Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

Tax Return Preparation State And Income Taxes

Pa Tax Forms 2011Income Tax Return FilingFree 1040 Ez FormHow To File An Amendment On TaxesFile State Taxes OnlyIrs Tax Forms For 20121040ez Tax ReturnCan I File State Taxes For FreeFiling An Amended ReturnHow To File Taxes Online For Free 2011Www Irs Gov Form1040ezIncome Tax Return 2013How To File Your Taxes Online For Free140 EzPrintable 1040ez Tax Form1040ez Free Online FilingFiling Amended Tax Return 2009What Is A 1040xFile 2007 Taxes For Free2013 1040xFree Tax ActAmended Tax ReturnEz Form 1040Tax Form 2010File 2011 State Taxes540ez Form1040 Ez 2011Online Tax PreparationFree Tax FilingH&r Block 20112012 Ez Tax FormFile TaxesFree Efile Tax Return 2013Income Tax Forms For 2012State Tax Forms 2012Tax 1040ezFree Tax ExtentionHow To Do Taxes1040a Income Tax FormPrintable 1040ez Form 2011

Tax Return Preparation State And Income Taxes

Tax return preparation state and income taxes Publication 530 - Main Content Table of Contents What You Can and Cannot DeductHardest Hit Fund and Emergency Homeowners' Loan Programs Real Estate Taxes Sales Taxes Home Mortgage Interest Mortgage Insurance Premiums Mortgage Interest CreditFiguring the Credit BasisFiguring Your Basis Adjusted Basis Keeping Records How To Get Tax HelpLow Income Taxpayer Clinics What You Can and Cannot Deduct To deduct expenses of owning a home, you must file Form 1040, U. Tax return preparation state and income taxes S. Tax return preparation state and income taxes Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). Tax return preparation state and income taxes If you itemize, you cannot take the standard deduction. Tax return preparation state and income taxes This section explains what expenses you can deduct as a homeowner. Tax return preparation state and income taxes It also points out expenses that you cannot deduct. Tax return preparation state and income taxes There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. Tax return preparation state and income taxes Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment. Tax return preparation state and income taxes Your house payment. Tax return preparation state and income taxes   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Tax return preparation state and income taxes Your house payment may include several costs of owning a home. Tax return preparation state and income taxes The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. Tax return preparation state and income taxes These are discussed in more detail later. Tax return preparation state and income taxes   Some nondeductible expenses that may be included in your house payment include: Fire or homeowner's insurance premiums, and The amount applied to reduce the principal of the mortgage. Tax return preparation state and income taxes Minister's or military housing allowance. Tax return preparation state and income taxes   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you still can deduct your real estate taxes and your home mortgage interest. Tax return preparation state and income taxes You do not have to reduce your deductions by your nontaxable allowance. Tax return preparation state and income taxes For more information see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and Publication 3, Armed Forces' Tax Guide. Tax return preparation state and income taxes Nondeductible payments. Tax return preparation state and income taxes   You cannot deduct any of the following items. Tax return preparation state and income taxes Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance. Tax return preparation state and income taxes Wages you pay for domestic help. Tax return preparation state and income taxes Depreciation. Tax return preparation state and income taxes The cost of utilities, such as gas, electricity, or water. Tax return preparation state and income taxes Most settlement costs. Tax return preparation state and income taxes See Settlement or closing costs under Cost as Basis, later, for more information. Tax return preparation state and income taxes Forfeited deposits, down payments, or earnest money. Tax return preparation state and income taxes Hardest Hit Fund and Emergency Homeowners' Loan Programs You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. Tax return preparation state and income taxes You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. Tax return preparation state and income taxes You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. Tax return preparation state and income taxes If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Tax return preparation state and income taxes However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. Tax return preparation state and income taxes Real Estate Taxes Most state and local governments charge an annual tax on the value of real property. Tax return preparation state and income taxes This is called a real estate tax. Tax return preparation state and income taxes You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. Tax return preparation state and income taxes The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you. Tax return preparation state and income taxes Deductible Real Estate Taxes You can deduct real estate taxes imposed on you. Tax return preparation state and income taxes You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. Tax return preparation state and income taxes If you own a cooperative apartment, see Special Rules for Cooperatives , later. Tax return preparation state and income taxes Where to deduct real estate taxes. Tax return preparation state and income taxes   Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6. Tax return preparation state and income taxes Real estate taxes paid at settlement or closing. Tax return preparation state and income taxes   Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Tax return preparation state and income taxes Your share of these taxes is fully deductible if you itemize your deductions. Tax return preparation state and income taxes Division of real estate taxes. Tax return preparation state and income taxes   For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. Tax return preparation state and income taxes You (the buyer) are treated as paying the taxes beginning with the date of sale. Tax return preparation state and income taxes This applies regardless of the lien dates under local law. Tax return preparation state and income taxes Generally, this information is included on the settlement statement you get at closing. Tax return preparation state and income taxes   You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. Tax return preparation state and income taxes You each can deduct your own share, if you itemize deductions, for the year the property is sold. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes You bought your home on September 1. Tax return preparation state and income taxes The property tax year (the period to which the tax relates) in your area is the calendar year. Tax return preparation state and income taxes The tax for the year was $730 and was due and paid by the seller on August 15. Tax return preparation state and income taxes You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). Tax return preparation state and income taxes You figure your deduction for real estate taxes on your home as follows. Tax return preparation state and income taxes 1. Tax return preparation state and income taxes Enter the total real estate taxes for the real property tax year $730 2. Tax return preparation state and income taxes Enter the number of days in the property tax year that you owned the property 122 3. Tax return preparation state and income taxes Divide line 2 by 365 . Tax return preparation state and income taxes 3342 4. Tax return preparation state and income taxes Multiply line 1 by line 3. Tax return preparation state and income taxes This is your deduction. Tax return preparation state and income taxes Enter it on Schedule A (Form 1040), line 6 $244   You can deduct $244 on your return for the year if you itemize your deductions. Tax return preparation state and income taxes You are considered to have paid this amount and can deduct it on your return even if, under the contract, you did not have to reimburse the seller. Tax return preparation state and income taxes Delinquent taxes. Tax return preparation state and income taxes   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. Tax return preparation state and income taxes If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. Tax return preparation state and income taxes You treat them as part of the cost of your home. Tax return preparation state and income taxes See Real estate taxes , later, under Basis. Tax return preparation state and income taxes Escrow accounts. Tax return preparation state and income taxes   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. Tax return preparation state and income taxes You may not be able to deduct the total you pay into the escrow account. Tax return preparation state and income taxes You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Tax return preparation state and income taxes Your real estate tax bill will show this amount. Tax return preparation state and income taxes Refund or rebate of real estate taxes. Tax return preparation state and income taxes   If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. Tax return preparation state and income taxes If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. Tax return preparation state and income taxes For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income. Tax return preparation state and income taxes Items You Cannot Deduct as Real Estate Taxes The following items are not deductible as real estate taxes. Tax return preparation state and income taxes Charges for services. Tax return preparation state and income taxes   An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. Tax return preparation state and income taxes You cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance). Tax return preparation state and income taxes    You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. Tax return preparation state and income taxes If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. Tax return preparation state and income taxes Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. Tax return preparation state and income taxes Assessments for local benefits. Tax return preparation state and income taxes   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Tax return preparation state and income taxes Local benefits include the construction of streets, sidewalks, or water and sewer systems. Tax return preparation state and income taxes You must add these amounts to the basis of your property. Tax return preparation state and income taxes   You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. Tax return preparation state and income taxes An example is a charge to repair an existing sidewalk and any interest included in that charge. Tax return preparation state and income taxes   If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. Tax return preparation state and income taxes If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it. Tax return preparation state and income taxes   An assessment for a local benefit may be listed as an item in your real estate tax bill. Tax return preparation state and income taxes If so, use the rules in this section to find how much of it, if any, you can deduct. Tax return preparation state and income taxes Transfer taxes (or stamp taxes). Tax return preparation state and income taxes   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. Tax return preparation state and income taxes If you are the buyer and you pay them, include them in the cost basis of the property. Tax return preparation state and income taxes If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale. Tax return preparation state and income taxes Homeowners association assessments. Tax return preparation state and income taxes   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them. Tax return preparation state and income taxes Special Rules for Cooperatives If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. Tax return preparation state and income taxes As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. Tax return preparation state and income taxes You can deduct your share of the corporation's deductible real estate taxes if the cooperative housing corporation meets the following conditions: The corporation has only one class of stock outstanding, Each stockholder, solely because of ownership of the stock, can live in a house, apartment, or house trailer owned or leased by the corporation, No stockholder can receive any distribution out of capital, except on a partial or complete liquidation of the corporation, and At least one of the following: At least 80% of the corporation's gross income for the tax year was paid by the tenant-stockholders. Tax return preparation state and income taxes For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership. Tax return preparation state and income taxes At least 80% of the total square footage of the corporation's property must be available for use by the tenant-stockholders during the entire tax year. Tax return preparation state and income taxes At least 90% of the expenditures paid or incurred by the corporation were used for the acquisition, construction, management, maintenance, or care of the property for the benefit of the tenant-shareholders during the entire tax year. Tax return preparation state and income taxes Tenant-stockholders. Tax return preparation state and income taxes   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. Tax return preparation state and income taxes The tenant-stockholder does not have to live in any of the cooperative's dwelling units. Tax return preparation state and income taxes The units that the tenant-stockholder has the right to occupy can be rented to others. Tax return preparation state and income taxes Deductible taxes. Tax return preparation state and income taxes   You figure your share of real estate taxes in the following way. Tax return preparation state and income taxes Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Tax return preparation state and income taxes Multiply the corporation's deductible real estate taxes by the number you figured in (1). Tax return preparation state and income taxes This is your share of the real estate taxes. Tax return preparation state and income taxes   Generally, the corporation will tell you your share of its real estate tax. Tax return preparation state and income taxes This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit. Tax return preparation state and income taxes Refund of real estate taxes. Tax return preparation state and income taxes   If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. Tax return preparation state and income taxes Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received. Tax return preparation state and income taxes Sales Taxes Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Tax return preparation state and income taxes Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. Tax return preparation state and income taxes For information on figuring your deduction, see the Instructions for Schedule A (Form 1040). Tax return preparation state and income taxes If you elect to deduct the sales taxes paid on your home, or home building materials, you cannot include them as part of your cost basis in the home. Tax return preparation state and income taxes Home Mortgage Interest This section of the publication gives you basic information about home mortgage interest, including information on interest paid at settlement, points, and Form 1098, Mortgage Interest Statement. Tax return preparation state and income taxes Most home buyers take out a mortgage (loan) to buy their home. Tax return preparation state and income taxes They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. Tax return preparation state and income taxes Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). Tax return preparation state and income taxes However, your deduction may be limited if: Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or You took out a mortgage for reasons other than to buy, build, or improve your home. Tax return preparation state and income taxes If either of these situations applies to you, see Publication 936 for more information. Tax return preparation state and income taxes Also see Publication 936 if you later refinance your mortgage or buy a second home. Tax return preparation state and income taxes Refund of home mortgage interest. Tax return preparation state and income taxes   If you receive a refund of home mortgage interest that you deducted in an earlier year and that reduced your tax, you generally must include the refund in income in the year you receive it. Tax return preparation state and income taxes For more information, see Recoveries in Publication 525. Tax return preparation state and income taxes The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. Tax return preparation state and income taxes See Mortgage Interest Statement , later. Tax return preparation state and income taxes Deductible Mortgage Interest To be deductible, the interest you pay must be on a loan secured by your main home or a second home. Tax return preparation state and income taxes The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. Tax return preparation state and income taxes Prepaid interest. Tax return preparation state and income taxes   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Tax return preparation state and income taxes Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. Tax return preparation state and income taxes An exception (discussed later) applies to points. Tax return preparation state and income taxes Late payment charge on mortgage payment. Tax return preparation state and income taxes   You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan. Tax return preparation state and income taxes Mortgage prepayment penalty. Tax return preparation state and income taxes   If you pay off your home mortgage early, you may have to pay a penalty. Tax return preparation state and income taxes You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. Tax return preparation state and income taxes Ground rent. Tax return preparation state and income taxes   In some states (such as Maryland), you may buy your home subject to a ground rent. Tax return preparation state and income taxes A ground rent is an obligation you assume to pay a fixed amount per year on the property. Tax return preparation state and income taxes Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Tax return preparation state and income taxes Redeemable ground rents. Tax return preparation state and income taxes   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. Tax return preparation state and income taxes The ground rent is a redeemable ground rent only if all of the following are true. Tax return preparation state and income taxes Your lease, including renewal periods, is for more than 15 years. Tax return preparation state and income taxes You can freely assign the lease. Tax return preparation state and income taxes You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specified amount. Tax return preparation state and income taxes The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Tax return preparation state and income taxes   Payments made to end the lease and buy the lessor's entire interest in the land are not redeemable ground rents. Tax return preparation state and income taxes You cannot deduct them. Tax return preparation state and income taxes Nonredeemable ground rents. Tax return preparation state and income taxes   Payments on a nonredeemable ground rent are not mortgage interest. Tax return preparation state and income taxes You can deduct them as rent only if they are a business expense or if they are for rental property. Tax return preparation state and income taxes Cooperative apartment. Tax return preparation state and income taxes   You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives . Tax return preparation state and income taxes In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. Tax return preparation state and income taxes Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. Tax return preparation state and income taxes For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936. Tax return preparation state and income taxes Refund of cooperative's mortgage interest. Tax return preparation state and income taxes   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Tax return preparation state and income taxes The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Tax return preparation state and income taxes   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Tax return preparation state and income taxes Mortgage Interest Paid at Settlement One item that normally appears on a settlement or closing statement is home mortgage interest. Tax return preparation state and income taxes You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). Tax return preparation state and income taxes This amount should be included in the mortgage interest statement provided by your lender. Tax return preparation state and income taxes See the discussion under Mortgage Interest Statement , later. Tax return preparation state and income taxes Also, if you pay interest in advance, see Prepaid interest , earlier, and Points , next. Tax return preparation state and income taxes Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Tax return preparation state and income taxes Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. Tax return preparation state and income taxes A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Tax return preparation state and income taxes See Points paid by the seller , later. Tax return preparation state and income taxes General rule. Tax return preparation state and income taxes   You cannot deduct the full amount of points in the year paid. Tax return preparation state and income taxes They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage. Tax return preparation state and income taxes Exception. Tax return preparation state and income taxes   You can deduct the full amount of points in the year paid if you meet all the following tests. Tax return preparation state and income taxes Your loan is secured by your main home. Tax return preparation state and income taxes (Generally, your main home is the one you live in most of the time. Tax return preparation state and income taxes ) Paying points is an established business practice in the area where the loan was made. Tax return preparation state and income taxes The points paid were not more than the points generally charged in that area. Tax return preparation state and income taxes You use the cash method of accounting. Tax return preparation state and income taxes This means you report income in the year you receive it and deduct expenses in the year you pay them. Tax return preparation state and income taxes Most individuals use this method. Tax return preparation state and income taxes The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. Tax return preparation state and income taxes The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Tax return preparation state and income taxes The funds you provided are not required to have been applied to the points. Tax return preparation state and income taxes They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Tax return preparation state and income taxes You cannot have borrowed these funds. Tax return preparation state and income taxes You use your loan to buy or build your main home. Tax return preparation state and income taxes The points were computed as a percentage of the principal amount of the mortgage. Tax return preparation state and income taxes The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. Tax return preparation state and income taxes The points may be shown as paid from either your funds or the seller's. Tax return preparation state and income taxes Note. Tax return preparation state and income taxes If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. Tax return preparation state and income taxes If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions. Tax return preparation state and income taxes Home improvement loan. Tax return preparation state and income taxes   You can also fully deduct in the year paid points paid on a loan to improve your main home, if you meet the first six tests listed earlier. Tax return preparation state and income taxes Refinanced loan. Tax return preparation state and income taxes   If you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Tax return preparation state and income taxes You can deduct the rest of the points over the life of the loan. Tax return preparation state and income taxes Points not fully deductible in year paid. Tax return preparation state and income taxes    If you do not qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Publication 936 for the rules on when and how much you can deduct. Tax return preparation state and income taxes Figure A. Tax return preparation state and income taxes   You can use Figure A, next, as a quick guide to see whether your points are fully deductible in the year paid. Tax return preparation state and income taxes    Please click here for the text description of the image. Tax return preparation state and income taxes Figure A. Tax return preparation state and income taxes Are my points fully deductible this year? Amounts charged for services. Tax return preparation state and income taxes   Amounts charged by the lender for specific services connected to the loan are not interest. Tax return preparation state and income taxes Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Tax return preparation state and income taxes You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Tax return preparation state and income taxes For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis , later. Tax return preparation state and income taxes Points paid by the seller. Tax return preparation state and income taxes   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Tax return preparation state and income taxes Treatment by seller. Tax return preparation state and income taxes   The seller cannot deduct these fees as interest. Tax return preparation state and income taxes However, they are a selling expense that reduces the seller's amount realized. Tax return preparation state and income taxes See Publication 523 for more information. Tax return preparation state and income taxes Treatment by buyer. Tax return preparation state and income taxes   The buyer treats seller-paid points as if he or she had paid them. Tax return preparation state and income taxes If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. Tax return preparation state and income taxes If any of those tests are not met, the buyer must deduct the points over the life of the loan. Tax return preparation state and income taxes   The buyer must also reduce the basis of the home by the amount of the seller-paid points. Tax return preparation state and income taxes For more information about the basis of your home, see Basis , later. Tax return preparation state and income taxes Funds provided are less than points. Tax return preparation state and income taxes   If you meet all the tests listed earlier under Exception except that the funds you provided were less than the points charged to you (test 6), you can deduct the points in the year paid up to the amount of funds you provided. Tax return preparation state and income taxes In addition, you can deduct any points paid by the seller. Tax return preparation state and income taxes Example 1. Tax return preparation state and income taxes When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Tax return preparation state and income taxes You meet all the tests for deducting points in the year paid (see Exception , earlier), except the only funds you provided were a $750 down payment. Tax return preparation state and income taxes Of the $1,000 you were charged for points, you can deduct $750 in the year paid. Tax return preparation state and income taxes You spread the remaining $250 over the life of the mortgage. Tax return preparation state and income taxes Example 2. Tax return preparation state and income taxes The facts are the same as in Example 1 , except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. Tax return preparation state and income taxes In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Tax return preparation state and income taxes You spread the remaining $250 over the life of the mortgage. Tax return preparation state and income taxes You must reduce the basis of your home by the $1,000 paid by the seller. Tax return preparation state and income taxes Excess points. Tax return preparation state and income taxes   If you meet all the tests under Exception , earlier, except that the points paid were more than are generally charged in your area (test 3), you can deduct in the year paid only the points that are generally charged. Tax return preparation state and income taxes You must spread any additional points over the life of the mortgage. Tax return preparation state and income taxes Mortgage ending early. Tax return preparation state and income taxes   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. Tax return preparation state and income taxes A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes Dan paid $3,000 in points in 2006 that he had to spread out over the 15-year life of the mortgage. Tax return preparation state and income taxes He had deducted $1,400 of these points through 2012. Tax return preparation state and income taxes Dan prepaid his mortgage in full in 2013. Tax return preparation state and income taxes He can deduct the remaining $1,600 of points in 2013. Tax return preparation state and income taxes Exception. Tax return preparation state and income taxes   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. Tax return preparation state and income taxes Instead, deduct them over the term of the new loan. Tax return preparation state and income taxes Form 1098. Tax return preparation state and income taxes   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. Tax return preparation state and income taxes See Mortgage Interest Statement , later. Tax return preparation state and income taxes Where To Deduct Home Mortgage Interest Enter on Schedule A (Form 1040), line 10, the home mortgage interest and points reported to you on Form 1098 (discussed next). Tax return preparation state and income taxes If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. Tax return preparation state and income taxes See Table 1 below for a summary of where to deduct home mortgage interest and real estate taxes. Tax return preparation state and income taxes If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and social security number (SSN) or employer identification number (EIN) on the dotted lines next to line 11. Tax return preparation state and income taxes The seller must give you this number and you must give the seller your SSN. Tax return preparation state and income taxes Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Tax return preparation state and income taxes Failure to meet either of these requirements may result in a $50 penalty for each failure. Tax return preparation state and income taxes Table 1. Tax return preparation state and income taxes Where To Deduct Interest and Taxes Paid on Your Home See the text for information on what expenses are eligible. Tax return preparation state and income taxes IF you are eligible to deduct . Tax return preparation state and income taxes . Tax return preparation state and income taxes . Tax return preparation state and income taxes THEN report the amount  on Schedule A (Form 1040) . Tax return preparation state and income taxes . Tax return preparation state and income taxes . Tax return preparation state and income taxes real estate taxes line 6. Tax return preparation state and income taxes home mortgage interest and points reported on Form 1098 line 10. Tax return preparation state and income taxes home mortgage interest not reported on  Form 1098 line 11. Tax return preparation state and income taxes points not reported on Form 1098 line 12. Tax return preparation state and income taxes qualified mortgage insurance premiums line 13. Tax return preparation state and income taxes Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage to a mortgage holder in the course of that holder's trade or business, you should receive a Form 1098 or similar statement from the mortgage holder. Tax return preparation state and income taxes The statement will show the total interest paid on your mortgage during the year. Tax return preparation state and income taxes If you bought a main home during the year, it also will show the deductible points you paid and any points you can deduct that were paid by the person who sold you your home. Tax return preparation state and income taxes See Points , earlier. Tax return preparation state and income taxes The interest you paid at settlement should be included on the statement. Tax return preparation state and income taxes If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. Tax return preparation state and income taxes Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. Tax return preparation state and income taxes Write “See attached” to the right of line 10. Tax return preparation state and income taxes A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. Tax return preparation state and income taxes If a statement comes from a cooperative housing corporation, it generally will show your share of interest. Tax return preparation state and income taxes Your mortgage interest statement for 2013 should be provided or sent to you by January 31, 2014. Tax return preparation state and income taxes If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. Tax return preparation state and income taxes A copy of this form will be sent to the IRS also. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes You bought a new home on May 3. Tax return preparation state and income taxes You paid no points on the purchase. Tax return preparation state and income taxes During the year, you made mortgage payments which included $4,480 deductible interest on your new home. Tax return preparation state and income taxes The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. Tax return preparation state and income taxes The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). Tax return preparation state and income taxes You can deduct the $5,100 if you itemize your deductions. Tax return preparation state and income taxes Refund of overpaid interest. Tax return preparation state and income taxes   If you receive a refund of mortgage interest you overpaid in a prior year, you generally will receive a Form 1098 showing the refund in box 3. Tax return preparation state and income taxes Generally, you must include the refund in income in the year you receive it. Tax return preparation state and income taxes See Refund of home mortgage interest , earlier, under Home Mortgage Interest. Tax return preparation state and income taxes More than one borrower. Tax return preparation state and income taxes   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 a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Tax return preparation state and income taxes Show how much of the interest each of you paid, and give the name and address of the person who received the form. Tax return preparation state and income taxes Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line. Tax return preparation state and income taxes Mortgage Insurance Premiums You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2013 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. Tax return preparation state and income taxes Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. Tax return preparation state and income taxes Qualified Mortgage Insurance Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Tax return preparation state and income taxes Prepaid mortgage insurance premiums. Tax return preparation state and income taxes   If you paid premiums that are allocable to periods after 2013, you must allocate them over the shorter of: The stated term of the mortgage, or 84 months, beginning with the month the insurance was obtained. Tax return preparation state and income taxes The premiums are treated as paid in the year to which they were allocated. Tax return preparation state and income taxes If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. Tax return preparation state and income taxes See Publication 936 for details. Tax return preparation state and income taxes Exception for certain mortgage insurance. Tax return preparation state and income taxes   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service. Tax return preparation state and income taxes Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home. Tax return preparation state and income taxes It also must be secured by that home. Tax return preparation state and income taxes If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. Tax return preparation state and income taxes Home acquisition debt limit. Tax return preparation state and income taxes   The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately). Tax return preparation state and income taxes Discharges of qualified principal residence indebtedness. Tax return preparation state and income taxes   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. Tax return preparation state and income taxes You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. Tax return preparation state and income taxes Principal residence. Tax return preparation state and income taxes   Your principal residence is the home where you ordinarily live most of the time. Tax return preparation state and income taxes You can have only one principal residence at any one time. Tax return preparation state and income taxes Qualified principal residence indebtedness. Tax return preparation state and income taxes   This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. Tax return preparation state and income taxes If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness cannot be more than the cost of your principal residence plus improvements. Tax return preparation state and income taxes   Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. Tax return preparation state and income taxes Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness. Tax return preparation state and income taxes Amount you can exclude. Tax return preparation state and income taxes   You can only exclude debt discharged after 2006 and before 2014. Tax return preparation state and income taxes The most you can exclude is $2 million ($1 million if married filing separately). Tax return preparation state and income taxes You cannot exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition. Tax return preparation state and income taxes Ordering rule. Tax return preparation state and income taxes   If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. Tax return preparation state and income taxes Qualified Home This means your main home or your second home. Tax return preparation state and income taxes A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Tax return preparation state and income taxes Main home. Tax return preparation state and income taxes   You can have only one main home at any one time. Tax return preparation state and income taxes This is the home where you ordinarily live most of the time. Tax return preparation state and income taxes Second home and other special situations. Tax return preparation state and income taxes   If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Home in Publication 936. Tax return preparation state and income taxes Limit on Deduction If your adjusted gross income (AGI) on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are deductible is reduced and may be eliminated. Tax return preparation state and income taxes See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. Tax return preparation state and income taxes If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Tax return preparation state and income taxes Form 1098. Tax return preparation state and income taxes   The amount of mortgage insurance premiums you paid during 2013 should be reported in box 4. Tax return preparation state and income taxes See Form 1098, Mortgage Interest Statement in Publication 936. Tax return preparation state and income taxes Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals afford home ownership. Tax return preparation state and income taxes If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay. Tax return preparation state and income taxes Who qualifies. Tax return preparation state and income taxes   You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. Tax return preparation state and income taxes Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. Tax return preparation state and income taxes The MCC will show the certificate credit rate you will use to figure your credit. Tax return preparation state and income taxes It also will show the certified indebtedness amount. Tax return preparation state and income taxes Only the interest on that amount qualifies for the credit. Tax return preparation state and income taxes See Figuring the Credit , later. Tax return preparation state and income taxes You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. Tax return preparation state and income taxes Contact your state or local housing finance agency for information about the availability of MCCs in your area. Tax return preparation state and income taxes How to claim the credit. Tax return preparation state and income taxes   To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U. Tax return preparation state and income taxes S. Tax return preparation state and income taxes Nonresident Alien Income Tax Return. Tax return preparation state and income taxes Include the credit in your total for Form 1040, line 53, or Form 1040NR, line 50; be sure to check box c and write “Form 8396” on that line. Tax return preparation state and income taxes Reducing your home mortgage interest deduction. Tax return preparation state and income taxes   If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. Tax return preparation state and income taxes You must do this even if part of that amount is to be carried forward to 2014. Tax return preparation state and income taxes Selling your home. Tax return preparation state and income taxes   If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program. Tax return preparation state and income taxes For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523. Tax return preparation state and income taxes Figuring the Credit Figure your credit on Form 8396. Tax return preparation state and income taxes Mortgage not more than certified indebtedness. Tax return preparation state and income taxes   If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year. Tax return preparation state and income taxes Mortgage more than certified indebtedness. Tax return preparation state and income taxes   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. Tax return preparation state and income taxes To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction. Tax return preparation state and income taxes Certified indebtedness amount on your MCC Original amount of your mortgage   The fraction will not change as long as you are entitled to take the mortgage interest credit. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes Emily bought a home this year. Tax return preparation state and income taxes Her mortgage loan is $125,000. Tax return preparation state and income taxes The certified indebtedness amount on her MCC is $100,000. Tax return preparation state and income taxes She paid $7,500 interest this year. Tax return preparation state and income taxes Emily figures the interest to enter on Form 8396, line 1, as follows:   $100,000 = 80% (. Tax return preparation state and income taxes 80)       $125,000       $7,500 x . Tax return preparation state and income taxes 80 = $6,000   Emily enters $6,000 on Form 8396, line 1. Tax return preparation state and income taxes In each later year, she will figure her credit using only 80% of the interest she pays for that year. Tax return preparation state and income taxes Limits Two limits may apply to your credit. Tax return preparation state and income taxes A limit based on the credit rate, and A limit based on your tax. Tax return preparation state and income taxes Limit based on credit rate. Tax return preparation state and income taxes   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000. Tax return preparation state and income taxes Limit based on tax. Tax return preparation state and income taxes   After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. Tax return preparation state and income taxes See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax. Tax return preparation state and income taxes Dividing the Credit If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes John and his brother, George, were issued an MCC. Tax return preparation state and income taxes They used it to get a mortgage on their main home. Tax return preparation state and income taxes John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. Tax return preparation state and income taxes John paid $5,400 mortgage interest this year and George paid $3,600. Tax return preparation state and income taxes The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. Tax return preparation state and income taxes The loan amount (mortgage) on their home is $120,000. Tax return preparation state and income taxes The credit is limited to $2,000 because the credit rate is more than 20%. Tax return preparation state and income taxes John figures the credit by multiplying the mortgage interest he paid this year ($5,400) by the certificate credit rate (25%) for a total of $1,350. Tax return preparation state and income taxes His credit is limited to $1,200 ($2,000 × 60%). Tax return preparation state and income taxes George figures the credit by multiplying the mortgage interest he paid this year ($3,600) by the certificate credit rate (25%) for a total of $900. Tax return preparation state and income taxes His credit is limited to $800 ($2,000 × 40%). Tax return preparation state and income taxes Carryforward If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes You receive a mortgage credit certificate from State X. Tax return preparation state and income taxes This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. Tax return preparation state and income taxes You claim no other credits. Tax return preparation state and income taxes Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). Tax return preparation state and income taxes You can carry forward this amount to the next 3 years or until used, whichever comes first. Tax return preparation state and income taxes Credit rate more than 20%. Tax return preparation state and income taxes   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit). Tax return preparation state and income taxes Example. Tax return preparation state and income taxes In the earlier example under Dividing the Credit , John and George used the entire $2,000 credit. Tax return preparation state and income taxes The excess   John $1,350 − $1,200 = $150     George $900 − $800 = $100   $150 for John ($1,350 − $1,200) and $100 for George ($900 − $800) cannot be carried forward to future years, despite the respective tax liabilities for John and George. Tax return preparation state and income taxes Refinancing If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. Tax return preparation state and income taxes The amount of credit you can claim on the new loan may change. Tax return preparation state and income taxes Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. Tax return preparation state and income taxes Table 2. Tax return preparation state and income taxes Effect of Refinancing on Your Credit IF you get a new (reissued) MCC and the amount of your new mortgage is . Tax return preparation state and income taxes . Tax return preparation state and income taxes . Tax return preparation state and income taxes THEN the interest you claim on Form 8396, line 1, is* . Tax return preparation state and income taxes . Tax return preparation state and income taxes . Tax return preparation state and income taxes smaller than or equal to the certified indebtedness amount on the new MCC all the interest paid during the year on your new mortgage. Tax return preparation state and income taxes larger than the certified indebtedness amount on the new MCC interest paid during the year on your new mortgage multiplied by the following fraction. Tax return preparation state and income taxes         certified indebtedness  amount on your new MCC       original amount of your  mortgage   *The credit using the new MCC cannot be more than the credit using the old MCC. Tax return preparation state and income taxes  See New MCC cannot increase your credit above. Tax return preparation state and income taxes An issuer may reissue an MCC after you refinance your mortgage. Tax return preparation state and income taxes If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC. Tax return preparation state and income taxes Year of refinancing. Tax return preparation state and income taxes   In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1. Tax return preparation state and income taxes   If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. Tax return preparation state and income taxes The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. Tax return preparation state and income taxes It must show a separate calculation for the part of the year when the new MCC was in effect. Tax return preparation state and income taxes Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and write “See attached” on the dotted line next to line 2. Tax return preparation state and income taxes New MCC cannot increase your credit. Tax return preparation state and income taxes   The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC. Tax return preparation state and income taxes   In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. Tax return preparation state and income taxes However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. Tax return preparation state and income taxes In that case, you will need to know the amount of the credit you could have claimed using the old MCC. Tax return preparation state and income taxes   There are two methods for figuring the credit you could have claimed. Tax return preparation state and income taxes Under one method, you figure the actual credit that would have been allowed. Tax return preparation state and income taxes This means you use the credit rate on the old MCC and the interest you would have paid on the old loan. Tax return preparation state and income taxes   If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. Tax return preparation state and income taxes Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. Tax return preparation state and income taxes The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. Tax return preparation state and income taxes The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC. Tax return preparation state and income taxes    You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC. Tax return preparation state and income taxes    As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage. Tax return preparation state and income taxes Basis Basis is your starting point for figuring a gain or loss if you later sell your home, or for figuring depreciation if you later use part of your home for business purposes or for rent. Tax return preparation state and income taxes While you own your home, you may add certain items to your basis. Tax return preparation state and income taxes You may subtract certain other items from your basis. Tax return preparation state and income taxes These items are called adjustments to basis and are explained later under Adjusted Basis . Tax return preparation state and income taxes It is important that you understand these terms when you first acquire your home because you must keep track of your basis and adjusted basis during the period you own your home. Tax return preparation state and income taxes You also must keep records of the events that affect basis or adjusted basis. Tax return preparation state and income taxes See Keeping Records , below. Tax return preparation state and income taxes Figuring Your Basis How you figure your basis depends on how you acquire your home. Tax return preparation state and income taxes If you buy or build your home, your cost is your basis. Tax return preparation state and income taxes If you receive your home as a gift, your basis is usually the same as the adjusted basis of the person who gave you the property. Tax return preparation state and income taxes If you inherit your home from a decedent, different rules apply depending on the date of the decedent's death. Tax return preparation state and income taxes Each of these topics is discussed later. Tax return preparation state and income taxes Property transferred from a spouse. Tax return preparation state and income taxes   If your home is transferred to you from your spouse, or from your former spouse as a result of a divorce, your basis is the same as your spouse's (or former spouse's) adjusted basis just before the transfer. Tax return preparation state and income taxes Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. Tax return preparation state and income taxes Cost as Basis The cost of your home, whether you purchased it or constructed it, is the amount you paid for it, including any debt you assumed. Tax return preparation state and income taxes The cost of your home includes most settlement or closing costs you paid when you bought the home. Tax return preparation state and income taxes If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. Tax return preparation state and income taxes See Settlement or closing costs , later. Tax return preparation state and income taxes If you elect to deduct the sales taxes on the purchase or construction of your home as an itemized deduction on Schedule A (Form 1040), you cannot include the sales taxes as part of your cost basis in the home. Tax return preparation state and income taxes Purchase. Tax return preparation state and income taxes   The basis of a home you bought is the amount you paid for it. Tax return preparation state and income taxes This usually includes your down payment and any debt you assumed. Tax return preparation state and income taxes The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. Tax return preparation state and income taxes This amount includes any purchase commissions or other costs of acquiring the shares. Tax return preparation state and income taxes Construction. Tax return preparation state and income taxes   If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. Tax return preparation state and income taxes This includes the cost of labor and materials, the amount you paid the contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. Tax return preparation state and income taxes If you built all or part of your home yourself, your basis is the total amount it cost you to build it. Tax return preparation state and income taxes You cannot include in basis the value of your own labor or any other labor for which you did not pay. Tax return preparation state and income taxes Real estate taxes. Tax return preparation state and income taxes   Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. Tax return preparation state and income taxes See the earlier discussion of Real estate taxes paid at settlement or closing , under Real Estate Taxes, earlier, to figure the real estate taxes you paid or are considered to have paid. Tax return preparation state and income taxes   If you pay any part of the seller's share of the real estate taxes (the taxes up to the date of sale), and the seller did not reimburse you, add those taxes to your basis in the home. Tax return preparation state and income taxes You cannot deduct them as taxes paid. Tax return preparation state and income taxes   If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. Tax return preparation state and income taxes Do not include those taxes in your basis. Tax return preparation state and income taxes If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Tax return preparation state and income taxes Example 1. Tax return preparation state and income taxes You bought your home on September 1. Tax return preparation state and income taxes The property tax year in your area is the calendar year, and the tax is due on August 15. Tax return preparation state and income taxes The real estate taxes on the home you bought were $1,275 for the year and had been paid by the seller on August 15. Tax return preparation state and income taxes You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. Tax return preparation state and income taxes You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. Tax return preparation state and income taxes You can deduct your $426 share of real estate taxes on your return for the year you purchased your home. Tax return preparation state and income taxes Example 2. Tax return preparation state and income taxes You bought your home on May 3, 2013. Tax return preparation state and income taxes The property tax year in your area is the calendar year. Tax return preparation state and income taxes The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. Tax return preparation state and income taxes Under state law, the taxes become a lien on May 31. Tax return preparation state and income taxes You agreed to pay all taxes due after the date of sale. Tax return preparation state and income taxes The taxes due in 2013 for 2012 were $1,375. Tax return preparation state and income taxes The taxes due in 2014 for 2013 will be $1,425. Tax return preparation state and income taxes You cannot deduct any of the taxes paid in 2013 because they relate to the 2012 property tax year and you did not own the home until 2013. Tax return preparation state and income taxes Instead, you add the $1,375 to the cost (basis) of your home. Tax return preparation state and income taxes You owned the home in 2013 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2014 return of $949 [(243 ÷ 365) × $1,425] paid in 2014 for 2013. Tax return preparation state and income taxes You add the remaining $476 ($1,425 − $949) of taxes paid in 2014 to the cost (basis) of your home. Tax return preparation state and income taxes Settlement or closing costs. Tax return preparation state and income taxes   If you bought your home, you probably paid settlement or closing costs in addition to the contract price. Tax return preparation state and income taxes These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. Tax return preparation state and income taxes If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. Tax return preparation state and income taxes   The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. Tax return preparation state and income taxes You deduct them in the year you buy your home if you itemize your deductions. Tax return preparation state and income taxes You can add certain other settlement or closing costs to the basis of your home. Tax return preparation state and income taxes Items added to basis. Tax return preparation state and income taxes   You can include in your basis the settlement fees and closing costs you paid for buying your home. Tax return preparation state and income taxes A fee is for buying the home if you would have had to pay it even if you paid cash for the home. Tax return preparation state and income taxes   The following are some of the settlement fees and closing costs that you can include in the original basis of your home. Tax return preparation state and income taxes Abstract fees (abstract of title fees). Tax return preparation state and income taxes Charges for installing utility services. Tax return preparation state and income taxes Legal fees (including fees for the title search and preparation of the sales contract and deed). Tax return preparation state and income taxes Recording fees. Tax return preparation state and income taxes Surveys. Tax return preparation state and income taxes Transfer or stamp taxes. Tax return preparation state and income taxes Owner's title insurance. Tax return preparation state and income taxes Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions. Tax return preparation state and income taxes   If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement. Tax return preparation state and income taxes Items not added to basis and not deductible. Tax return preparation state and income taxes   Here are some settlement and closing costs that you cannot deduct or add to your basis. Tax return preparation state and income taxes Fire insurance premiums. Tax return preparation state and income taxes Charges for using utilities or other services related to occupancy of the home before closing. Tax return preparation state and income taxes Rent for occupying the home before closing. Tax return preparation state and income taxes Charges connected with getting or refinancing a mortgage loan, such as: Loan assumption fees, Cost of a credit report, and Fee for an appraisal required by a lender. Tax return preparation state and income taxes Points paid by seller. Tax return preparation state and income taxes   If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home. Tax return preparation state and income taxes   If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by seller-paid points only if you deducted them. Tax return preparation state and income taxes See Points , earlier, for the rules on deducting points. Tax return preparation state and income taxes Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined later) to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and any gift tax paid on it. Tax return preparation state and income taxes Fair market value. Tax return preparation state and income taxes   Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and who both have a reasonable knowledge of all the necessary facts. Tax return preparation state and income taxes Donor's adjusted basis is more than FMV. Tax return preparation state and income taxes   If someone gave you your home and the donor's adjusted basis, when it was given to you, was more than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis. Tax return preparation state and income taxes Disposition basis. Tax return preparation state and income taxes   If the donor's adjusted basis at the time of the gift is more than the FMV, your basis (plus or minus any required adjustments, see Adjusted Basis , later) when you dispose of the property will depend on whether you have a gain or a loss. Tax return preparation state and income taxes Your basis for figuring a gain is the same as the donor's adjusted basis. Tax return preparation state and income taxes Your basis for figuring a loss is the FMV when you received the gift. Tax return preparation state and income taxes If you use the donor's adjusted basis to figure a gain and it results in a loss, then you must use the FMV (at the time of the gift) to refigure the loss. Tax return preparation state and income taxes However, if using the FMV results in a gain, then you neither have a gain nor a loss. Tax return preparation state and income taxes Example 1. Tax return preparation state and income taxes Andrew received a house as a gift from Ishmael (the donor). Tax return preparation state and income taxes At the time of the gift, the home had an FMV of $80,000. Tax return preparation state and income taxes Ishmael's adjusted basis was $100,000. Tax return preparation state and income taxes After he received the house, no events occurred to increase or decrease the basis. Tax return preparation state and income taxes If Andrew sells the house for $120,000, he will have a $20,000 gain because he must use the donor's adjusted basis ($100,000) at the time of the gift as his basis to figure the gain. Tax return preparation state and income taxes Example 2. Tax return preparation state and income taxes Same facts as Example 1 , except this time Andrew sells the house for $70,000. Tax return preparation state and income taxes He will have a loss of $10,000 because he must use the FMV ($80,000) at the time of the gift as his basis to figure the loss. Tax return preparation state and income taxes Example 3. Tax return preparation state and income taxes Same facts as Example 1 , except this time Andrew sells the house for $90,000. Tax return preparation state and income taxes Initially, he figures the gain using Ishmael's adjusted basis ($100,000), which results in a loss of $10,000. Tax return preparation state and income taxes Since it is a loss, Andrew must now recalculate the loss using the FMV ($80,000), which results in a gain of $10,000. Tax return preparation state and income taxes So in this situation, Andrew will neither have a gain nor a loss. Tax return preparation state and income taxes Donor's adjusted basis equal to or less than the FMV. Tax return preparation state and income taxes   If someone gave you your home after 1976 and the donor's adjusted basis, when it was given to you, was equal to or less than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home. Tax return preparation state and income taxes Part of federal gift tax due to net increase in value. Tax return preparation state and income taxes   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Tax return preparation state and income taxes The numerator (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom part) is the value of the home for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies to the gift. Tax return preparation state and income taxes The net increase in the value of the home is its FMV minus the adjusted basis of the donor. Tax return preparation state and income taxes Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift. Tax return preparation state and income taxes Inheritance Your basis in a home you inherited is generally the fair market value of the home on the date of the decedent's death or on the alternative valuation date if the personal representative for the estate chooses to use alternative valuation. Tax return preparation state and income taxes If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return. Tax return preparation state and income taxes If an estate tax return was not filed, your basis is the appraised value of the home at the decedent's date of death for state inheritance or transmission taxes. Tax return preparation state and income taxes Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. Tax return preparation state and income taxes If you inherited your home from someone who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Tax return preparation state and income taxes Adjusted Basis While you own your home, various events may take place that can change the original basis of your home. Tax return preparation state and income taxes These events can increase or decrease your original basis. Tax return preparation state and income taxes The result is called adjusted basis. Tax return preparation state and income taxes See Table 3, on this page, for a list of some of the items that can adjust your basis. Tax return preparation state and income taxes Table 3. Tax return preparation state and income taxes Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. Tax return preparation state and income taxes It is not intended to be all-inclusive. Tax return preparation state and income taxes Increases to Basis Decreases to Basis Improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Assessments for local improvements (see Assessments for local benefits , under What You Can and Cannot Deduct, earlier) Amounts spent to restore damaged property Insurance or other reimbursement for casualty losses Deductible casualty loss not covered by insurance Payments received for easement or right-of-way granted Depreciation allowed or allowable if home is used for business or rental purposes Value of subsidy for energy conservation measure excluded from income Improvements. Tax return preparation state and income taxes   An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. Tax return preparation state and income taxes You must add the cost of any improvements to the basis of your home. Tax return preparation state and income taxes You cannot deduct these costs. Tax return preparation state and income taxes   Improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, and paving your driveway. Tax return preparation state and income taxes Amount added to basis. Tax return preparation state and income taxes   The amount you add to your basis for improvements is your actual cost. Tax return preparation state and income taxes This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. Tax return preparation state and income taxes For example, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Tax return preparation state and income taxes   You also must add to your basis state and local assessments for improvements such as streets and sidewalks if they increase the value of the property. Tax return preparation state and income taxes These assessments are discussed earlier under Real Estate Taxes . Tax return preparation state and income taxes Improvements no longer part of home. Tax return preparation state and income taxes    Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes You put wall-to-wall carpeting in your home 15 years ago. Tax return preparation state and income taxes Later, you replaced that carpeting with new wall-to-wall carpeting. Tax return preparation state and income taxes The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Tax return preparation state and income taxes Repairs versus improvements. Tax return preparation state and income taxes   A repair keeps your home in an ordinary, efficient operating condition. Tax return preparation state and income taxes It does not add to the value of your home or prolong its life. Tax return preparation state and income taxes Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. Tax return preparation state and income taxes You cannot deduct repair costs and generally cannot add them to the basis of your home. Tax return preparation state and income taxes   However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. Tax return preparation state and income taxes You add them to the basis of your home. Tax return preparation state and income taxes Records to keep. Tax return preparation state and income taxes   You can use Table 4 (at the end of the publication) as a guide to help you keep track of improvements to your home. Tax return preparation state and income taxes Also see Keeping Records , below. Tax return preparation state and income taxes Energy conservation subsidy. Tax return preparation state and income taxes   If a public utility gives you (directly or indirectly) a subsidy for the purchase or installation of an energy conservation measure for your home, do not include the value of that subsidy in your income. Tax return preparation state and income taxes You must reduce the basis of your home by that value. Tax return preparation state and income taxes   An energy conservation measure is an installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand. Tax return preparation state and income taxes Keeping Records Keeping full and accurate records is vital to properly report your income and expenses, to support your deductions and credits, and to know the basis or adjusted basis of your home. Tax return preparation state and income taxes These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means. Tax return preparation state and income taxes You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Tax return preparation state and income taxes In addition, you should keep track of any decreases to the basis such as those listed in Table 3, earlier. Tax return preparation state and income taxes How to keep records. Tax return preparation state and income taxes   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. Tax return preparation state and income taxes How long to keep records. Tax return preparation state and income taxes   You must keep your records for as long as they are important for meeting any provision of the federal tax law. Tax return preparation state and income taxes   Keep records that support an item of income, a deduction, or a credit appearing on a return until the period of limitations for the return runs out. Tax return preparation state and income taxes (A period of limitations is the period of time after which no legal action can be brought. Tax return preparation state and income taxes ) For assessment of tax you owe, this is generally 3 years from the date you filed the return. Tax return preparation state and income taxes For filing a claim for credit or refund, this is generally 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. Tax return preparation state and income taxes Returns filed before the due date are treated as filed on the due date. Tax return preparation state and income taxes   You may need to keep records relating to the basis of property (discussed earlier) for longer than the period of limitations. Tax return preparation state and income taxes Keep those records as long as they are important in figuring the basis of the original or replacement property. Tax return preparation state and income taxes Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. Tax return preparation state and income taxes Table 4. Tax return preparation state and income taxes Record of Home Improvements Keep this for your records. Tax return preparation state and income taxes Also, keep receipts or other proof of improvements. Tax return preparation state and income taxes Remove from this record any improvements that are no longer part of your main home. Tax return preparation state and income taxes For example, if you put wall-to-wall carpeting in your home and later replace it with new wall-to-wall carpeting, remove the cost of the first carpeting. Tax return preparation state and income taxes (a) Type of Improvement (b) Date (c) Amount   (a) Type of Improvement (b) Date (c) Amount Additions:       Heating & Air  Conditioning:     Bedroom       Heating system     Bathroom       Central air conditioning     Deck       Furnace     Garage       Duct work     Porch       Central humidifier     Patio       Filtration system     Storage shed       Other     Fireplace       Electrical:     Other           Lawn & Grounds:       Lighting fixtures           Wiring upgrades     Landscaping       Other     Driveway       Plumbing:     Walkway           Fences       Water heater     Retaining wall       Soft water system     Sprinkler system       Filtration system     Swimming pool       Other     Exterior lighting       Insulation:     Other           Communications:       Attic           Walls     Satellite dish       Floors     Intercom       Pipes and duct work     Security system       Other     Other             Miscellaneous:       Interior  Improvements:     Storm windows and doors       Built-in appliances     Roof       Kitchen modernization     Central vacuum       Bathroom modernization     Other       Flooring             Wall-to-wall carpeting             Other     How To
Español

Index of Better Business Bureaus

The Tax Return Preparation State And Income Taxes

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