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Free State Filing Income Tax

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Free State Filing Income Tax

Free state filing income tax Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. Free state filing income tax Property not disposed of or abandoned. Free state filing income tax Special rule for normal retirements from item accounts. Free state filing income tax Abandoned property. Free state filing income tax Single item accounts. Free state filing income tax Multiple property account. Free state filing income tax Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. Free state filing income tax If your property qualified for MACRS, you must depreciate it under MACRS. Free state filing income tax See Publication 946. Free state filing income tax However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Free state filing income tax Also, you can elect to exclude certain property from being depreciated under MACRS. Free state filing income tax Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. Free state filing income tax Intangible property. Free state filing income tax   You cannot depreciate intangible property under ACRS or MACRS. Free state filing income tax You depreciate intangible property using any other reasonable method, usually, the straight line method. Free state filing income tax Note. Free state filing income tax The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Free state filing income tax For more information, see chapter 12 of Publication 535. Free state filing income tax Public utility property. Free state filing income tax   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Free state filing income tax This type of property is subject to depreciation under a special rule. Free state filing income tax Videocassettes. Free state filing income tax   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Free state filing income tax You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. Free state filing income tax The straight line method, salvage value, and useful life are discussed later under Methods To Use. Free state filing income tax You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. Free state filing income tax How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Free state filing income tax These methods are straight line and declining balance. Free state filing income tax To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Free state filing income tax They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Free state filing income tax The amount of the deduction in any year also depends on which method of depreciation you choose. Free state filing income tax Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Free state filing income tax The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Free state filing income tax Your original basis is usually the purchase price. Free state filing income tax However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. Free state filing income tax Adjusted basis. Free state filing income tax   Events will often change the basis of property. Free state filing income tax When this occurs, the changed basis is called the adjusted basis. Free state filing income tax Some events, such as improvements you make, increase basis. Free state filing income tax Events such as deducting casualty losses and depreciation decrease basis. Free state filing income tax If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. Free state filing income tax   Publication 551 explains how to figure basis for property acquired in different ways. Free state filing income tax It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. Free state filing income tax Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. Free state filing income tax It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Free state filing income tax It is how long it will continue to be useful to you, not how long the property will last. Free state filing income tax Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Free state filing income tax The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Free state filing income tax Consider all these factors before you arrive at a useful life for your property. Free state filing income tax The useful life of the same type of property varies from user to user. Free state filing income tax When you determine the useful life of your property, keep in mind your own experience with similar property. Free state filing income tax You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. Free state filing income tax Change in useful life. Free state filing income tax   You base your estimate of useful life on certain facts. Free state filing income tax If these facts change significantly, you can adjust your estimate of the remaining useful life. Free state filing income tax However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Free state filing income tax Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Free state filing income tax You generally cannot depreciate property below a reasonable salvage value. Free state filing income tax Determining salvage value. Free state filing income tax   Salvage value is the estimated value of property at the end of its useful life. Free state filing income tax It is what you expect to get for the property if you sell it after you can no longer use it productively. Free state filing income tax You must estimate the salvage value of a piece of property when you first acquire it. Free state filing income tax   Salvage value is affected both by how you use the property and how long you use it. Free state filing income tax If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Free state filing income tax However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Free state filing income tax Changing salvage value. Free state filing income tax   Once you determine the salvage value for property, you should not change it merely because prices have changed. Free state filing income tax However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Free state filing income tax When you redetermine the salvage value, take into account the facts that exist at the time. Free state filing income tax Net salvage. Free state filing income tax   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Free state filing income tax You can choose either salvage value or net salvage when you figure depreciation. Free state filing income tax You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Free state filing income tax However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Free state filing income tax Your salvage value can never be less than zero. Free state filing income tax Ten percent rule. Free state filing income tax   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. Free state filing income tax You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Free state filing income tax If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Free state filing income tax Methods To Use Two methods of depreciation are the straight line and declining balance methods. Free state filing income tax If ACRS or MACRS does not apply, you can use one of these methods. Free state filing income tax The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. Free state filing income tax Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Free state filing income tax One of these methods was the straight line method. Free state filing income tax This method was also used for intangible property. Free state filing income tax It lets you deduct the same amount of depreciation each year. Free state filing income tax To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Free state filing income tax Subtract the salvage value, if any, from the adjusted basis. Free state filing income tax The balance is the total amount of depreciation you can take over the useful life of the property. Free state filing income tax Divide the balance by the number of years remaining in the useful life. Free state filing income tax This gives you the amount of your yearly depreciation deduction. Free state filing income tax Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. Free state filing income tax If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Free state filing income tax Example. Free state filing income tax In April 1994, Frank bought a franchise for $5,600. Free state filing income tax It expires in 10 years. Free state filing income tax This property is intangible property that cannot be depreciated under MACRS. Free state filing income tax Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Free state filing income tax He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Free state filing income tax He must prorate the $560 for his 9 months of use in 1994. Free state filing income tax This gives him a deduction of $420 ($560 ÷ 9/12). Free state filing income tax In 1995, Frank can deduct $560 for the full year. Free state filing income tax Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. Free state filing income tax The rate cannot be more than twice the straight line rate. Free state filing income tax Rate of depreciation. Free state filing income tax   Under this method, you must determine your declining balance rate of depreciation. Free state filing income tax The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Free state filing income tax (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Free state filing income tax ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Free state filing income tax Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Free state filing income tax Depreciation deductions. Free state filing income tax   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Free state filing income tax This gives you the amount of your deduction. Free state filing income tax For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). Free state filing income tax To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Free state filing income tax Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Free state filing income tax Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Free state filing income tax Your depreciation deduction for the second year is $1,600. Free state filing income tax   As you can see from this example, your adjusted basis in the property gets smaller each year. Free state filing income tax Also, under this method, deductions are larger in the earlier years and smaller in the later years. Free state filing income tax You can make a change to the straight line method without consent. Free state filing income tax Salvage value. Free state filing income tax   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Free state filing income tax However, you cannot depreciate the property below its reasonable salvage value. Free state filing income tax Determine salvage value using the rules discussed earlier, including the special 10% rule. Free state filing income tax Example. Free state filing income tax If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Free state filing income tax But if your estimate of salvage value was $900, you can only deduct $100. Free state filing income tax This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Free state filing income tax Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Free state filing income tax You can group the videocassettes by title for making this projection. Free state filing income tax You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Free state filing income tax The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Free state filing income tax For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Free state filing income tax How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Free state filing income tax If you change your method of depreciation, it is generally a change in your method of accounting. Free state filing income tax You must get IRS consent before making the change. Free state filing income tax However, you do not need permission for certain changes in your method of depreciation. Free state filing income tax The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Free state filing income tax For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Free state filing income tax Change to the straight line method. Free state filing income tax   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. Free state filing income tax However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Free state filing income tax When the change is made, figure depreciation based on your adjusted basis in the property at that time. Free state filing income tax Your adjusted basis takes into account all previous depreciation deductions. Free state filing income tax Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Free state filing income tax   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. Free state filing income tax You cannot make the change on an amended return filed after the due date of the original return (including extensions). Free state filing income tax   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. Free state filing income tax   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. Free state filing income tax Changes that require permission. Free state filing income tax   For most other changes in method of depreciation, you must get permission from the IRS. Free state filing income tax To request a change in method of depreciation, file Form 3115. Free state filing income tax File the application within the first 180 days of the tax year the change is to become effective. Free state filing income tax In most cases, there is a user fee that must accompany Form 3115. Free state filing income tax See the instructions for Form 3115 to determine if a fee is required. Free state filing income tax Changes granted automatically. Free state filing income tax   The IRS automatically approves certain changes of a method of depreciation. Free state filing income tax But, you must file Form 3115 for these automatic changes. Free state filing income tax   However, IRS can deny permission if Form 3115 is not filed on time. Free state filing income tax For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Free state filing income tax B. Free state filing income tax 420. Free state filing income tax Changes for which approval is not automatic. Free state filing income tax   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. Free state filing income tax   You must request and receive permission for these changes. Free state filing income tax To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. Free state filing income tax Change from an improper method. Free state filing income tax   If the IRS disallows the method you are using, you do not need permission to change to a proper method. Free state filing income tax You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Free state filing income tax If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. Free state filing income tax However, you must file the amended return before the filing date for the next tax year. Free state filing income tax Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Free state filing income tax You can do this by selling, exchanging, or abandoning the item of property. Free state filing income tax You can also withdraw it from use without disposing of it. Free state filing income tax For example, you could place it in a supplies or scrap account. Free state filing income tax Retirements can be either normal or abnormal depending on all facts and circumstances. Free state filing income tax The rules discussed next do not apply to MACRS and ACRS property. Free state filing income tax Normal retirement. Free state filing income tax   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. Free state filing income tax A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. Free state filing income tax Abnormal retirement. Free state filing income tax   A retirement can be abnormal if you withdraw the property early or under other circumstances. Free state filing income tax For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Free state filing income tax Gain or loss on retirement. Free state filing income tax   There are special rules for figuring the gain or loss on retirement of property. Free state filing income tax The gain or loss will depend on several factors. Free state filing income tax These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. Free state filing income tax A single property account contains only one item of property. Free state filing income tax A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Free state filing income tax Sale or exchange. Free state filing income tax   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. Free state filing income tax See Publication 544. Free state filing income tax Property not disposed of or abandoned. Free state filing income tax   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Free state filing income tax You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. Free state filing income tax However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. Free state filing income tax   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. Free state filing income tax Special rule for normal retirements from item accounts. Free state filing income tax   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. Free state filing income tax However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Free state filing income tax   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. Free state filing income tax Abandoned property. Free state filing income tax   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Free state filing income tax However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. Free state filing income tax Basis of property retired. Free state filing income tax   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. Free state filing income tax Single item accounts. Free state filing income tax   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. Free state filing income tax This is generally the cost or other basis of the item of property less depreciation. Free state filing income tax See Publication 551. Free state filing income tax Multiple property account. Free state filing income tax   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. Free state filing income tax If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. Free state filing income tax   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. Free state filing income tax The method of depreciation used for the multiple property account is used. Free state filing income tax You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. Free state filing income tax Prev  Up  Next   Home   More Online Publications
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The Free State Filing Income Tax

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