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Credits & Deductions For Businesses

Alternative Motor Vehicle Credit
The Alternative Fuel Motor Vehicle Credit was enacted by the Energy Policy Act of 2005 and includes separate credits for four distinct categories of vehicles: Hybrid vehicles, Fuel Cell vehicles, Qualified Alternative Fuel Motor vehicles (QAFMV) and Advanced Lean Burn Technology vehicles. The amount of the potential credit varies by type of vehicle and which of the four credits applies.

Manufacturers' Energy Efficient Appliance Credit
Act Section 305 - Modifications of Energy Efficient Appliance Credit for Appliances Produced After 2007

Plug-In Electric Drive Vehicle Credit (IRC 30D)
Plug-In Electric Drive Vehicle Credit (IRC 30D) - Internal Revenue Code Section 30D provides a credit for Qualified Plug-in Electric Drive Motor Vehicles including passenger vehicles and light trucks.

Research Credit
Guidelines and audit technique guide are provided for field examiners on the examination of Research Credit cases.

Deducting Business Expenses
Find out what qualifies as a deductible business expense, including depreciation.

Abusive Tax Shelters and Transactions
The Internal Revenue Service has a comprehensive strategy in place to combat abusive tax shelters and transactions. This strategy includes guidance on abusive transactions, regulations governing tax shelters, a hotline for taxpayers to use to report abusive technical transactions, and enforcement activity against abusive tax shelter promoters and investors.

Page Last Reviewed or Updated: 18-Feb-2014

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Www irs gov com 4. Www irs gov com   Special Situations Table of Contents Condominiums CooperativesDepreciation Property Changed to Rental UseBasis of Property Changed to Rental Use Figuring the Depreciation Deduction Renting Part of Property Not Rented for ProfitPostponing decision. Www irs gov com Example—Property Changed to Rental Use This chapter discusses some rental real estate activities that are subject to additional rules. Www irs gov com Condominiums A condominium is most often a dwelling unit in a multi-unit building, but can also take other forms, such as a townhouse or garden apartment. Www irs gov com If you own a condominium, you also own a share of the common elements, such as land, lobbies, elevators, and service areas. Www irs gov com You and the other condominium owners may pay dues or assessments to a special corporation that is organized to take care of the common elements. Www irs gov com Special rules apply if you rent your condominium to others. Www irs gov com You can deduct as rental expenses all the expenses discussed in chapters 1 and 2. Www irs gov com In addition, you can deduct any dues or assessments paid for maintenance of the common elements. Www irs gov com You cannot deduct special assessments you pay to a condominium management corporation for improvements. Www irs gov com However, you may be able to recover your share of the cost of any improvement by taking depreciation. Www irs gov com Cooperatives If you live in a cooperative, you do not own your apartment. Www irs gov com Instead, a corporation owns the apartments and you are a tenant-stockholder in the cooperative housing corporation. Www irs gov com If you rent your apartment to others, you usually can deduct, as a rental expense, all the maintenance fees you pay to the cooperative housing corporation. Www irs gov com In addition to the maintenance fees paid to the cooperative housing corporation, you can deduct your direct payments for repairs, upkeep, and other rental expenses, including interest paid on a loan used to buy your stock in the corporation. Www irs gov com Depreciation You will be depreciating your stock in the corporation rather than the apartment itself. Www irs gov com Figure your depreciation deduction as follows. Www irs gov com Figure the depreciation for all the depreciable real property owned by the corporation. Www irs gov com (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. Www irs gov com ) If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. Www irs gov com Multiply your cost per share by the total number of outstanding shares. Www irs gov com Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. Www irs gov com Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. Www irs gov com Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. Www irs gov com Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Www irs gov com Multiply the result of (2) by the percentage you figured in (3). Www irs gov com This is your depreciation on the stock. Www irs gov com Your depreciation deduction for the year cannot be more than the part of your adjusted basis (defined in chapter 2) in the stock of the corporation that is allocable to your rental property. Www irs gov com Payments added to capital account. Www irs gov com   Payments earmarked for a capital asset or improvement, or otherwise charged to the corporation's capital account are added to the basis of your stock in the corporation. Www irs gov com For example, you cannot deduct a payment used to pave a community parking lot, install a new roof, or pay the principal of the corporation's mortgage. Www irs gov com   Treat as a capital cost the amount you were assessed for capital items. Www irs gov com This cannot be more than the amount by which your payments to the corporation exceeded your share of the corporation's mortgage interest and real estate taxes. Www irs gov com   Your share of interest and taxes is the amount the corporation elected to allocate to you, if it reasonably reflects those expenses for your apartment. Www irs gov com Otherwise, figure your share in the following manner. Www irs gov com Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Www irs gov com Multiply the corporation's deductible interest by the number you figured in (1). Www irs gov com This is your share of the interest. Www irs gov com Multiply the corporation's deductible taxes by the number you figured in (1). Www irs gov com This is your share of the taxes. Www irs gov com 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. Www irs gov com 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. Www irs gov com You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Www irs gov com 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). Www irs gov com Example. Www irs gov com Your tax year is the calendar year. Www irs gov com You moved from your home in May and started renting it out on June 1. Www irs gov com You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Www irs gov com Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Www irs gov com When figuring depreciation, treat the property as placed in service on June 1. Www irs gov com Basis of Property Changed to Rental Use When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion. Www irs gov com Fair market value. Www irs gov com   This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Www irs gov com Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property. Www irs gov com Figuring the basis. Www irs gov com   The basis for depreciation is the lesser of: The fair market value of the property on the date you changed it to rental use, or Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. Www irs gov com For other increases and decreases to basis, see Adjusted Basis in chapter 2. Www irs gov com Example. Www irs gov com Several years ago you built your home for $140,000 on a lot that cost you $14,000. Www irs gov com Before changing the property to rental use this year, you added $28,000 of permanent improvements to the house and claimed a $3,500 casualty loss deduction for damage to the house. Www irs gov com Part of the improvements qualified for a $500 residential energy credit, which you claimed on your 2010 tax return. Www irs gov com Because land is not depreciable, you can only include the cost of the house when figuring the basis for depreciation. Www irs gov com The adjusted basis of the house at the time of the change in its use was $164,000 ($140,000 + $28,000 − $3,500 − $500). Www irs gov com On the date of the change in use, your property had a fair market value of $168,000, of which $21,000 was for the land and $147,000 was for the house. Www irs gov com The basis for depreciation on the house is the fair market value on the date of the change ($147,000), because it is less than your adjusted basis ($164,000). Www irs gov com Cooperatives If you change your cooperative apartment to rental use, figure your allowable depreciation as explained earlier. Www irs gov com (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. Www irs gov com ) The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. Www irs gov com The fair market value of the property on the date you change your apartment to rental use. Www irs gov com This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. Www irs gov com The corporation's adjusted basis in the property on that date. Www irs gov com Do not subtract depreciation when figuring the corporation's adjusted basis. Www irs gov com If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1) under Depreciation (under Cooperatives, near the beginning of this chapter). Www irs gov com The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. Www irs gov com Figuring the Depreciation Deduction To figure the deduction, use the depreciation system in effect when you convert your residence to rental use. Www irs gov com Generally, that will be MACRS for any conversion after 1986. Www irs gov com Treat the property as placed in service on the conversion date. Www irs gov com Example. Www irs gov com Your converted residence (see previous example under Figuring the basis) was available for rent on August 1. Www irs gov com Using Table 2-2d (see chapter 2), the percentage for Year 1 beginning in August is 1. Www irs gov com 364% and the depreciation deduction for Year 1 is $2,005 ($147,000 × . Www irs gov com 01364). Www irs gov com 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. Www irs gov com 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). Www irs gov com You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity, or painting the outside of the house. Www irs gov com There is no change in the types of expenses deductible for the personal-use part of your property. Www irs gov com Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Www irs gov com You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Www irs gov com You do not have to divide the expenses that belong only to the rental part of your property. Www irs gov com 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. Www irs gov com If you install a second phone line strictly for your tenant's use, all of the cost of the second line is deductible as a rental expense. Www irs gov com You can deduct depreciation on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. Www irs gov com How to divide expenses. Www irs gov com   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. Www irs gov com You can use any reasonable method for dividing the expense. Www irs gov com It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Www irs gov com The two most common methods for dividing an expense are (1) the number of rooms in your home, and (2) the square footage of your home. Www irs gov com Example. Www irs gov com You rent a room in your house. Www irs gov com The room is 12 × 15 feet, or 180 square feet. Www irs gov com Your entire house has 1,800 square feet of floor space. Www irs gov com You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. Www irs gov com If your heating bill for the year for the entire house was $600, $60 ($600 × . Www irs gov com 10) is a rental expense. Www irs gov com The balance, $540, is a personal expense that you cannot deduct. Www irs gov com Duplex. Www irs gov com   A common situation is the duplex where you live in one unit and rent out the other. Www irs gov com Certain expenses apply to the entire property, such as mortgage interest and real estate taxes, and must be split to determine rental and personal expenses. Www irs gov com Example. Www irs gov com You own a duplex and live in one half, renting the other half. Www irs gov com Both units are approximately the same size. Www irs gov com Last year, you paid a total of $10,000 mortgage interest and $2,000 real estate taxes for the entire property. Www irs gov com You can deduct $5,000 mortgage interest and $1,000 real estate taxes on Schedule E (Form 1040), and if you itemize your deductions, you can deduct the other $5,000 mortgage interest and $1,000 real estate taxes on Schedule A (Form 1040). Www irs gov com 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. Www irs gov com 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. Www irs gov com Where to report. Www irs gov com   Report your not-for-profit rental income on Form 1040 or 1040NR, line 21. Www irs gov com For example, if you are filing Form 1040, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. Www irs gov com   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. Www irs gov com You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Www irs gov com Presumption of profit. Www irs gov com   If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. Www irs gov com Postponing decision. Www irs gov com   If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. Www irs gov com You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. Www irs gov com You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Www irs gov com More information. Www irs gov com   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. Www irs gov com Example—Property Changed to Rental Use In January, Eileen Johnson bought a condominium apartment to live in. Www irs gov com Instead of selling the house she had been living in, she decided to change it to rental property. Www irs gov com Eileen selected a tenant and started renting the house on February 1. Www irs gov com Eileen charges $750 a month for rent and collects it herself. Www irs gov com Eileen also received a $750 security deposit from her tenant. Www irs gov com Because she plans to return it to her tenant at the end of the lease, she does not include it in her income. Www irs gov com Her rental expenses for the year are as follows. Www irs gov com   Mortgage interest $1,800     Fire insurance (1-year policy) 100     Miscellaneous repairs (after renting) 297     Real estate taxes imposed and paid 1,200   Eileen must divide the real estate taxes, mortgage interest, and fire insurance between the personal use of the property and the rental use of the property. Www irs gov com She can deduct eleven-twelfths of these expenses as rental expenses. Www irs gov com She can include the balance of the allowable taxes and mortgage interest on Schedule A (Form 1040) if she itemizes. Www irs gov com She cannot deduct the balance of the fire insurance because it is a personal expense. Www irs gov com Eileen bought this house in 1984 for $35,000. Www irs gov com Her property tax was based on assessed values of $10,000 for the land and $25,000 for the house. Www irs gov com Before changing it to rental property, Eileen added several improvements to the house. Www irs gov com She figures her adjusted basis as follows:   Improvements Cost     House $25,000     Remodeled kitchen 4,200     Recreation room 5,800     New roof 1,600     Patio and deck 2,400     Adjusted basis $39,000   On February 1, when Eileen changed her house to rental property, the property had a fair market value of $152,000. Www irs gov com Of this amount, $35,000 was for the land and $117,000 was for the house. Www irs gov com Because Eileen's adjusted basis is less than the fair market value on the date of the change, Eileen uses $39,000 as her basis for depreciation. Www irs gov com As specified for residential rental property, Eileen must use the straight line method of depreciation over the GDS or ADS recovery period. Www irs gov com She chooses the GDS recovery period of 27. Www irs gov com 5 years. Www irs gov com She uses Table 2-2d to find her depreciation percentage. Www irs gov com Since she placed the property in service in February, the percentage is 3. Www irs gov com 182%. Www irs gov com On April 1, Eileen bought a new dishwasher for the rental property at a cost of $425. Www irs gov com The dishwasher is personal property used in a rental real estate activity, which has a 5-year recovery period. Www irs gov com She uses Table 2-2a to find the percentage for Year 1 under “Half-year convention” (20%) to figure her depreciation deduction. Www irs gov com On May 1, Eileen paid $4,000 to have a furnace installed in the house. Www irs gov com The furnace is residential rental property. Www irs gov com Because she placed the property in service in May, the percentage from Table 2-2d is 2. Www irs gov com 273%. Www irs gov com Eileen figures her net rental income or loss for the house as follows: Total rental income received  ($750 × 11) $8,250 Minus: Expenses     Mortgage interest ($1,800 × 11/12) $1,650   Fire insurance ($100 × 11/12) 92   Miscellaneous repairs 297   Real estate taxes ($1,200 × 11/12) 1,100   Total expenses 3,139 Balance $5,111 Minus: Depreciation     House ($39,000 × . Www irs gov com 03182) $1,241   Dishwasher ($425 × . Www irs gov com 20) 85   Furnace ($4,000 × . Www irs gov com 02273) 91   Total depreciation 1,417 Net rental income for house   $3,694       Eileen uses Schedule E, Part I, to report her rental income and expenses. Www irs gov com She enters her income, expenses, and depreciation for the house in the column for Property A. Www irs gov com Since all property was placed in service this year, Eileen must use Form 4562 to figure the depreciation. Www irs gov com See the Instructions for Form 4562 for more information on preparing the form. 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