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Www irs gov efile 16. Www irs gov efile   Rulings Program The IRS has a program for assisting taxpayers who have technical problems with tax laws and regulations. Www irs gov efile The IRS will answer inquiries from individuals and organizations about the tax effect of their acts or transactions. Www irs gov efile The National Office of the IRS issues rulings on those matters. Www irs gov efile A ruling is a written statement to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. Www irs gov efile There are also determination letters issued by IRS directors and information letters issued by IRS directors or the National Office. Www irs gov efile There is a fee for most types of determination letters and rulings. Www irs gov efile For complete information on the rulings program, see the first Internal Revenue Bulletin published each year. Www irs gov efile Prev  Up  Next   Home   More Online Publications
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Www irs gov efile 1. Www irs gov efile   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Www irs gov efile Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Www irs gov efile The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. Www irs gov efile If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Www irs gov efile Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Www irs gov efile Rental income is any payment you receive for the use or occupation of property. Www irs gov efile In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Www irs gov efile When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Www irs gov efile Most individual taxpayers use the cash method. Www irs gov efile Cash method. Www irs gov efile   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. Www irs gov efile You constructively receive income when it is made available to you, for example, by being credited to your bank account. Www irs gov efile Accrual method. Www irs gov efile    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Www irs gov efile You generally deduct your expenses when you incur them, rather than when you pay them. Www irs gov efile More information. Www irs gov efile   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Www irs gov efile Types of Income The following are common types of rental income. Www irs gov efile Advance rent. Www irs gov efile   Advance rent is any amount you receive before the period that it covers. Www irs gov efile 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. Www irs gov efile Example. Www irs gov efile On March 18, 2013, you signed a 10-year lease to rent your property. Www irs gov efile During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Www irs gov efile You must include $19,200 in your rental income in the first year. Www irs gov efile Canceling a lease. Www irs gov efile   If your tenant pays you to cancel a lease, the amount you receive is rent. Www irs gov efile Include the payment in your income in the year you receive it regardless of your method of accounting. Www irs gov efile Expenses paid by tenant. Www irs gov efile   If your tenant pays any of your expenses, those payments are rental income. Www irs gov efile Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Www irs gov efile For more information, see Rental Expenses , later. Www irs gov efile Example 1. Www irs gov efile Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Www irs gov efile Under the terms of the lease, your tenant does not have to pay this bill. Www irs gov efile Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Www irs gov efile You can deduct the utility payment made by your tenant as a rental expense. Www irs gov efile Example 2. Www irs gov efile While you are out of town, the furnace in your rental property stops working. Www irs gov efile Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Www irs gov efile Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Www irs gov efile You can deduct the repair payment made by your tenant as a rental expense. Www irs gov efile Property or services. Www irs gov efile   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. Www irs gov efile   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. Www irs gov efile Example. Www irs gov efile Your tenant is a house painter. Www irs gov efile He offers to paint your rental property instead of paying 2 months rent. Www irs gov efile You accept his offer. Www irs gov efile Include in your rental income the amount the tenant would have paid for 2 months rent. Www irs gov efile You can deduct that same amount as a rental expense for painting your property. Www irs gov efile Security deposits. Www irs gov efile   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. Www irs gov efile 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. Www irs gov efile    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Www irs gov efile Include it in your income when you receive it. Www irs gov efile Other Sources of Rental Income Lease with option to buy. Www irs gov efile   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. Www irs gov efile If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Www irs gov efile Part interest. Www irs gov efile   If you own a part interest in rental property, you must report your part of the rental income from the property. Www irs gov efile Rental of property also used as your home. Www irs gov efile   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. Www irs gov efile However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Www irs gov efile See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Www irs gov efile Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Www irs gov efile Personal use of rental property. Www irs gov efile   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Www irs gov efile Also, your rental expense deductions may be limited. Www irs gov efile See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Www irs gov efile Part interest. Www irs gov efile   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Www irs gov efile Example. Www irs gov efile Roger owns a one-half undivided interest in a rental house. Www irs gov efile Last year he paid $968 for necessary repairs on the property. Www irs gov efile Roger can deduct $484 (50% × $968) as a rental expense. Www irs gov efile He is entitled to reimbursement for the remaining half from the co-owner. Www irs gov efile When To Deduct You generally deduct your rental expenses in the year you pay them. Www irs gov efile If you use the accrual method, see Publication 538 for more information. Www irs gov efile Types of Expenses Listed below are the most common rental expenses. Www irs gov efile Advertising. Www irs gov efile Auto and travel expenses. Www irs gov efile Cleaning and maintenance. Www irs gov efile Commissions. Www irs gov efile Depreciation. Www irs gov efile Insurance. Www irs gov efile Interest (other). Www irs gov efile Legal and other professional fees. Www irs gov efile Local transportation expenses. Www irs gov efile Management fees. Www irs gov efile Mortgage interest paid to banks, etc. Www irs gov efile Points. Www irs gov efile Rental payments. Www irs gov efile Repairs. Www irs gov efile Taxes. Www irs gov efile Utilities. Www irs gov efile Some of these expenses, as well as other less common ones, are discussed below. Www irs gov efile Depreciation. Www irs gov efile   Depreciation is a capital expense. Www irs gov efile It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Www irs gov efile   You can begin to depreciate rental property when it is ready and available for rent. Www irs gov efile See Placed in Service under When Does Depreciation Begin and End in chapter 2. Www irs gov efile Insurance premiums paid in advance. Www irs gov efile   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. Www irs gov efile You cannot deduct the total premium in the year you pay it. Www irs gov efile See chapter 6 of Publication 535 for information on deductible premiums. Www irs gov efile Interest expense. Www irs gov efile   You can deduct mortgage interest you pay on your rental property. Www irs gov efile When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Www irs gov efile Chapter 4 of Publication 535 explains mortgage interest in detail. Www irs gov efile Expenses paid to obtain a mortgage. Www irs gov efile   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Www irs gov efile These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Www irs gov efile Form 1098, Mortgage Interest Statement. Www irs gov efile   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. Www irs gov efile 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. Www irs gov efile Attach a statement to your return showing the name and address of the other person. Www irs gov efile On the dotted line next to line 13, enter “See attached. Www irs gov efile ” Legal and other professional fees. Www irs gov efile   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. Www irs gov efile For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Www irs gov efile 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. Www irs gov efile Local benefit taxes. Www irs gov efile   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. Www irs gov efile These charges are nondepreciable capital expenditures and must be added to the basis of your property. Www irs gov efile However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Www irs gov efile Local transportation expenses. Www irs gov efile   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. Www irs gov efile 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. Www irs gov efile See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Www irs gov efile   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. Www irs gov efile For 2013, the standard mileage rate for business use is 56. Www irs gov efile 5 cents per mile. Www irs gov efile For more information, see chapter 4 of Publication 463. Www irs gov efile    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Www irs gov efile In addition, you must complete Form 4562, Part V, and attach it to your tax return. Www irs gov efile Pre-rental expenses. Www irs gov efile   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Www irs gov efile Rental of equipment. Www irs gov efile   You can deduct the rent you pay for equipment that you use for rental purposes. Www irs gov efile However, in some cases, lease contracts are actually purchase contracts. Www irs gov efile If so, you cannot deduct these payments. Www irs gov efile You can recover the cost of purchased equipment through depreciation. Www irs gov efile Rental of property. Www irs gov efile   You can deduct the rent you pay for property that you use for rental purposes. Www irs gov efile 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. Www irs gov efile Travel expenses. Www irs gov efile   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. Www irs gov efile You must properly allocate your expenses between rental and nonrental activities. Www irs gov efile You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Www irs gov efile The cost of improvements is recovered by taking depreciation. Www irs gov efile For information on travel expenses, see chapter 1 of Publication 463. Www irs gov efile    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Www irs gov efile Uncollected rent. Www irs gov efile   If you are a cash basis taxpayer, do not deduct uncollected rent. Www irs gov efile Because you have not included it in your income, it is not deductible. Www irs gov efile   If you use an accrual method, report income when you earn it. Www irs gov efile If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Www irs gov efile See chapter 10 of Publication 535 for more information about business bad debts. Www irs gov efile Vacant rental property. Www irs gov efile   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. Www irs gov efile However, you cannot deduct any loss of rental income for the period the property is vacant. Www irs gov efile Vacant while listed for sale. Www irs gov efile   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. Www irs gov efile If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Www irs gov efile Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. Www irs gov efile These charges are also called loan origination fees, maximum loan charges, or premium charges. Www irs gov efile Any of these charges (points) that are solely for the use of money are interest. Www irs gov efile Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. Www irs gov efile The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Www irs gov efile In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). Www irs gov efile The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. Www irs gov efile If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Www irs gov efile De minimis OID. Www irs gov efile   The OID is de minimis if it is less than one-fourth of 1% (. Www irs gov efile 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). Www irs gov efile   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. Www irs gov efile On a constant-yield basis over the term of the loan. Www irs gov efile On a straight line basis over the term of the loan. Www irs gov efile In proportion to stated interest payments. Www irs gov efile In its entirety at maturity of the loan. Www irs gov efile You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Www irs gov efile Example. Www irs gov efile Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. Www irs gov efile The loan is to be repaid over 30 years. Www irs gov efile During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Www irs gov efile When the loan was made, she paid $1,500 in points to the lender. Www irs gov efile The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Www irs gov efile Carol determines that the points (OID) she paid are de minimis based on the following computation. Www irs gov efile Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Www irs gov efile 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Www irs gov efile Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Www irs gov efile Under the straight line method, she can deduct $50 each year for 30 years. Www irs gov efile Constant-yield method. Www irs gov efile   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Www irs gov efile   You figure your deduction for the first year in the following manner. Www irs gov efile Determine the issue price of the loan. Www irs gov efile If you paid points on the loan, the issue price generally is the difference between the principal and the points. Www irs gov efile Multiply the result in (1) by the yield to maturity (defined later). Www irs gov efile Subtract any qualified stated interest payments (defined later) from the result in (2). Www irs gov efile This is the OID you can deduct in the first year. Www irs gov efile Yield to maturity (YTM). Www irs gov efile   This rate is generally shown in the literature you receive from your lender. Www irs gov efile If you do not have this information, consult your lender or tax advisor. Www irs gov efile In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Www irs gov efile Qualified stated interest (QSI). Www irs gov efile   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. Www irs gov efile Example—Year 1. Www irs gov efile The facts are the same as in the previous example. Www irs gov efile The yield to maturity on Carol's loan is 10. Www irs gov efile 2467%, compounded annually. Www irs gov efile She figured the amount of points (OID) she could deduct in 2013 as follows. Www irs gov efile Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Www irs gov efile 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. Www irs gov efile To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Www irs gov efile Then follow steps (2) and (3), earlier. Www irs gov efile Example—Year 2. Www irs gov efile Carol figured the deduction for 2014 as follows. Www irs gov efile Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Www irs gov efile 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Www irs gov efile    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. Www irs gov efile A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Www irs gov efile However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. Www irs gov efile Points when loan refinance is more than the previous outstanding balance. Www irs gov efile   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Www irs gov efile For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. Www irs gov efile 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. Www irs gov efile Improvements. Www irs gov efile   You must capitalize any expense you pay to improve your rental property. Www irs gov efile 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. Www irs gov efile Betterments. Www irs gov efile   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. Www irs gov efile Restoration. Www irs gov efile   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. Www irs gov efile Adaptation. Www irs gov efile   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. Www irs gov efile Separate the costs of repairs and improvements, and keep accurate records. Www irs gov efile You will need to know the cost of improvements when you sell or depreciate your property. Www irs gov efile The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Www irs gov efile Table 1-1. Www irs gov efile Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications