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H7r block free file 9. H7r block free file   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. H7r block free file 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. H7r block free file Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. H7r block free file 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. H7r block free file It also covers the following topics. H7r block free file Personal use of dwelling unit (including vacation home). H7r block free file Depreciation. H7r block free file Limits on rental losses. H7r block free file How to report your rental income and expenses. H7r block free file If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. H7r block free file If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. H7r block free file 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. H7r block free file See Publication 527, Residential Rental Property, for more information. H7r block free file 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. H7r block free file Rental income is any payment you receive for the use or occupation of property. H7r block free file In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. H7r block free file When to report. H7r block free file   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. H7r block free file You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. H7r block free file You constructively receive income when it is made available to you, for example, by being credited to your bank account. H7r block free file   For more information about when you constructively receive income, see Accounting Methods in chapter 1. H7r block free file Advance rent. H7r block free file   Advance rent is any amount you receive before the period that it covers. H7r block free file 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. H7r block free file Example. H7r block free file You sign a 10-year lease to rent your property. H7r block free file 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. H7r block free file You must include $10,000 in your income in the first year. H7r block free file Canceling a lease. H7r block free file   If your tenant pays you to cancel a lease, the amount you receive is rent. H7r block free file Include the payment in your income in the year you receive it regardless of your method of accounting. H7r block free file Expenses paid by tenant. H7r block free file   If your tenant pays any of your expenses, the payments are rental income. H7r block free file Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. H7r block free file See Rental Expenses , later, for more information. H7r block free file Property or services. H7r block free file   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. H7r block free file   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. H7r block free file Security deposits. H7r block free file   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. H7r block free file 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. H7r block free file   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. H7r block free file Include it in your income when you receive it. H7r block free file Part interest. H7r block free file   If you own a part interest in rental property, you must report your part of the rental income from the property. H7r block free file Rental of property also used as your home. H7r block free file   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. H7r block free file However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. H7r block free file See Personal Use of Dwelling Unit (Including Vacation Home) , later. H7r block free file Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. H7r block free file 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. H7r block free file Depreciation , which you can also deduct from your rental income, is discussed later. H7r block free file Personal use of rental property. H7r block free file   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. H7r block free file Also, your rental expense deductions may be limited. H7r block free file See Personal Use of Dwelling Unit (Including Vacation Home) , later. H7r block free file Part interest. H7r block free file   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. H7r block free file When to deduct. H7r block free file   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. H7r block free file Depreciation. H7r block free file   You can begin to depreciate rental property when it is ready and available for rent. H7r block free file See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. H7r block free file Pre-rental expenses. H7r block free file   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. H7r block free file Uncollected rent. H7r block free file   If you are a cash-basis taxpayer, do not deduct uncollected rent. H7r block free file Because you have not included it in your income, it is not deductible. H7r block free file Vacant rental property. H7r block free file   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. H7r block free file However, you cannot deduct any loss of rental income for the period the property is vacant. H7r block free file Vacant while listed for sale. H7r block free file   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. H7r block free file If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. H7r block free file 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. H7r block free file Improvements. H7r block free file   You must capitalize any expense you pay to improve your rental property. H7r block free file 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. H7r block free file Betterments. H7r block free file   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. H7r block free file Restoration. H7r block free file   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. H7r block free file Adaptation. H7r block free file   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. H7r block free file Separate the costs of repairs and improvements, and keep accurate records. H7r block free file You will need to know the cost of improvements when you sell or depreciate your property. H7r block free file The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. H7r block free file 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. H7r block free file Insurance premiums paid in advance. H7r block free file   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. H7r block free file You cannot deduct the total premium in the year you pay it. H7r block free file Legal and other professional fees. H7r block free file   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. H7r block free file For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. H7r block free file 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. H7r block free file Local benefit taxes. H7r block free file   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. H7r block free file These charges are nondepreciable capital expenditures, and must be added to the basis of your property. H7r block free file However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. H7r block free file Local transportation expenses. H7r block free file    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. H7r block free file 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. H7r block free file See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. H7r block free file   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. H7r block free file For 2013, the standard mileage rate for business use is 56. H7r block free file 5 cents per mile. H7r block free file For more information, see chapter 26. H7r block free file    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. H7r block free file In addition, you must complete Form 4562, Part V, and attach it to your tax return. H7r block free file Rental of equipment. H7r block free file   You can deduct the rent you pay for equipment that you use for rental purposes. H7r block free file However, in some cases, lease contracts are actually purchase contracts. H7r block free file If so, you cannot deduct these payments. H7r block free file You can recover the cost of purchased equipment through depreciation. H7r block free file Rental of property. H7r block free file   You can deduct the rent you pay for property that you use for rental purposes. H7r block free file 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. H7r block free file Travel expenses. H7r block free file   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. H7r block free file You must properly allocate your expenses between rental and nonrental activities. H7r block free file You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. H7r block free file You recover the cost of improvements by taking depreciation. H7r block free file For information on travel expenses, see chapter 26. H7r block free file    To deduct travel expenses, you must keep records that follow the rules in chapter 26. H7r block free file   See Rental Expenses in Publication 527 for more information. H7r block free file 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. H7r block free file 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. H7r block free file You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. H7r block free file 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). H7r block free file Example. H7r block free file Your tax year is the calendar year. H7r block free file You moved from your home in May and started renting it out on June 1. H7r block free file You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. H7r block free file Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. H7r block free file 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. H7r block free file 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). H7r block free file 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. H7r block free file There is no change in the types of expenses deductible for the personal-use part of your property. H7r block free file Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). H7r block free file You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. H7r block free file You do not have to divide the expenses that belong only to the rental part of your property. H7r block free file 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. H7r block free file 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. H7r block free file 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. H7r block free file How to divide expenses. H7r block free file   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. H7r block free file You can use any reasonable method for dividing the expense. H7r block free file It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. H7r block free file 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. H7r block free file 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. H7r block free file 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. H7r block free file 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. H7r block free file Where to report. H7r block free file   Report your not-for-profit rental income on Form 1040, line 21. H7r block free file 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. H7r block free file   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. H7r block free file You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. H7r block free file 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. H7r block free file 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. H7r block free file Only your rental expenses may be deducted on Schedule E (Form 1040). H7r block free file Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). H7r block free file You must also determine if the dwelling unit is considered a home. H7r block free file The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. H7r block free file Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. H7r block free file 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. H7r block free file Dwelling unit. H7r block free file   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. H7r block free file It also includes all structures or other property belonging to the dwelling unit. H7r block free file A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. H7r block free file   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. H7r block free file 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. H7r block free file Example. H7r block free file   You rent a room in your home that is always available for short-term occupancy by paying customers. H7r block free file You do not use the room yourself, and you allow only paying customers to use the room. H7r block free file The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. H7r block free file 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. H7r block free file When dividing your expenses, follow these rules. H7r block free file 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. H7r block free file This rule does not apply when determining whether you used the unit as a home. H7r block free file Any day that the unit is available for rent but not actually rented is not a day of rental use. H7r block free file Example. H7r block free file Your beach cottage was available for rent from June 1 through August 31 (92 days). H7r block free file 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. H7r block free file 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. H7r block free file Your family also used the cottage during the last 2 weeks of May (14 days). H7r block free file The cottage was not used at all before May 17 or after August 31. H7r block free file You figure the part of the cottage expenses to treat as rental expenses as follows. H7r block free file The cottage was used for rental a total of 85 days (92 − 7). H7r block free file The days it was available for rent but not rented (7 days) are not days of rental use. H7r block free file The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. H7r block free file You used the cottage for personal purposes for 14 days (the last 2 weeks in May). H7r block free file The total use of the cottage was 99 days (14 days personal use + 85 days rental use). H7r block free file Your rental expenses are 85/99 (86%) of the cottage expenses. H7r block free file Note. H7r block free file 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. H7r block free file Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. H7r block free file 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. H7r block free file If you have a net loss, you may not be able to deduct all of the rental expenses. H7r block free file See Dwelling Unit Used as a Home, next. H7r block free file 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. H7r block free file 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. H7r block free file See What is a day of personal use , later. H7r block free file Fair rental price. H7r block free file   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. H7r block free file 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. H7r block free file   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. H7r block free file Instead, count it as a day of personal use in applying both (1) and (2) above. H7r block free file 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. H7r block free file 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). H7r block free file However, see Days used as a main home before or after renting , later. H7r block free file 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. H7r block free file Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. H7r block free file ), and lineal descendants (children, grandchildren, etc. H7r block free file ). H7r block free file Anyone under an arrangement that lets you use some other dwelling unit. H7r block free file Anyone at less than a fair rental price. H7r block free file Main home. H7r block free file   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. H7r block free file Shared equity financing agreement. H7r block free file   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. H7r block free file Donation of use of property. H7r block free file   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. H7r block free file Examples. H7r block free file   The following examples show how to determine days of personal use. H7r block free file Example 1. H7r block free file You and your neighbor are co-owners of a condominium at the beach. H7r block free file Last year, you rented the unit to vacationers whenever possible. H7r block free file The unit was not used as a main home by anyone. H7r block free file Your neighbor used the unit for 2 weeks last year; you did not use it at all. H7r block free file 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. H7r block free file Example 2. H7r block free file You and your neighbors are co-owners of a house under a shared equity financing agreement. H7r block free file Your neighbors live in the house and pay you a fair rental price. H7r block free file 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. H7r block free file This is because your neighbors rent the house as their main home under a shared equity financing agreement. H7r block free file Example 3. H7r block free file You own a rental property that you rent to your son. H7r block free file Your son does not own any interest in this property. H7r block free file He uses it as his main home and pays you a fair rental price. H7r block free file 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. H7r block free file Example 4. H7r block free file You rent your beach house to Joshua. H7r block free file Joshua rents his cabin in the mountains to you. H7r block free file You each pay a fair rental price. H7r block free file 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. H7r block free file Days used for repairs and maintenance. H7r block free file   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. H7r block free file 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. H7r block free file Days used as a main home before or after renting. H7r block free file   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. H7r block free file Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. H7r block free file 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. H7r block free file However, this special rule does not apply when dividing expenses between rental and personal use. H7r block free file Examples. H7r block free file   The following examples show how to determine whether you used your rental property as a home. H7r block free file Example 1. H7r block free file You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. H7r block free file You rented the basement apartment at a fair rental price to college students during the regular school year. H7r block free file You rented to them on a 9-month lease (273 days). H7r block free file You figured 10% of the total days rented to others at a fair rental price is 27 days. H7r block free file During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. H7r block free file Your basement apartment was used as a home because you used it for personal purposes for 30 days. H7r block free file Rent-free use by your brothers is considered personal use. H7r block free file Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). H7r block free file Example 2. H7r block free file 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). H7r block free file Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. H7r block free file You figured 10% of the total days rented to others at a fair rental price is 3 days. H7r block free file The room was used as a home because you used it for personal purposes for 21 days. H7r block free file That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). H7r block free file Example 3. H7r block free file You own a condominium apartment in a resort area. H7r block free file You rented it at a fair rental price for a total of 170 days during the year. H7r block free file 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. H7r block free file Your family actually used the apartment for 10 of those days. H7r block free file Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. H7r block free file You figured 10% of the total days rented to others at a fair rental price is 16 days. H7r block free file Your family also used the apartment for 7 other days during the year. H7r block free file You used the apartment as a home because you used it for personal purposes for 17 days. H7r block free file That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). H7r block free file Minimal rental use. H7r block free file   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. H7r block free file See Used as a home but rented less than 15 days , later, for more information. H7r block free file Limit on deductions. H7r block free file   Renting a dwelling unit that is considered a home is not a passive activity. H7r block free file 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. H7r block free file 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. H7r block free file Any expenses carried forward to the next year will be subject to any limits that apply for that year. H7r block free file 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. H7r block free file   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. H7r block free file Reporting Income and Deductions Property not used for personal purposes. H7r block free file   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. H7r block free file Property used for personal purposes. H7r block free file   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. H7r block free file Not used as a home. H7r block free file   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. H7r block free file 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 . H7r block free file The expenses for personal use are not deductible as rental expenses. H7r block free file   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. H7r block free file Used as a home but rented less than 15 days. H7r block free file   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). H7r block free file You are not required to report the rental income and rental expenses from this activity. H7r block free file The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). H7r block free file See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. H7r block free file Used as a home and rented 15 days or more. H7r block free file   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. H7r block free file 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 . H7r block free file The expenses for personal use are not deductible as rental expenses. H7r block free file   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. H7r block free file You do not need to use Worksheet 9-1. H7r block free file   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. H7r block free file To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. H7r block free file Depreciation You recover the cost of income-producing property through yearly tax deductions. H7r block free file You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. H7r block free file 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. H7r block free file You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. H7r block free file You can deduct depreciation only on the part of your property used for rental purposes. H7r block free file Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. H7r block free file You may have to use Form 4562 to figure and report your depreciation. H7r block free file See How To Report Rental Income and Expenses , later. H7r block free file Alternative minimum tax (AMT). H7r block free file    If you use accelerated depreciation, you may be subject to the AMT. H7r block free file 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). H7r block free file Claiming the correct amount of depreciation. H7r block free file   You should claim the correct amount of depreciation each tax year. H7r block free file 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. H7r block free file   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. H7r block free file S Individual Income Tax Return. H7r block free file 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. H7r block free file See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. H7r block free file Changing your accounting method to deduct unclaimed depreciation. H7r block free file   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. H7r block free file In some instances, that consent is automatic. H7r block free file For more information, see chapter 1 of Publication 946. H7r block free file Land. H7r block free file   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. H7r block free file The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. H7r block free file More information. H7r block free file   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. H7r block free file 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. H7r block free file You must consider these rules in the order shown below. H7r block free file At-risk rules. H7r block free file These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. H7r block free file This applies only if the real property was placed in service after 1986. H7r block free file Passive activity limits. H7r block free file 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. H7r block free file However, there are exceptions. H7r block free file 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. H7r block free file Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. H7r block free file 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. H7r block free file 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. H7r block free file See Publication 925 for more information. H7r block free file Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. H7r block free file 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. H7r block free file Limits on passive activity deductions and credits. H7r block free file    Deductions or losses from passive activities are limited. H7r block free file You generally cannot offset income, other than passive income, with losses from passive activities. H7r block free file Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. H7r block free file Any excess loss or credit is carried forward to the next tax year. H7r block free file   For a detailed discussion of these rules, see Publication 925. H7r block free file    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. H7r block free file Real estate professionals. H7r block free file   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. H7r block free file For a detailed discussion of the requirements, see Publication 527. H7r block free file For a detailed discussion of material participation, see Publication 925. H7r block free file 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. H7r block free file Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. H7r block free file 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. H7r block free file This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. H7r block free file 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. H7r block free file Active participation. H7r block free file   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. H7r block free file Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. H7r block free file Maximum special allowance. H7r block free file   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. H7r block free file   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. H7r block free file 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. H7r block free file   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. H7r block free file More information. H7r block free file   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. H7r block free file How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). H7r block free file However, do not use that schedule to report a not-for-profit activity. H7r block free file See Not Rented for Profit, earlier. H7r block free file Providing substantial services. H7r block free file   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). H7r block free file Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. H7r block free file For information, see Publication 334, Tax Guide for Small Business. H7r block free file You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. H7r block free file   Use Form 1065, U. H7r block free file S. H7r block free file Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). H7r block free file Qualified joint venture. H7r block free file   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. H7r block free file 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. H7r block free file For more information, see Publication 527. H7r block free file Form 1098, Mortgage Interest Statement. H7r block free file    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. H7r block free file 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. H7r block free file Attach a statement to your return showing the name and address of the other person. H7r block free file In the left margin of Schedule E, next to line 13, enter “See attached. H7r block free file ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. H7r block free file , you normally report your rental income and expenses on Schedule E, Part I. H7r block free file List your total income, expenses, and depreciation for each rental property. H7r block free file Be sure to enter the number of fair rental and personal use days on line 2. H7r block free file If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. H7r block free file Complete lines 1 and 2 for each property. H7r block free file However, fill in lines 23a through 26 on only one Schedule E. H7r block free file On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. H7r block free file To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. H7r block free file If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. H7r block free file Form 6198, At-Risk Limitations. H7r block free file See At-Risk Rules , earlier. H7r block free file Also see Publication 925. H7r block free file Form 8582, Passive Activity Loss Limitations. H7r block free file See Passive Activity Limits , earlier. H7r block free file Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. H7r block free file 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. H7r block free file Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). H7r block free file Worksheet 9-1. H7r block free file 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. H7r block free file Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . H7r block free file ) 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. H7r block free file Rental Use Percentage A. H7r block free file Total days available for rent at fair rental price A. H7r block free file       B. H7r block free file Total days available for rent (line A) but not rented B. H7r block free file       C. H7r block free file Total days of rental use. H7r block free file Subtract line B from line A C. H7r block free file       D. H7r block free file Total days of personal use (including days rented at less than fair rental price) D. H7r block free file       E. H7r block free file Total days of rental and personal use. H7r block free file Add lines C and D E. H7r block free file       F. H7r block free file Percentage of expenses allowed for rental. H7r block free file Divide line C by line E     F. H7r block free file   PART II. H7r block free file Allowable Rental Expenses 1. H7r block free file Enter rents received 1. H7r block free file   2a. H7r block free file Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. H7r block free file       b. H7r block free file Enter the rental portion of real estate taxes b. H7r block free file       c. H7r block free file Enter the rental portion of deductible casualty and theft losses (see instructions) c. H7r block free file       d. H7r block free file Enter direct rental expenses (see instructions) d. H7r block free file       e. H7r block free file Fully deductible rental expenses. H7r block free file Add lines 2a–2d. H7r block free file Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. H7r block free file   3. H7r block free file Subtract line 2e from line 1. H7r block free file If zero or less, enter -0- 3. H7r block free file   4a. H7r block free file Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. H7r block free file       b. H7r block free file Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. H7r block free file       c. H7r block free file Carryover of operating expenses from 2012 worksheet c. H7r block free file       d. H7r block free file Add lines 4a–4c d. H7r block free file       e. H7r block free file Allowable expenses. H7r block free file Enter the smaller of line 3 or line 4d (see instructions) 4e. H7r block free file   5. H7r block free file Subtract line 4e from line 3. H7r block free file If zero or less, enter -0- 5. H7r block free file   6a. H7r block free file Enter the rental portion of excess casualty and theft losses (see instructions) 6a. H7r block free file       b. H7r block free file Enter the rental portion of depreciation of the dwelling unit b. H7r block free file       c. H7r block free file Carryover of excess casualty losses and depreciation from 2012 worksheet c. H7r block free file       d. H7r block free file Add lines 6a–6c d. H7r block free file       e. H7r block free file Allowable excess casualty and theft losses and depreciation. H7r block free file Enter the smaller of  line 5 or line 6d (see instructions) 6e. H7r block free file   PART III. H7r block free file Carryover of Unallowed Expenses to Next Year 7a. H7r block free file Operating expenses to be carried over to next year. H7r block free file Subtract line 4e from line 4d 7a. H7r block free file   b. H7r block free file Excess casualty and theft losses and depreciation to be carried over to next year. H7r block free file  Subtract line 6e from line 6d b. H7r block free file   Worksheet 9-1 Instructions. H7r block free file Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. H7r block free file 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. H7r block free file Line 2a. H7r block free file Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. H7r block free file Do not include interest on a loan that did not benefit the dwelling unit. H7r block free file 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. H7r block free file Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. H7r block free file Include the rental portion of this interest in the total you enter on line 2a of the worksheet. H7r block free file   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. H7r block free file See the Schedule A instructions. H7r block free file However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. H7r block free file See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. H7r block free file Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. H7r block free file   Note. H7r block free file Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. H7r block free file Instead, figure the personal portion on a separate Schedule A. H7r block free file 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. H7r block free file           Line 2c. H7r block free file 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. H7r block free file To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. H7r block free file If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. H7r block free file On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. H7r block free file Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. H7r block free file   Note. H7r block free file Do not file this Form 4684 or use it to figure your personal losses on Schedule A. H7r block free file Instead, figure the personal portion on a separate Form 4684. H7r block free file           Line 2d. H7r block free file Enter the total of your rental expenses that are directly related only to the rental activity. H7r block free file These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. H7r block free file Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. H7r block free file           Line 2e. H7r block free file 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. H7r block free file Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. H7r block free file           Line 4b. H7r block free file 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. H7r block free file 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. H7r block free file Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). H7r block free file           Line 4e. H7r block free file 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. H7r block free file *           Line 6a. H7r block free file To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. H7r block free file   A. H7r block free file Enter the amount from Form 4684, line 10       B. H7r block free file Enter the rental portion of line A       C. H7r block free file Enter the amount from line 2c of this worksheet       D. H7r block free file Subtract line C from line B. H7r block free file Enter the result here and on line 6a of this worksheet               Line 6e. H7r block free file 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. H7r block free file * *Allocating the limited deduction. H7r block free file 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. H7r block free file Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. H7r block free file Prev  Up  Next   Home   More Online Publications
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IRS Non-Retaliation Policy

Section 1203 of the IRS Restructuring and Reform Act of 1998 (RRA ’98), created a statutory provision requiring termination of IRS employment for misconduct.  Section 1203(a) provides that the Commissioner of the Internal Revenue shall terminate the employment of any employee of the Internal Revenue Service if there is a final administrative or judicial determination that such employee committed any act or omission described under subsection (b) in the performance of the employee’s official duties. One of the acts described in subsection (b) is retaliation.

Section 1203 (b)(6) provides that:

Violations of the Internal Revenue Code of 1986, Department of Treasury regulations, or policies of the Internal Revenue Service (including the Internal Revenue Manual) for the purpose of retaliating against, or harassing, a taxpayer, taxpayer representative, or other employee of the Internal Revenue Service.

is an act or omission requiring termination.

IRM Section 6.751.1.1 addresses administrative disciplinary matters.  Exhibit 6.751.1-1 is the Internal Revenue Service Guide for Penalty Determinations. Violations of RRA ’98, Section 1203 (b)(6) is included  in the Guide for Penalty Determinations.  This Exhibit shows that the penalty for a First Offense for an RRA ‘98 1203 (b)(6) offense is removal.

Page Last Reviewed or Updated: 05-Nov-2013

The H7r Block Free File

H7r block free file Publication 587 - Additional Material Prev  Up  Next   Home   More Online Publications