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Tax Return Amendment

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Tax Return Amendment

Tax return amendment Index A Accounting methods Accrual method, Accrual Method Cash method, Cash Method Change in, Change in Accounting Method Methods you can use, Methods you can use. Tax return amendment Accounting periods 52-53 week tax year, 52-53-Week Tax Year Business purpose tax year, Business Purpose Tax Year Calendar year, Calendar Year Improper tax year, Improper Tax Year Partnerships, Partnership Accrual method Expenses, Expenses Income, Income Advance payments, Advance Payment for Services Sales, Advance Payment for Sales Services, Advance Payment for Services Assistance (see Tax help) B Business purpose tax year, Business Purpose Tax Year C Calendar year, Calendar Year Cash method, Income Expenses, Expenses Income, Income Change, accounting method, Change to accrual method. Tax return amendment , Change in Accounting Method Comments on publication, Comments and suggestions. Tax return amendment Constructive receipt of income, Constructive receipt. Tax return amendment Corporation tax periods, Corporations (Other Than S Corporations and PSCs) Cost identification, Identifying Cost D Death of individual, short period return, Death of individual. Tax return amendment E Economic performance, Economic Performance Excluded entities, cash method, Excluded Entities F Fiscal year, Fiscal Year Form 1128, Improper Tax Year, Change in Tax Year 8716, Making the election. Tax return amendment , Making back-up election. Tax return amendment 8752, Required payment for partnership or S corporation. Tax return amendment , Activating election. Tax return amendment 970, Adopting LIFO method. Tax return amendment Free tax services, How To Get Tax Help H Help (see Tax help) I Inventories Cost identification, Identifying Cost FIFO, FIFO Method LIFO, LIFO Method Lower of cost or market, Lower of Cost or Market Method Perpetual or book, Perpetual or Book Inventory Retail method, Retail Method Specific identification, Specific Identification Method Uniform capitalization rules, Inventories. Tax return amendment Valuing, Valuing Inventory M More information (see Tax help) P Partnerships, Partnership Personal service corporation, Partnerships, S Corporations, and Personal Service Corporations (PSCs) Limit, use of cash method, Qualified PSC. Tax return amendment Required tax year, Partnerships, S Corporations, and Personal Service Corporations (PSCs), Personal Service Corporation (PSC) Publications (see Tax help) R Related persons, Related Persons S S corporations, S Corporation Section 444 election, Section 444 Election Short period return, Short period return. Tax return amendment Short tax year, Short Tax Year Suggestions for publication, Comments and suggestions. Tax return amendment T Tax help, How To Get Tax Help Tax year Change in, Change in Tax Year Corporations, Corporations (Other Than S Corporations and PSCs) Fiscal year, Fiscal Year Personal service corporation, Personal Service Corporation (PSC) S corporations, S Corporation Section 444 election, Section 444 Election Short tax year, Short Tax Year Taxpayer Advocate, Taxpayer Advocate Service. Tax return amendment TTY/TDD information, How To Get Tax Help U Uniform capitalization rules Exceptions, Exceptions. Tax return amendment General rules, Uniform Capitalization Rules Prev  Up     Home   More Online Publications
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The Tax Return Amendment

Tax return amendment 4. Tax return amendment   Special Situations Table of Contents Condominiums CooperativesDepreciation Property Changed to Rental UseBasis of Property Changed to Rental Use Figuring the Depreciation Deduction Renting Part of Property Not Rented for ProfitPostponing decision. Tax return amendment Example—Property Changed to Rental Use This chapter discusses some rental real estate activities that are subject to additional rules. Tax return amendment Condominiums A condominium is most often a dwelling unit in a multi-unit building, but can also take other forms, such as a townhouse or garden apartment. Tax return amendment If you own a condominium, you also own a share of the common elements, such as land, lobbies, elevators, and service areas. Tax return amendment You and the other condominium owners may pay dues or assessments to a special corporation that is organized to take care of the common elements. Tax return amendment Special rules apply if you rent your condominium to others. Tax return amendment You can deduct as rental expenses all the expenses discussed in chapters 1 and 2. Tax return amendment In addition, you can deduct any dues or assessments paid for maintenance of the common elements. Tax return amendment You cannot deduct special assessments you pay to a condominium management corporation for improvements. Tax return amendment However, you may be able to recover your share of the cost of any improvement by taking depreciation. Tax return amendment Cooperatives If you live in a cooperative, you do not own your apartment. Tax return amendment Instead, a corporation owns the apartments and you are a tenant-stockholder in the cooperative housing corporation. Tax return amendment If you rent your apartment to others, you usually can deduct, as a rental expense, all the maintenance fees you pay to the cooperative housing corporation. Tax return amendment In addition to the maintenance fees paid to the cooperative housing corporation, you can deduct your direct payments for repairs, upkeep, and other rental expenses, including interest paid on a loan used to buy your stock in the corporation. Tax return amendment Depreciation You will be depreciating your stock in the corporation rather than the apartment itself. Tax return amendment Figure your depreciation deduction as follows. Tax return amendment Figure the depreciation for all the depreciable real property owned by the corporation. Tax return amendment (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. Tax return amendment ) If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. Tax return amendment Multiply your cost per share by the total number of outstanding shares. Tax return amendment Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. Tax return amendment Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. Tax return amendment Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. Tax return amendment Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Tax return amendment Multiply the result of (2) by the percentage you figured in (3). Tax return amendment This is your depreciation on the stock. Tax return amendment Your depreciation deduction for the year cannot be more than the part of your adjusted basis (defined in chapter 2) in the stock of the corporation that is allocable to your rental property. Tax return amendment Payments added to capital account. Tax return amendment   Payments earmarked for a capital asset or improvement, or otherwise charged to the corporation's capital account are added to the basis of your stock in the corporation. Tax return amendment For example, you cannot deduct a payment used to pave a community parking lot, install a new roof, or pay the principal of the corporation's mortgage. Tax return amendment   Treat as a capital cost the amount you were assessed for capital items. Tax return amendment This cannot be more than the amount by which your payments to the corporation exceeded your share of the corporation's mortgage interest and real estate taxes. Tax return amendment   Your share of interest and taxes is the amount the corporation elected to allocate to you, if it reasonably reflects those expenses for your apartment. Tax return amendment Otherwise, figure your share in the following manner. Tax return amendment Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Tax return amendment Multiply the corporation's deductible interest by the number you figured in (1). Tax return amendment This is your share of the interest. Tax return amendment Multiply the corporation's deductible taxes by the number you figured in (1). Tax return amendment This is your share of the taxes. Tax return amendment 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. Tax return amendment 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. Tax return amendment You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Tax return amendment 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). Tax return amendment Example. Tax return amendment Your tax year is the calendar year. Tax return amendment You moved from your home in May and started renting it out on June 1. Tax return amendment You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Tax return amendment Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Tax return amendment When figuring depreciation, treat the property as placed in service on June 1. Tax return amendment Basis of Property Changed to Rental Use When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion. Tax return amendment Fair market value. Tax return amendment   This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Tax return amendment Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property. Tax return amendment Figuring the basis. Tax return amendment   The basis for depreciation is the lesser of: The fair market value of the property on the date you changed it to rental use, or Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. Tax return amendment For other increases and decreases to basis, see Adjusted Basis in chapter 2. Tax return amendment Example. Tax return amendment Several years ago you built your home for $140,000 on a lot that cost you $14,000. Tax return amendment Before changing the property to rental use this year, you added $28,000 of permanent improvements to the house and claimed a $3,500 casualty loss deduction for damage to the house. Tax return amendment Part of the improvements qualified for a $500 residential energy credit, which you claimed on your 2010 tax return. Tax return amendment Because land is not depreciable, you can only include the cost of the house when figuring the basis for depreciation. Tax return amendment The adjusted basis of the house at the time of the change in its use was $164,000 ($140,000 + $28,000 − $3,500 − $500). Tax return amendment On the date of the change in use, your property had a fair market value of $168,000, of which $21,000 was for the land and $147,000 was for the house. Tax return amendment The basis for depreciation on the house is the fair market value on the date of the change ($147,000), because it is less than your adjusted basis ($164,000). Tax return amendment Cooperatives If you change your cooperative apartment to rental use, figure your allowable depreciation as explained earlier. Tax return amendment (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. Tax return amendment ) The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. Tax return amendment The fair market value of the property on the date you change your apartment to rental use. Tax return amendment This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. Tax return amendment The corporation's adjusted basis in the property on that date. Tax return amendment Do not subtract depreciation when figuring the corporation's adjusted basis. Tax return amendment If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1) under Depreciation (under Cooperatives, near the beginning of this chapter). Tax return amendment The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. Tax return amendment Figuring the Depreciation Deduction To figure the deduction, use the depreciation system in effect when you convert your residence to rental use. Tax return amendment Generally, that will be MACRS for any conversion after 1986. Tax return amendment Treat the property as placed in service on the conversion date. Tax return amendment Example. Tax return amendment Your converted residence (see previous example under Figuring the basis) was available for rent on August 1. Tax return amendment Using Table 2-2d (see chapter 2), the percentage for Year 1 beginning in August is 1. Tax return amendment 364% and the depreciation deduction for Year 1 is $2,005 ($147,000 × . Tax return amendment 01364). Tax return amendment 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. Tax return amendment 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). Tax return amendment 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 the house. Tax return amendment There is no change in the types of expenses deductible for the personal-use part of your property. Tax return amendment Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Tax return amendment You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Tax return amendment You do not have to divide the expenses that belong only to the rental part of your property. Tax return amendment 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. Tax return amendment If you install a second phone line strictly for your tenant's use, all of the cost of the second line is deductible as a rental expense. Tax return amendment You can deduct depreciation on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. Tax return amendment How to divide expenses. Tax return amendment   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 rental use and personal use. Tax return amendment You can use any reasonable method for dividing the expense. Tax return amendment It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Tax return amendment The two most common methods for dividing an expense are (1) the number of rooms in your home, and (2) the square footage of your home. Tax return amendment Example. Tax return amendment You rent a room in your house. Tax return amendment The room is 12 × 15 feet, or 180 square feet. Tax return amendment Your entire house has 1,800 square feet of floor space. Tax return amendment You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. Tax return amendment If your heating bill for the year for the entire house was $600, $60 ($600 × . Tax return amendment 10) is a rental expense. Tax return amendment The balance, $540, is a personal expense that you cannot deduct. Tax return amendment Duplex. Tax return amendment   A common situation is the duplex where you live in one unit and rent out the other. Tax return amendment Certain expenses apply to the entire property, such as mortgage interest and real estate taxes, and must be split to determine rental and personal expenses. Tax return amendment Example. Tax return amendment You own a duplex and live in one half, renting the other half. Tax return amendment Both units are approximately the same size. Tax return amendment Last year, you paid a total of $10,000 mortgage interest and $2,000 real estate taxes for the entire property. Tax return amendment You can deduct $5,000 mortgage interest and $1,000 real estate taxes on Schedule E (Form 1040), and if you itemize your deductions, you can deduct the other $5,000 mortgage interest and $1,000 real estate taxes on Schedule A (Form 1040). Tax return amendment 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. Tax return amendment 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. Tax return amendment Where to report. Tax return amendment   Report your not-for-profit rental income on Form 1040 or 1040NR, line 21. Tax return amendment For example, if you are filing Form 1040, 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. Tax return amendment   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 Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. Tax return amendment You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Tax return amendment Presumption of profit. Tax return amendment   If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. Tax return amendment Postponing decision. Tax return amendment   If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. Tax return amendment You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. Tax return amendment You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Tax return amendment More information. Tax return amendment   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. Tax return amendment Example—Property Changed to Rental Use In January, Eileen Johnson bought a condominium apartment to live in. Tax return amendment Instead of selling the house she had been living in, she decided to change it to rental property. Tax return amendment Eileen selected a tenant and started renting the house on February 1. Tax return amendment Eileen charges $750 a month for rent and collects it herself. Tax return amendment Eileen also received a $750 security deposit from her tenant. Tax return amendment Because she plans to return it to her tenant at the end of the lease, she does not include it in her income. Tax return amendment Her rental expenses for the year are as follows. Tax return amendment   Mortgage interest $1,800     Fire insurance (1-year policy) 100     Miscellaneous repairs (after renting) 297     Real estate taxes imposed and paid 1,200   Eileen must divide the real estate taxes, mortgage interest, and fire insurance between the personal use of the property and the rental use of the property. Tax return amendment She can deduct eleven-twelfths of these expenses as rental expenses. Tax return amendment She can include the balance of the allowable taxes and mortgage interest on Schedule A (Form 1040) if she itemizes. Tax return amendment She cannot deduct the balance of the fire insurance because it is a personal expense. Tax return amendment Eileen bought this house in 1984 for $35,000. Tax return amendment Her property tax was based on assessed values of $10,000 for the land and $25,000 for the house. Tax return amendment Before changing it to rental property, Eileen added several improvements to the house. Tax return amendment She figures her adjusted basis as follows:   Improvements Cost     House $25,000     Remodeled kitchen 4,200     Recreation room 5,800     New roof 1,600     Patio and deck 2,400     Adjusted basis $39,000   On February 1, when Eileen changed her house to rental property, the property had a fair market value of $152,000. Tax return amendment Of this amount, $35,000 was for the land and $117,000 was for the house. Tax return amendment Because Eileen's adjusted basis is less than the fair market value on the date of the change, Eileen uses $39,000 as her basis for depreciation. Tax return amendment As specified for residential rental property, Eileen must use the straight line method of depreciation over the GDS or ADS recovery period. Tax return amendment She chooses the GDS recovery period of 27. Tax return amendment 5 years. Tax return amendment She uses Table 2-2d to find her depreciation percentage. Tax return amendment Since she placed the property in service in February, the percentage is 3. Tax return amendment 182%. Tax return amendment On April 1, Eileen bought a new dishwasher for the rental property at a cost of $425. Tax return amendment The dishwasher is personal property used in a rental real estate activity, which has a 5-year recovery period. Tax return amendment She uses Table 2-2a to find the percentage for Year 1 under “Half-year convention” (20%) to figure her depreciation deduction. Tax return amendment On May 1, Eileen paid $4,000 to have a furnace installed in the house. Tax return amendment The furnace is residential rental property. Tax return amendment Because she placed the property in service in May, the percentage from Table 2-2d is 2. Tax return amendment 273%. Tax return amendment Eileen figures her net rental income or loss for the house as follows: Total rental income received  ($750 × 11) $8,250 Minus: Expenses     Mortgage interest ($1,800 × 11/12) $1,650   Fire insurance ($100 × 11/12) 92   Miscellaneous repairs 297   Real estate taxes ($1,200 × 11/12) 1,100   Total expenses 3,139 Balance $5,111 Minus: Depreciation     House ($39,000 × . Tax return amendment 03182) $1,241   Dishwasher ($425 × . Tax return amendment 20) 85   Furnace ($4,000 × . Tax return amendment 02273) 91   Total depreciation 1,417 Net rental income for house   $3,694       Eileen uses Schedule E, Part I, to report her rental income and expenses. Tax return amendment She enters her income, expenses, and depreciation for the house in the column for Property A. Tax return amendment Since all property was placed in service this year, Eileen must use Form 4562 to figure the depreciation. Tax return amendment See the Instructions for Form 4562 for more information on preparing the form. Tax return amendment Prev  Up  Next   Home   More Online Publications