online tax 10,000   7. Free online tax   Subtract line 6 from line 5. Free online tax If the result is less than zero, enter -0- 7. Free online tax 190,000   8. Free online tax   Aggregate number of days of nonqualified use after 2008. Free online tax If none, enter -0-. Free online tax  If line 8 is equal to zero, skip to line 12 and enter the amount from line 7 on line 12 8. Free online tax 668   9. Free online tax   Number of days taxpayer owned the property 9. Free online tax 2,080   10. Free online tax   Divide the amount on line 8 by the amount on line 9. Free online tax Enter the result as a decimal (rounded to at least 3 places). Free online tax But do not enter an amount greater than 1. Free online tax 00 10. Free online tax 0. Free online tax 321   11. Free online tax   Gain allocated to nonqualified use. Free online tax (Line 7 multiplied by line 10) 11. Free online tax 60,990   12. Free online tax   Gain eligible for exclusion. Free online tax Subtract line 11 from line 7 12. Free online tax 129,010   13. Free online tax   If you qualify to exclude gain on the sale, enter your maximum exclusion (see Maximum Exclusion ). Free online tax  If you qualify for a reduced maximum exclusion, enter the amount from Worksheet 3, line 7. Free online tax If you do  not qualify to exclude gain, enter -0- 13. Free online tax 250,000   14. Free online tax   Exclusion. Free online tax Enter the smaller of line 12 or line 13 14. Free online tax 129,010   15. Free online tax   Taxable gain. Free online tax Subtract line 14 from line 5. Free online tax Report your taxable gain as described under Reporting the Sale . Free online tax If the amount on line 6 is more than zero, complete line 16 15. Free online tax 70,990   16. Free online tax   Enter the smaller of line 6 or line 15. Free online tax Enter this amount on line 12 of the Unrecaptured Section 1250 Gain  Worksheet in the instructions for Schedule D (Form 1040) 16. Free online tax 10,000 Property Used Partly for Business or Rental If you use property partly as a home and partly for business or to produce rental income, the treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Free online tax Part of Home Used for Business or Rental If the part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. Free online tax In addition, you do not need to report the sale of the business or rental part on Form 4797. Free online tax This is true whether or not you were entitled to claim any depreciation. Free online tax However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. Free online tax See Depreciation after May 6, 1997, earlier. Free online tax Example 1. Free online tax Ray sold his main home in 2013 at a $30,000 gain. Free online tax He has no gains or losses from the sale of property other than the gain from the sale of his home. Free online tax He meets the ownership and use tests to exclude the gain from his income. Free online tax However, he used part of the home as a business office in 2012 and claimed $500 depreciation. Free online tax Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. Free online tax In addition, he does not have to report any part of the gain on Form 4797. Free online tax Because Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. Free online tax He reports his gain, exclusion, and the taxable gain of $500 on Form 8949 and Schedule D (Form 1040). Free online tax Example 2. Free online tax The facts are the same as in Example 1 except that Ray was not entitled to claim depreciation for the business use of his home. Free online tax Since Ray did not claim any depreciation, he can exclude the entire $30,000 gain. Free online tax Separate Part of Property Used for Business or Rental You may have used part of your property as your home and a separate part of it for business or to produce rental income. Free online tax Examples are: A working farm on which your house was located, A duplex in w
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Free online tax 9. Free online tax   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. Free online tax 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. Free online tax Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. Free online tax 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. Free online tax It also covers the following topics. Free online tax Personal use of dwelling unit (including vacation home). Free online tax Depreciation. Free online tax Limits on rental losses. Free online tax How to report your rental income and expenses. Free online tax If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. Free online tax If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. Free online tax 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. Free online tax See Publication 527, Residential Rental Property, for more information. Free online tax 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. Free online tax Rental income is any payment you receive for the use or occupation of property. Free online tax In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. Free online tax When to report. Free online tax   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. Free online tax You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. Free online tax You constructively receive income when it is made available to you, for example, by being credited to your bank account. Free online tax   For more information about when you constructively receive income, see Accounting Methods in chapter 1. Free online tax Advance rent. Free online tax   Advance rent is any amount you receive before the period that it covers. Free online tax 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. Free online tax Example. Free online tax You sign a 10-year lease to rent your property. Free online tax 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. Free online tax You must include $10,000 in your income in the first year. Free online tax Canceling a lease. Free online tax   If your tenant pays you to cancel a lease, the amount you receive is rent. Free online tax Include the payment in your income in the year you receive it regardless of your method of accounting. Free online tax Expenses paid by tenant. Free online tax   If your tenant pays any of your expenses, the payments are rental income. Free online tax Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. Free online tax See Rental Expenses , later, for more information. Free online tax Property or services. Free online tax   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. Free online tax   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. Free online tax Security deposits. Free online tax   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. Free online tax 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. Free online tax   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Free online tax Include it in your income when you receive it. Free online tax Part interest. Free online tax   If you own a part interest in rental property, you must report your part of the rental income from the property. Free online tax Rental of property also used as your home. Free online tax   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. Free online tax However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Free online tax See Personal Use of Dwelling Unit (Including Vacation Home) , later. Free online tax Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. Free online tax 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. Free online tax Depreciation , which you can also deduct from your rental income, is discussed later. Free online tax Personal use of rental property. Free online tax   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Free online tax Also, your rental expense deductions may be limited. Free online tax See Personal Use of Dwelling Unit (Including Vacation Home) , later. Free online tax Part interest. Free online tax   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. Free online tax When to deduct. Free online tax   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. Free online tax Depreciation. Free online tax   You can begin to depreciate rental property when it is ready and available for rent. Free online tax See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. Free online tax Pre-rental expenses. Free online tax   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Free online tax Uncollected rent. Free online tax   If you are a cash-basis taxpayer, do not deduct uncollected rent. Free online tax Because you have not included it in your income, it is not deductible. Free online tax Vacant rental property. Free online tax   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. Free online tax However, you cannot deduct any loss of rental income for the period the property is vacant. Free online tax Vacant while listed for sale. Free online tax   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. Free online tax If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Free online tax 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. Free online tax Improvements. Free online tax   You must capitalize any expense you pay to improve your rental property. Free online tax 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. Free online tax Betterments. Free online tax   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. Free online tax Restoration. Free online tax   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. Free online tax Adaptation. Free online tax   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. Free online tax Separate the costs of repairs and improvements, and keep accurate records. Free online tax You will need to know the cost of improvements when you sell or depreciate your property. Free online tax The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Free online tax 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. Free online tax Insurance premiums paid in advance. Free online tax   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. Free online tax You cannot deduct the total premium in the year you pay it. Free online tax Legal and other professional fees. Free online tax   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. Free online tax For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. Free online tax 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. Free online tax Local benefit taxes. Free online tax   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. Free online tax These charges are nondepreciable capital expenditures, and must be added to the basis of your property. Free online tax However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Free online tax Local transportation expenses. Free online tax    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. Free online tax 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. Free online tax See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Free online tax   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. Free online tax For 2013, the standard mileage rate for business use is 56. Free online tax 5 cents per mile. Free online tax For more information, see chapter 26. Free online tax    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. Free online tax In addition, you must complete Form 4562, Part V, and attach it to your tax return. Free online tax Rental of equipment. Free online tax   You can deduct the rent you pay for equipment that you use for rental purposes. Free online tax However, in some cases, lease contracts are actually purchase contracts. Free online tax If so, you cannot deduct these payments. Free online tax You can recover the cost of purchased equipment through depreciation. Free online tax Rental of property. Free online tax   You can deduct the rent you pay for property that you use for rental purposes. Free online tax 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. Free online tax Travel expenses. Free online tax   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. Free online tax You must properly allocate your expenses between rental and nonrental activities. Free online tax You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. Free online tax You recover the cost of improvements by taking depreciation. Free online tax For information on travel expenses, see chapter 26. Free online tax    To deduct travel expenses, you must keep records that follow the rules in chapter 26. Free online tax   See Rental Expenses in Publication 527 for more information. Free online tax 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. Free online tax 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. Free online tax You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Free online tax 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). Free online tax Example. Free online tax Your tax year is the calendar year. Free online tax You moved from your home in May and started renting it out on June 1. Free online tax You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Free online tax Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Free online tax 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. Free online tax 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). Free online tax 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. Free online tax There is no change in the types of expenses deductible for the personal-use part of your property. Free online tax Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Free online tax You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Free online tax You do not have to divide the expenses that belong only to the rental part of your property. Free online tax 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. Free online tax 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. Free online tax 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. Free online tax How to divide expenses. Free online tax   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. Free online tax You can use any reasonable method for dividing the expense. Free online tax It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Free online tax 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. Free online tax 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. Free online tax 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. Free online tax 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. Free online tax Where to report. Free online tax   Report your not-for-profit rental income on Form 1040, line 21. Free online tax 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. Free online tax   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. Free online tax You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Free online tax 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. Free online tax 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. Free online tax Only your rental expenses may be deducted on Schedule E (Form 1040). Free online tax Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Free online tax You must also determine if the dwelling unit is considered a home. Free online tax The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Free online tax Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Free online tax 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. Free online tax Dwelling unit. Free online tax   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Free online tax It also includes all structures or other property belonging to the dwelling unit. Free online tax A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Free online tax   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. Free online tax 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. Free online tax Example. Free online tax   You rent a room in your home that is always available for short-term occupancy by paying customers. Free online tax You do not use the room yourself, and you allow only paying customers to use the room. Free online tax The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Free online tax 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. Free online tax When dividing your expenses, follow these rules. Free online tax 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. Free online tax This rule does not apply when determining whether you used the unit as a home. Free online tax Any day that the unit is available for rent but not actually rented is not a day of rental use. Free online tax Example. Free online tax Your beach cottage was available for rent from June 1 through August 31 (92 days). Free online tax 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. Free online tax 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. Free online tax Your family also used the cottage during the last 2 weeks of May (14 days). Free online tax The cottage was not used at all before May 17 or after August 31. Free online tax You figure the part of the cottage expenses to treat as rental expenses as follows. Free online tax The cottage was used for rental a total of 85 days (92 − 7). Free online tax The days it was available for rent but not rented (7 days) are not days of rental use. Free online tax The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Free online tax You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Free online tax The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Free online tax Your rental expenses are 85/99 (86%) of the cottage expenses. Free online tax Note. Free online tax 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. Free online tax Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Free online tax 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. Free online tax If you have a net loss, you may not be able to deduct all of the rental expenses. Free online tax See Dwelling Unit Used as a Home, next. Free online tax 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. Free online tax 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. Free online tax See What is a day of personal use , later. Free online tax Fair rental price. Free online tax   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. Free online tax 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. Free online tax   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. Free online tax Instead, count it as a day of personal use in applying both (1) and (2) above. Free online tax 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. Free online tax 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). Free online tax However, see Days used as a main home before or after renting , later. Free online tax 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. Free online tax Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Free online tax ), and lineal descendants (children, grandchildren, etc. Free online tax ). Free online tax Anyone under an arrangement that lets you use some other dwelling unit. Free online tax Anyone at less than a fair rental price. Free online tax Main home. Free online tax   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. Free online tax Shared equity financing agreement. Free online tax   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. Free online tax Donation of use of property. Free online tax   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. Free online tax Examples. Free online tax   The following examples show how to determine days of personal use. Free online tax Example 1. Free online tax You and your neighbor are co-owners of a condominium at the beach. Free online tax Last year, you rented the unit to vacationers whenever possible. Free online tax The unit was not used as a main home by anyone. Free online tax Your neighbor used the unit for 2 weeks last year; you did not use it at all. Free online tax 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. Free online tax Example 2. Free online tax You and your neighbors are co-owners of a house under a shared equity financing agreement. Free online tax Your neighbors live in the house and pay you a fair rental price. Free online tax 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. Free online tax This is because your neighbors rent the house as their main home under a shared equity financing agreement. Free online tax Example 3. Free online tax You own a rental property that you rent to your son. Free online tax Your son does not own any interest in this property. Free online tax He uses it as his main home and pays you a fair rental price. Free online tax 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. Free online tax Example 4. Free online tax You rent your beach house to Joshua. Free online tax Joshua rents his cabin in the mountains to you. Free online tax You each pay a fair rental price. Free online tax 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. Free online tax Days used for repairs and maintenance. Free online tax   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. Free online tax 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. Free online tax Days used as a main home before or after renting. Free online tax   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. Free online tax Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Free online tax 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. Free online tax However, this special rule does not apply when dividing expenses between rental and personal use. Free online tax Examples. Free online tax   The following examples show how to determine whether you used your rental property as a home. Free online tax Example 1. Free online tax You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Free online tax You rented the basement apartment at a fair rental price to college students during the regular school year. Free online tax You rented to them on a 9-month lease (273 days). Free online tax You figured 10% of the total days rented to others at a fair rental price is 27 days. Free online tax During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Free online tax Your basement apartment was used as a home because you used it for personal purposes for 30 days. Free online tax Rent-free use by your brothers is considered personal use. Free online tax Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Free online tax Example 2. Free online tax 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). Free online tax Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Free online tax You figured 10% of the total days rented to others at a fair rental price is 3 days. Free online tax The room was used as a home because you used it for personal purposes for 21 days. Free online tax That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Free online tax Example 3. Free online tax You own a condominium apartment in a resort area. Free online tax You rented it at a fair rental price for a total of 170 days during the year. Free online tax 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. Free online tax Your family actually used the apartment for 10 of those days. Free online tax Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. Free online tax You figured 10% of the total days rented to others at a fair rental price is 16 days. Free online tax Your family also used the apartment for 7 other days during the year. Free online tax You used the apartment as a home because you used it for personal purposes for 17 days. Free online tax That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Free online tax Minimal rental use. Free online tax   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. Free online tax See Used as a home but rented less than 15 days , later, for more information. Free online tax Limit on deductions. Free online tax   Renting a dwelling unit that is considered a home is not a passive activity. Free online tax 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. Free online tax 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. Free online tax Any expenses carried forward to the next year will be subject to any limits that apply for that year. Free online tax 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. Free online tax   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. Free online tax Reporting Income and Deductions Property not used for personal purposes. Free online tax   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. Free online tax Property used for personal purposes. Free online tax   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. Free online tax Not used as a home. Free online tax   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Free online tax 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 . Free online tax The expenses for personal use are not deductible as rental expenses. Free online tax   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. Free online tax Used as a home but rented less than 15 days. Free online tax   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). Free online tax You are not required to report the rental income and rental expenses from this activity. Free online tax The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Free online tax See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Free online tax Used as a home and rented 15 days or more. Free online tax   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. Free online tax 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 . Free online tax The expenses for personal use are not deductible as rental expenses. Free online tax   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. Free online tax You do not need to use Worksheet 9-1. Free online tax   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Free online tax To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. Free online tax Depreciation You recover the cost of income-producing property through yearly tax deductions. Free online tax You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Free online tax 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. Free online tax You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. Free online tax You can deduct depreciation only on the part of your property used for rental purposes. Free online tax Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Free online tax You may have to use Form 4562 to figure and report your depreciation. Free online tax See How To Report Rental Income and Expenses , later. Free online tax Alternative minimum tax (AMT). Free online tax    If you use accelerated depreciation, you may be subject to the AMT. Free online tax 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). Free online tax Claiming the correct amount of depreciation. Free online tax   You should claim the correct amount of depreciation each tax year. Free online tax 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. Free online tax   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. Free online tax S Individual Income Tax Return. Free online tax 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. Free online tax See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. Free online tax Changing your accounting method to deduct unclaimed depreciation. Free online tax   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Free online tax In some instances, that consent is automatic. Free online tax For more information, see chapter 1 of Publication 946. Free online tax Land. Free online tax   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Free online tax The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Free online tax More information. Free online tax   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. Free online tax 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. Free online tax You must consider these rules in the order shown below. Free online tax At-risk rules. Free online tax These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Free online tax This applies only if the real property was placed in service after 1986. Free online tax Passive activity limits. Free online tax 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. Free online tax However, there are exceptions. Free online tax 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. Free online tax Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Free online tax 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. Free online tax 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. Free online tax See Publication 925 for more information. Free online tax Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Free online tax 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. Free online tax Limits on passive activity deductions and credits. Free online tax    Deductions or losses from passive activities are limited. Free online tax You generally cannot offset income, other than passive income, with losses from passive activities. Free online tax Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Free online tax Any excess loss or credit is carried forward to the next tax year. Free online tax   For a detailed discussion of these rules, see Publication 925. Free online tax    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. Free online tax Real estate professionals. Free online tax   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. Free online tax For a detailed discussion of the requirements, see Publication 527. Free online tax For a detailed discussion of material participation, see Publication 925. Free online tax 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. Free online tax Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. Free online tax 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. Free online tax This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Free online tax 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. Free online tax Active participation. Free online tax   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. Free online tax Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Free online tax Maximum special allowance. Free online tax   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. Free online tax   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. Free online tax 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. Free online tax   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Free online tax More information. Free online tax   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. Free online tax How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Free online tax However, do not use that schedule to report a not-for-profit activity. Free online tax See Not Rented for Profit, earlier. Free online tax Providing substantial services. Free online tax   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). Free online tax Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Free online tax For information, see Publication 334, Tax Guide for Small Business. Free online tax You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Free online tax   Use Form 1065, U. Free online tax S. Free online tax Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Free online tax Qualified joint venture. Free online tax   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. Free online tax 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. Free online tax For more information, see Publication 527. Free online tax Form 1098, Mortgage Interest Statement. Free online tax    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. Free online tax 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. Free online tax Attach a statement to your return showing the name and address of the other person. Free online tax In the left margin of Schedule E, next to line 13, enter “See attached. Free online tax ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Free online tax , you normally report your rental income and expenses on Schedule E, Part I. Free online tax List your total income, expenses, and depreciation for each rental property. Free online tax Be sure to enter the number of fair rental and personal use days on line 2. Free online tax If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Free online tax Complete lines 1 and 2 for each property. Free online tax However, fill in lines 23a through 26 on only one Schedule E. Free online tax On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Free online tax To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. Free online tax If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Free online tax Form 6198, At-Risk Limitations. Free online tax See At-Risk Rules , earlier. Free online tax Also see Publication 925. Free online tax Form 8582, Passive Activity Loss Limitations. Free online tax See Passive Activity Limits , earlier. Free online tax Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Free online tax 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. Free online tax Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Free online tax Worksheet 9-1. Free online tax 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. Free online tax Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Free online tax ) 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. Free online tax Rental Use Percentage A. Free online tax Total days available for rent at fair rental price A. Free online tax       B. Free online tax Total days available for rent (line A) but not rented B. Free online tax       C. Free online tax Total days of rental use. Free online tax Subtract line B from line A C. Free online tax       D. Free online tax Total days of personal use (including days rented at less than fair rental price) D. Free online tax       E. Free online tax Total days of rental and personal use. Free online tax Add lines C and D E. Free online tax       F. Free online tax Percentage of expenses allowed for rental. Free online tax Divide line C by line E     F. Free online tax   PART II. Free online tax Allowable Rental Expenses 1. Free online tax Enter rents received 1. Free online tax   2a. Free online tax Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Free online tax       b. Free online tax Enter the rental portion of real estate taxes b. Free online tax       c. Free online tax Enter the rental portion of deductible casualty and theft losses (see instructions) c. Free online tax       d. Free online tax Enter direct rental expenses (see instructions) d. Free online tax       e. Free online tax Fully deductible rental expenses. Free online tax Add lines 2a–2d. Free online tax Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Free online tax   3. Free online tax Subtract line 2e from line 1. Free online tax If zero or less, enter -0- 3. Free online tax   4a. Free online tax Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Free online tax       b. Free online tax Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Free online tax       c. Free online tax Carryover of operating expenses from 2012 worksheet c. Free online tax       d. Free online tax Add lines 4a–4c d. Free online tax       e. Free online tax Allowable expenses. Free online tax Enter the smaller of line 3 or line 4d (see instructions) 4e. Free online tax   5. Free online tax Subtract line 4e from line 3. Free online tax If zero or less, enter -0- 5. Free online tax   6a. Free online tax Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Free online tax       b. Free online tax Enter the rental portion of depreciation of the dwelling unit b. Free online tax       c. Free online tax Carryover of excess casualty losses and depreciation from 2012 worksheet c. Free online tax       d. Free online tax Add lines 6a–6c d. Free online tax       e. Free online tax Allowable excess casualty and theft losses and depreciation. Free online tax Enter the smaller of  line 5 or line 6d (see instructions) 6e. Free online tax   PART III. Free online tax Carryover of Unallowed Expenses to Next Year 7a. Free online tax Operating expenses to be carried over to next year. Free online tax Subtract line 4e from line 4d 7a. Free online tax   b. Free online tax Excess casualty and theft losses and depreciation to be carried over to next year. Free online tax  Subtract line 6e from line 6d b. Free online tax   Worksheet 9-1 Instructions. Free online tax Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Free online tax 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. Free online tax Line 2a. Free online tax Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Free online tax Do not include interest on a loan that did not benefit the dwelling unit. Free online tax 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. Free online tax Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Free online tax Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Free online tax   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. Free online tax See the Schedule A instructions. Free online tax However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Free online tax See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Free online tax Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Free online tax   Note. Free online tax Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Free online tax Instead, figure the personal portion on a separate Schedule A. Free online tax 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. Free online tax           Line 2c. Free online tax 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. Free online tax To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Free online tax If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Free online tax On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Free online tax Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Free online tax   Note. Free online tax Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Free online tax Instead, figure the personal portion on a separate Form 4684. Free online tax           Line 2d. Free online tax Enter the total of your rental expenses that are directly related only to the rental activity. Free online tax These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Free online tax Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Free online tax           Line 2e. Free online tax 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. Free online tax Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Free online tax           Line 4b. Free online tax 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. Free online tax 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. Free online tax Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). Free online tax           Line 4e. Free online tax 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. Free online tax *           Line 6a. Free online tax To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Free online tax   A. Free online tax Enter the amount from Form 4684, line 10       B. Free online tax Enter the rental portion of line A       C. Free online tax Enter the amount from line 2c of this worksheet       D. Free online tax Subtract line C from line B. Free online tax Enter the result here and on line 6a of this worksheet               Line 6e. Free online tax 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. Free online tax * *Allocating the limited deduction. Free online tax 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. Free online tax Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Free online tax Prev  Up  Next   Home   More Online Publications