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H&r block free return 3. H&r block free return   Reporting Rental Income, Expenses, and Losses Table of Contents Which Forms To UseSchedule E (Form 1040) Schedule C (Form 1040), Profit or Loss From Business Qualified Joint Venture Limits on Rental LossesAt-Risk Rules Passive Activity Limits Casualties and Thefts Example Figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on Schedule E (Form 1040). H&r block free return There are activities which do not qualify to use Schedule E, such as when the activity is not engaged in to make a profit or when you provide substantial services in conjunction with the property. H&r block free return There are also the limitations which may need to be applied if you have a net loss on Schedule E. H&r block free return There are two: (1) the limitation based on the amount of investment you have at risk in your rental activity, and (2) the special limits imposed on passive activities. H&r block free return You may also have a gain or loss related to your rental property from a casualty or theft. H&r block free return This is considered separately from the income and expense information you report on Schedule E. H&r block free return Which Forms To Use The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). H&r block free return However, do not use that schedule to report a not-for-profit activity. H&r block free return See Not Rented for Profit , in chapter 4. H&r block free return There are also other rental situations in which forms other than Schedule E would be used. H&r block free return Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. H&r block free return , you normally report your rental income and expenses on Schedule E, Part I. H&r block free return List your total income, expenses, and depreciation for each rental property. H&r block free return Be sure to enter the number of fair rental and personal use days on line 2. H&r block free return If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. H&r block free return Complete lines 1 and 2 for each property. H&r block free return However, fill in lines 23a through 26 on only one Schedule E. H&r block free return On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. H&r block free return To find out if you need to attach Form 4562, see Form 4562 , later. H&r block free return If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. H&r block free return Form 6198, At-Risk Limitations. H&r block free return See At-Risk Rules , later. H&r block free return Also see Publication 925. H&r block free return Form 8582, Passive Activity Loss Limitations. H&r block free return See Passive Activity Limits , later. H&r block free return Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. H&r block free return 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. H&r block free return Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). H&r block free return Form 4562. H&r block free return   You must complete and attach Form 4562 for rental activities only if you are claiming: Depreciation, including the special depreciation allowance, on property placed in service during 2013; Depreciation on listed property (such as a car), regardless of when it was placed in service; or Any other car expenses, including the standard mileage rate or lease expenses. H&r block free return Otherwise, figure your depreciation on your own worksheet. H&r block free return You do not have to attach these computations to your return, but you should keep them in your records for future reference. H&r block free return   See Publication 946 for information on preparing Form 4562. H&r block free return Schedule C (Form 1040), Profit or Loss From Business Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer. H&r block free return Providing substantial services. H&r block free return   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you 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. H&r block free return Use Form 1065, U. H&r block free return S. H&r block free return Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). H&r block free return Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. H&r block free return For information, see Publication 334, Tax Guide for Small Business. H&r block free return Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. H&r block free return For a discussion of “substantial services,” see Real Estate Rents in Publication 334, chapter 5. H&r block free return Qualified Joint Venture If you and your spouse each materially participate (see Material participation under Passive Activity Limits, later) 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. H&r block free return 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. H&r block free return If you make this election, you must report rental real estate income on Schedule E (or Schedule C if you provide substantial services). H&r block free return You will not be required to file Form 1065 for any year the election is in effect. H&r block free return Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive activity limits. H&r block free return If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect. H&r block free return For more information on qualified joint ventures, go to IRS. H&r block free return gov and enter “qualified joint venture” in the search box. H&r block free return 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. H&r block free return You must consider these rules in the order shown below. H&r block free return Both are discussed in this section. H&r block free return At-risk rules. H&r block free return These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. H&r block free return This applies only if the real property was placed in service after 1986. H&r block free return Passive activity limits. H&r block free return 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. H&r block free return However, there are exceptions. H&r block free return 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. H&r block free return Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. H&r block free return 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. H&r block free return 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. H&r block free return Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. H&r block free return See Publication 925 for a discussion of the at-risk rules. H&r block free return Form 6198. H&r block free return   If you are subject to the at-risk rules, file Form 6198, At-Risk Limitations, with your tax return. H&r block free return Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. H&r block free return 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. H&r block free return For a discussion of activities that are not considered rental activities, see Rental Activities in Publication 925. H&r block free return Deductions or losses from passive activities are limited. H&r block free return You generally cannot offset income, other than passive income, with losses from passive activities. H&r block free return Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. H&r block free return Any excess loss or credit is carried forward to the next tax year. H&r block free return Exceptions to the rules for figuring passive activity limits for personal use of a dwelling unit and for rental real estate with active participation are discussed later. H&r block free return For a detailed discussion of these rules, see Publication 925. H&r block free return Real estate professionals. H&r block free return   If you are a real estate professional, complete line 43 of Schedule E. H&r block free return      You qualify as a real estate professional for the tax year if you meet both of the following requirements. H&r block free return More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate. H&r block free return You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. H&r block free return If you qualify as a real estate professional, rental real estate activities in which you materially participated are not passive activities. H&r block free return For purposes of determining whether you materially participated in your rental real estate activities, each interest in rental real estate is a separate activity unless you elect to treat all your interests in rental real estate as one activity. H&r block free return   Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. H&r block free return You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest. H&r block free return   Do not count your spouse's personal services to determine whether you met the requirements listed earlier to qualify as a real estate professional. H&r block free return However, you can count your spouse's participation in an activity in determining if you materially participated. H&r block free return Real property trades or businesses. H&r block free return   A real property trade or business is a trade or business that does any of the following with real property. H&r block free return Develops or redevelops it. H&r block free return Constructs or reconstructs it. H&r block free return Acquires it. H&r block free return Converts it. H&r block free return Rents or leases it. H&r block free return Operates or manages it. H&r block free return Brokers it. H&r block free return Choice to treat all interests as one activity. H&r block free return   If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. H&r block free return You can make this choice for any year that you qualify as a real estate professional. H&r block free return If you forgo making the choice for one year, you can still make it for a later year. H&r block free return   If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. H&r block free return This is true even if you are not a real estate professional in any intervening year. H&r block free return (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules. H&r block free return )   See the Instructions for Schedule E for information about making this choice. H&r block free return Material participation. H&r block free return   Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. H&r block free return For details, see Publication 925 or the Instructions for Schedule C. H&r block free return Participating spouse. H&r block free return   If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. H&r block free return Do this even if your spouse owns no interest in the activity or files a separate return for the year. H&r block free return Form 8582. H&r block free return    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. H&r block free return See Form 8582 not required , later in this chapter, to determine if you must complete Form 8582. H&r block free return   If you are required to complete Form 8582 and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible loss) in column (b) of Form 8582, Worksheet 1 or 3, as required. H&r block free return 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. H&r block free return Instead, follow the rules explained in chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). H&r block free return Exception for Rental Real Estate 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. H&r block free return This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. H&r block free return 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. H&r block free return Example. H&r block free return Jane is single and has $40,000 in wages, $2,000 of passive income from a limited partnership, and $3,500 of passive loss from a rental real estate activity in which she actively participated. H&r block free return $2,000 of Jane's $3,500 loss offsets her passive income. H&r block free return The remaining $1,500 loss can be deducted from her $40,000 wages. H&r block free return The special allowance is not available if you were married, lived with your spouse at any time during the year, and are filing a separate return. H&r block free return Active participation. H&r block free return   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. H&r block free return Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions. H&r block free return Example. H&r block free return Mike is single and had the following income and losses during the tax year:   Salary $42,300     Dividends 300     Interest 1,400     Rental loss (4,000)   The rental loss was from the rental of a house Mike owned. H&r block free return Mike had advertised and rented the house to the current tenant himself. H&r block free return He also collected the rents, which usually came by mail. H&r block free return All repairs were either made or contracted out by Mike. H&r block free return Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other income. H&r block free return Maximum special allowance. H&r block free return   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. H&r block free return   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. H&r block free return 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. H&r block free return   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. H&r block free return Modified adjusted gross income (MAGI). H&r block free return   This is your adjusted gross income from Form 1040, U. H&r block free return S. H&r block free return Individual Income Tax Return, line 38, or Form 1040NR, U. H&r block free return S. H&r block free return Nonresident Alien Income Tax Return, line 37, figured without taking into account: The taxable amount of social security or equivalent tier 1 railroad retirement benefits, The deductible contributions to traditional individual retirement accounts (IRAs) and section 501(c)(18) pension plans, The exclusion from income of interest from Series EE and I U. H&r block free return S. H&r block free return savings bonds used to pay higher educational expenses, The exclusion of amounts received under an employer's adoption assistance program, Any passive activity income or loss included on Form 8582, Any rental real estate loss allowed to real estate professionals, Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582), The deduction allowed for one-half of self-employment tax, The deduction allowed for interest paid on student loans, The deduction for qualified tuition and related fees, and The domestic production activities deduction (see the Instructions for Form 8903). H&r block free return Form 8582 not required. H&r block free return   Do not complete Form 8582 if you meet all of the following conditions. H&r block free return Your only passive activities were rental real estate activities in which you actively participated. H&r block free return Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately and you lived apart from your spouse all year). H&r block free return If married filing separately, you lived apart from your spouse all year. H&r block free return You have no prior year unallowed losses from these (or any other passive) activities. H&r block free return You have no current or prior year unallowed credits from passive activities. H&r block free return Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year). H&r block free return You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust. H&r block free return   If you meet all of the conditions listed above, your rental real estate activities are not limited by the passive activity rules and you do not have to complete Form 8582. H&r block free return On lines 23a through 23e of your Schedule E, enter the applicable amounts. H&r block free return Casualties and Thefts As a result of a casualty or theft, you may have a loss related to your rental property. H&r block free return You may be able to deduct the loss on your income tax return. H&r block free return Casualty. H&r block free return   This is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. H&r block free return Such events include a storm, fire, or earthquake. H&r block free return Theft. H&r block free return   This is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it. H&r block free return Gain from casualty or theft. H&r block free return   It is also possible to have a gain from a casualty or theft if you receive money, including insurance, that is more than your adjusted basis in the property. H&r block free return Generally, you must report this gain. H&r block free return However, under certain circumstances, you may defer paying tax by choosing to postpone reporting the gain. H&r block free return To do this, you generally must buy replacement property within 2 years after the close of the first tax year in which any part of your gain is realized. H&r block free return In certain circumstances, the replacement period can be greater than 2 years; see Replacement Period in Publication 547 for more information. H&r block free return The cost of the replacement property must be equal to or more than the net insurance or other payment you received. H&r block free return More information. H&r block free return   For information on business and nonbusiness casualty and theft losses, see Publication 547. H&r block free return How to report. H&r block free return    If you had a casualty or theft that involved property used in your rental activity, figure the net gain or loss in Section B of Form 4684, Casualties and Thefts. H&r block free return Follow the Instructions for Form 4684 for where to carry your net gain or loss. H&r block free return Example In February 2008, Marie Pfister bought a rental house for $135,000 (house $120,000 and land $15,000) and immediately began renting it out. H&r block free return In 2013, she rented it all 12 months for a monthly rental fee of $1,125. H&r block free return In addition to her rental income of $13,500 (12 x $1,125), Marie had the following expenses. H&r block free return Mortgage interest $8,000 Fire insurance (1-year policy) 250 Miscellaneous repairs 400 Real estate taxes imposed and paid 500 Maintenance 200 Marie depreciates the residential rental property under MACRS GDS. H&r block free return This means using the straight line method over a recovery period of 27. H&r block free return 5 years. H&r block free return She uses Table 2-2d to find her depreciation percentage. H&r block free return Because she placed the property in service in February 2008, she continues to use that row of Table 2-2d. H&r block free return For year 6, the rate is 3. H&r block free return 636%. H&r block free return Marie figures her net rental income or loss for the house as follows: Total rental income received  ($1,125 × 12) $13,500 Minus: Expenses     Mortgage interest $8,000   Fire insurance 250   Miscellaneous repairs 400   Real estate taxes 500   Maintenance 200   Total expenses 9,350 Balance $4,150 Minus: Depreciation ($120,000 x 3. H&r block free return 636%) 4,363 Net rental (loss) for house ($213)       Marie had a net loss for the year. H&r block free return Because she actively participated in her passive rental real estate activity and her loss was less than $25,000, she can deduct the loss on her return. H&r block free return Marie also meets all of the requirements for not having to file Form 8582. H&r block free return She uses Schedule E, Part I, to report her rental income and expenses. H&r block free return She enters her income, expenses, and depreciation for the house in the column for Property A and enters her loss on line 22. H&r block free return Form 4562 is not required. H&r block free return Prev  Up  Next   Home   More Online Publications
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