| Publication 17 |
2008 Tax Year |
9.
Rental Income and Expenses
This chapter discusses rental income and expenses. It also covers the following topics.
If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets.
If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts.
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. See Publication 527, Residential Rental Property, for more information.
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
You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive
for the use or occupation of property. In addition to amounts you receive as normal rent payments, there are other amounts
that may be rental income.
When to report.
If you are a cash basis taxpayer, you report rental income on your return for the year you actually or constructively
receive it. You are a cash basis taxpayer if you report income in the year you receive it, regardless of when it was earned.
You constructively receive income when it is made available to you, for example, by being credited to your bank account.
For more information about when you constructively receive income, see
Accounting Methods
in chapter 1.
Advance rent.
Advance rent is any amount you receive before the period that it covers. 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.
Example.
You sign a 10-year lease to rent your property. 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. You must include $10,000 in your income in the first year.
Security deposits.
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. 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.
If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in
your income when you receive it.
Payment for canceling a lease.
If your tenant pays you to cancel a lease, the amount you receive is rent. Include the payment in your income in the
year you receive it regardless of your method of accounting.
Expenses paid by tenant.
If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You
can deduct the expenses if they are deductible rental expenses. See
Rental Expenses
, later, for more information.
Property or services.
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.
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.
Rental of property also used as a home.
If you rent property that you also use as your home and you rent it fewer than 15 days during the tax year, do not
include the rent you receive in your income and do not deduct rental expenses. However, you can deduct on Schedule A (Form
1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. See
Personal Use of Dwelling Unit (Including Vacation Home)
, later.
Part interest.
If you own a part interest in rental property, you must report your part of the rental income from the property.
This part discusses expenses of renting property that you ordinarily can deduct from your rental income. 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.
Depreciation
, which you can also deduct from your rental income, is discussed later.
When to deduct.
You generally deduct your rental expenses in the year you pay them.
Vacant rental property.
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. However, you cannot deduct
any loss of rental income for the period the property is vacant.
Pre-rental expenses.
You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from
the time you make it available for rent.
Depreciation.
You can begin to depreciate rental property when it is ready and available for rent. See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527.
Vacant while listed for sale.
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.
Personal use of rental property.
If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and
personal use. Also, your rental expense deductions may be limited. See
Personal Use of Dwelling Unit (Including Vacation Home)
, later.
Part interest.
If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage
of ownership.
Uncollected rent.
If you are a cash basis taxpayer, do not deduct uncollected rent. Because you do not include it in your income, you
cannot deduct it.
If you use an accrual method, you report income when you earn it. If you are unable to collect the rent, you may be
able to deduct it as a business bad debt. See chapter 10 of Publication 535 for more information about business bad debts.
You can deduct the cost of repairs to your rental property. You cannot deduct the cost of improvements. Instead, recover the
cost of improvements by taking depreciation (explained later).
Separate the costs of repairs and improvements, and keep accurate records. You will need to know the cost of improvements
when you sell or depreciate your property.
Repairs.
A repair keeps your property in good operating condition. It does not materially add to the value of your property
or substantially prolong its life. Repainting your property inside or out, fixing gutters or floors, fixing leaks, plastering,
and replacing broken windows are examples of repairs.
If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an improvement.
Improvements.
An improvement adds to the value of property, prolongs its useful life, or adapts it to new uses. Improvements include
the following items.
-
Putting a recreation room in an unfinished basement.
-
Paneling a den.
-
Adding a bathroom or bedroom.
-
Putting decorative grillwork on a balcony.
-
Putting up a fence.
-
Putting in new plumbing or wiring.
-
Putting in new cabinets.
-
Putting on a new roof.
-
Paving a driveway.
If you make an improvement to property, the cost of the improvement must be capitalized. The capitalized cost can generally
be depreciated as if the improvement were separate property.
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.
Rental of property.
You can deduct the rent you pay for property that you use for rental purposes. 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.
Rental of equipment.
You can deduct the rent you pay for equipment that you use for rental purposes. However, in some cases, lease contracts
are actually purchase contracts. If so, you cannot deduct these payments. You can recover the cost of purchased equipment
through depreciation.
Insurance premiums paid in advance.
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. You cannot deduct the total premium in the year you pay it.
Local benefit taxes.
Generally, 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. These charges are nondepreciable capital expenditures, and
must be added to the basis of your property. However, you can deduct local benefit taxes that are for maintaining, repairing,
or paying interest charges for the benefits.
Travel expenses.
You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip
was to collect rental income or to manage, conserve, or maintain your rental property. You must properly allocate your expenses
between rental and nonrental activities. You cannot deduct the cost of traveling away from home if the primary purpose of
the trip was to improve your property. You recover the cost of improvements by taking depreciation. For information on travel
expenses, see chapter 26.
To deduct travel expenses, you must keep records that follow the rules in chapter 26.
Local transportation expenses.
You can 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.
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. For 2008, the standard mileage rate for each mile
of business use is:
-
50½ cents a mile for the period January 1 through June 30, 2008, and
-
58½ cents a mile for the period July 1 through December 31, 2008.
For more information, see chapter 26.
To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. In addition, you must complete Form 4562, Part V, and attach it to your tax return.
Tax return preparation.
You can deduct, as a rental expense, the part of tax return preparation fees you paid to prepare Schedule E (Form
1040), Part I. For example, on your 2008 Schedule E, you can deduct fees paid in 2008 to prepare your 2007 Schedule E, Part
I. 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.
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. 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. 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.
Where to report.
Report your not-for-profit rental income on Form 1040, line 21. 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 Form 1040, Schedule A, 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. You can deduct these expenses only if they, together with certain other
miscellaneous itemized deductions, total more than 2% of your adjusted gross income.
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.
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.
You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. 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). Alternatively, some real
estate taxes may be added to your standard deduction. See your tax form instructions.
Example.
Your tax year is the calendar year. You moved from your home in May and started renting it out on June 1. You can deduct as
rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance.
Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities.
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.
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). 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.
There is no change in the types of expenses deductible for the personal-use part of your property. Generally, these expenses
may be deducted only if you itemize your deductions on Schedule A (Form 1040).
You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it.
You do not have to divide the expenses that belong only to the rental part of your property. 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. 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. 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.
How to divide expenses.
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. You can use any reasonable method for dividing the expense.
It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. 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.
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. See
What Is a Day of Personal Use
and
How To Divide Expenses
, later.
If you used a dwelling unit for personal purposes, it may be considered a “dwelling unit used as a home.” If it is, you cannot deduct rental expenses that are more than your rental income for the unit. See
Dwelling Unit Used as Home
and
How To Figure Rental Income and Deductions
, later. If your dwelling unit is not considered a dwelling unit used as a home, you can deduct rental expenses that are more
than rental income for the unit subject to certain limits. See
Limits on Rental Losses,
later.
Exception for minimal rental use.
If you use the dwelling unit as a home and you rent it fewer than 15 days during the year, that period is not treated
as rental activity. Do not include any of the rent in your income and do not deduct any of the rental expenses. To determine
if you use a dwelling unit as a home, see
Dwelling Unit Used as Home
, later.
Dwelling unit.
A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property.
It also includes all structures or other property belonging to the dwelling unit. A dwelling unit has basic living accommodations,
such as sleeping space, a toilet, and cooking facilities.
A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. 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.
Example.
You rent a room in your home that is always available for short-term occupancy by paying customers. You do not use the room
yourself, and you allow only paying customers to use the room. The room is used solely as a hotel, motel, inn, or similar
establishment and is not a dwelling unit.
Dwelling Unit Used as Home
The tax treatment of rental income and expenses for a dwelling unit that you also use for personal purposes depends on whether
you use it as a home. (See
How To Figure Rental Income and Deductions,
later.)
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.
See
What Is a Day of Personal Use
, later.
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. Instead, count it as a day of personal use in applying both (1) and (2) above. However,
this rule does not apply when dividing expenses between rental and personal use.
Fair rental price.
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. 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.
The following examples show how to determine whether you used your rental property as a home.
Example 1.
You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. You rented the
basement apartment at a fair rental price to college students during the regular school year. You rented to them on a 9-month
lease (273 days). You figured 10% of the total days rented to others at a fair rental price is 27 days.
During June (30 days), your brothers stayed with you and lived in the basement apartment rent free.
Your basement apartment was used as a home because you used it for personal purposes for 30 days. Rent-free use by your brothers
is considered personal use. Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was
rented (27 days).
Example 2.
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). Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in
July. You figured 10% of the total days rented to others at a fair rental price is 3 days.
The room was used as a home because you used it for personal purposes for 21 days. That is more than the greater of 14 days
or 10% of the 27 days it was rented (3 days).
Example 3.
You own a condominium apartment in a resort area. You rented it at a fair rental price for a total of 170 days during the
year. 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. Your family actually used the apartment for 10 of those days. Therefore, the apartment is treated
as having been rented for 160 (170 − 10) days. You figured 10% of the total days rented to others at a fair rental price is
16 days. Your family also used the apartment for 7 other days during the year.
You used the apartment as a home because you used it for personal purposes for 17 days. That is more than the greater of 14
days or 10% of the 160 days it was rented (16 days).
Use As Main Home Before or After Renting
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. Do not count them as days of
personal use if:
-
You rented or tried to rent the property for 12 or more consecutive months.
-
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.
This special rule does not apply when dividing expenses between rental and personal use.
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.
-
You or any other person who has an interest in it, unless you rent it to another owner as his or her main home under a shared
equity financing agreement (defined later). However, see
Use as Main Home Before or After Renting
under
Dwelling Unit Used as Home
, earlier.
-
A member of your family or a member of the family of any other person who owns an interest in it, unless the family member
uses the dwelling unit as his or her main home and pays a fair rental price. Family includes only your spouse, brothers and
sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren,
etc.).
-
Anyone under an arrangement that lets you use some other dwelling unit.
-
Anyone at less than a fair rental price.
Main home.
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.
Shared equity financing agreement.
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.
Donation of use of property.
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.
The following examples show how to determine days of personal use.
Example 1.
You and your neighbor are co-owners of a condominium at the beach. Last year, you rented the unit to vacationers whenever
possible. The unit was not used as a main home by anyone. Your neighbor used the unit for 2 weeks last year.
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.
Example 2.
You and your neighbors are co-owners of a house under a shared equity financing agreement. Your neighbors live in the house
and pay you a fair rental price.
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. This is because your neighbors rent the house as their main home under a shared equity financing agreement.
Example 3.
You own a rental property that you rent to your son. Your son does not own any interest in this property. He uses it as his
main home and pays you a fair rental price for the property.
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.
Example 4.
You rent your beach house to Joshua. Joshua rents his house in the mountains to you. You each pay a fair rental price.
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.
Days Used for Repairs and Maintenance
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. 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.
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. You can deduct expenses for the rental use of the unit under the rules
explained in
How To Figure Rental Income and Deductions
, later.
When dividing your expenses, follow these rules.
-
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. This rule does not apply when determining whether you used the unit as a home.
-
Any day that the unit is available for rent but not actually rented is not a day of rental use.
Example.
Your beach cottage was available for rent from June 1 through August 31 (92 days). Your family uses the cottage during the
last 2 weeks in May (14 days). You were unable to find a renter for the first week in August (7 days). The person who rented
the cottage for July allowed you to use it over a weekend (2 days) without any reduction in or refund of rent. The cottage
was not used at all before May 17 or after August 31.
You figure the part of the cottage expenses to treat as rental expenses as follows.
-
The cottage was used for rental a total of 85 days (92 − 7). The days it was available for rent but not rented (7 days) are
not days of rental use. The July weekend (2 days) you used it is rental use because you received a fair rental price for the
weekend.
-
You used the cottage for personal purposes for 14 days (the last 2 weeks in May).
-
The total use of the cottage was 99 days (14 days personal use + 85 days rental use).
-
Your rental expenses are 85/99 (86%) of the cottage expenses.
When determining whether you used the cottage as a home, the July weekend (2 days) you used it is personal use even though
you received a fair rental price for the weekend. Therefore, you had 16 days of personal use and 83 days of rental use for
this purpose. 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. If you have a net loss, you may not be able to deduct all of the rental expenses. See
Property Used as a Home
in the following discussion.
How To Figure Rental Income and Deductions
How you figure your rental income and deductions depends on whether you used the dwelling unit as a home (see
Dwelling Unit Used as Home,
earlier) and, if you used it as a home, how many days the property was rented at a fair rental price.
If you use a dwelling unit as a home during the year (see
Dwelling Unit Used as Home
, earlier), how you figure your rental income and deductions depends on how many days the unit was rented at a fair rental
price.
Rented fewer than 15 days.
If you use a dwelling unit as a home and you rent it fewer than 15 days during the year, do not include any rental
income in your income. Also, you cannot deduct any expenses as rental expenses.
Rented 15 days or more.
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. See
How To Report Rental Income and Expenses
, later. If you had a net profit from the rental property 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. However, if you had a net loss, your
deduction for certain rental expenses is limited.
To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1 at the end of this chapter.
You recover the cost of income producing property through yearly tax deductions. You do this by depreciating the property;
that is, by deducting some of the cost on the tax return each year.
Three basic factors determine how much depreciation you can deduct. They are: (1) your basis in the property, (2) the recovery
period for the property, and (3) the depreciation method used. You cannot simply deduct your mortgage or principal payments,
or the cost of furniture, fixtures and equipment, as an expense.
You can deduct depreciation only on the part of your property used for rental purposes. Depreciation reduces your basis for
figuring gain or loss on a later sale or exchange.
You may have to use Form 4562 to figure and report your depreciation. See
How To Report Rental Income and Expenses,
later.
Claiming the correct amount of depreciation.
You should claim the correct amount of depreciation each tax year. Even if you did not claim depreciation that 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.
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.S Individual Income Tax Return. 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. See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information.
Changing your accounting method to deduct unclaimed depreciation.
To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method,
to get the consent of the IRS. In some instances, that consent is automatic. For more information, see chapter 1 of Publication
946.
Land.
You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up.
The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated.
More information.
See Publication 527 for more information about depreciating rental property and see Publication 946 for more information
about depreciation.
Other Rules About Depreciable Property
In addition to the rules about what methods you can use, there are other rules you should be aware of with respect to depreciable
property.
Gain from disposition.
If you dispose of depreciable property at a gain, you may have to report, as ordinary income, all or part of the gain.
See Publication 544, Sales and Other Dispositions of Assets.
Alternative minimum tax.
If you use accelerated depreciation, you may have to file Form 6251. Accelerated depreciation can be determined under
MACRS, ACRS, and any other method that allows you to deduct more depreciation than you could deduct using a straight line
method.
Rental real estate activities are generally considered passive activities, and the amount of loss you can deduct is limited.
Generally, you cannot deduct losses from rental real estate activities unless you have income from other passive activities.
However, you may be able to deduct rental losses without regard to whether you have income from other passive activities if
you “materially” or “actively” participated in your rental activity. See
Passive Activity Limits
, later.
Losses from passive activities are first subject to the at-risk rules. At-risk rules limit the amount of deductible losses
from holding most real property placed in service after 1986.
Exception.
If your rental losses are less than $25,000, and you actively participated in the rental activity, the passive activity
limits probably do not apply to you. See
Losses From Rental Real Estate Activities,
later.
The at-risk rules place a limit on the amount you can deduct as losses from activities often described as tax shelters. Losses
from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules.
Generally, 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. 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. See
Publication 925 for more information.
Generally, all rental activities (except those meeting the exception for real estate professionals, below) are passive activities.
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.
Limits on passive activity deductions and credits.
Deductions for losses from passive activities are limited. You generally cannot offset income, other than passive
income, with losses from passive activities. Nor can you offset taxes on income, other than passive income, with credits resulting
from passive activities. Any excess loss or credit is carried forward to the next tax year.
For a detailed discussion of these rules, see Publication 925.
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.
Exception for real estate professionals.
Rental activities in which you materially participated during the year are not passive activities if, for that year,
you were a real estate professional. For a detailed discussion of the requirements, see Publication 527. For a detailed discussion
of material participation, see Publication 925.
Losses From Rental Real Estate Activities
If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss
from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses
in excess of income from passive activities. Similarly, you can 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.
Active participation.
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 in a significant and bona fide sense. Management decisions include approving new tenants, deciding on rental terms, approving expenditures, and similar
decisions.
Maximum special allowance.
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.
If your modified adjusted gross income 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 modified
adjusted gross income.
Generally, if your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately),
there is no special allowance.
More information.
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.
How To Report Rental Income and Expenses
If you rent buildings, rooms, or apartments, and provide only heat and light, trash collection, etc., you normally report
your rental income and expenses on Form 1040, Schedule E, Part I. However, do not use that schedule to report a not-for-profit
activity. See
Not Rented for Profit,
earlier.
Providing substantial services.
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, Net Profit From Business (Sole Proprietorship). Substantial services do not include the furnishing of heat
and light, cleaning of public areas, trash collection, etc. For information, see Publication 334, Tax Guide for Small Business.
You also may have to pay self-employment tax on your rental income.
Form 1098.
If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, Mortgage
Interest Statement, or similar statement showing the interest you paid for the year. 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 Form 1040, Schedule E, line 13. Attach a statement to your return
showing the name and address of the other person. In the left margin of Schedule E (Form 1040), next to line 13, enter “ See attached.”
Use Schedule E (Form 1040), Part I, to report your rental income and expenses. List your total income, expenses, and depreciation
for each rental property. Be sure to answer the question on line 2.
If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the
properties. Complete lines 1 and 2 for each property. However, fill in the “Totals” column on only one Schedule E. The figures in the “Totals” column on that Schedule E should be the combined totals of all Schedules E.
Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate
mortgage investment conduits. If you need to use Schedule E, page 2, use page 2 of the same Schedule E you used to enter the
combined totals in Part I.
On Schedule E, page 1, line 20, enter the depreciation you are claiming for each property. You must complete and attach Form
4562 for rental activities only if you are claiming:
-
Depreciation, including the special depreciation allowance, on property placed in service during 2008,
-
Depreciation on listed property (such as a car), regardless of when it was placed in service, or
-
Any other car expenses, including the standard mileage rate or lease expenses.
Otherwise, figure your depreciation on your own worksheet. You do not have to attach these computations to your return.
Worksheet 9-1.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.
-
Did you use the dwelling unit as a home this year? (See
Dwelling Unit Used as Home
.)
-
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.Rental Use Percentage |
| A. |
Total days available for rent at fair rental price |
A. |
|
|
|
| B. |
Total days available for rent (line A) but not rented |
B. |
|
|
|
| C. |
Total days of rental use. Subtract line B from line A
|
C. |
|
|
|
| D. |
Total days of personal use (including days rented at less than fair rental price)
|
D. |
|
|
|
| E. |
Total days of rental and personal use. Add lines C and D
|
E. |
|
|
|
| F. |
Percentage of expenses allowed for rental. Divide line C by line E
|
|
|
F. |
|
| PART II.Allowable Rental Expenses |
| 1. |
Enter rents received |
1. |
|
| 2a. |
Enter the rental portion of deductible home mortgage interest and qualified
mortgage insurance premiums (see instructions)
|
2a. |
|
|
|
| b. |
Enter the rental portion of real estate taxes |
b. |
|
|
|
| c. |
Enter the rental portion of deductible casualty and theft losses (see instructions) |
c. |
|
|
|
| d. |
Enter direct rental expenses (see instructions) |
d. |
|
|
|
| e. |
Fully deductible rental expenses. Add lines 2a–2d. Enter here and
on the appropriate lines on Schedule E (see instructions)
|
2e. |
|
| 3. |
Subtract line 2e from line 1. If zero or less, enter -0- |
3. |
|
| 4a. |
Enter the rental portion of expenses directly related to operating or maintaining
the dwelling unit (such as repairs, insurance, and utilities)
|
4a. |
|
|
|
| b. |
Enter the rental portion of excess mortgage interest and qualified mortgage insurance
premiums (see instructions)
|
b. |
|
|
|
| c. |
Carryover of operating expenses from 2007 worksheet |
c. |
|
|
|
| d. |
Add lines 4a–4c |
d. |
|
|
|
| e. |
Allowable expenses. Enter the smaller of line 3 or line 4d (see instructions)
|
4e. |
|
| 5. |
Subtract line 4e from line 3. If zero or less, enter -0- |
5. |
|
| 6a. |
Enter the rental portion of excess casualty and theft losses (see instructions) |
6a. |
|
|
|
| b. |
Enter the depreciation for the rental portion of the dwelling unit |
b. |
|
|
|
| c. |
Carryover of excess casualty losses and depreciation from 2007 worksheet |
c. |
|
|
|
| d. |
Add lines 6a–6c |
d. |
|
|
|
| e. |
Allowable excess casualty and theft losses and depreciation. Enter the smaller of
line 5 or line 6d (see instructions)
|
6e. |
|
| Part III. Carryover of Unallowed Expenses to Next Year |
| 7a. |
Operating expenses to be carried over to next year. Subtract line 4e from line 4d
|
7a. |
|
| b. |
Excess casualty and theft losses and depreciation to be carried over to next year.
Subtract line 6e from line 6d
|
b. |
|
Worksheet 9-1 Instructions.Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home
Caution. 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.
|
| Line 2a. |
Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A (as if you were itemizing your deductions)
if you had not rented the unit. Do not include interest on a loan that did not benefit the dwelling unit. 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. Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Include
the rental portion of this interest in the total you enter on line 2a of the worksheet.
|
| |
Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A, if you
had not rented the unit. See page A-4 of the Schedule A instructions. However, figure your adjusted gross income (Form 1040,
line 38) without your rental income and expenses from the dwelling unit. See Line 4b below to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit.
Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet.
|
| |
Note. Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Instead, figure the personal
portion on a separate Schedule A. 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.
|
| |
|
|
|
|
| Line 2c. |
Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A if you had not rented
the dwelling unit. To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses.
If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. On Form 4684, line 22, enter
10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Enter the rental
portion of the result from Form 4684, line 24, on line 2c of this worksheet.
|
| |
Note. Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Instead, figure the personal portion on
a separate Form 4684.
|
| |
|
|
|
|
| Line 2d. |
Enter the total of your rental expenses that are directly related only to the rental activity. These include interest on loans
used for rental activities other than to buy, build, or improve the dwelling unit. Also include rental agency fees, advertising,
office supplies, and depreciation on office equipment used in your rental activity.
|
| |
|
|
|
|
| Line 2e. |
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. Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E.
|
| |
|
|
|
|
| Line 4b. |
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. 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. Do not include interest on a loan that did not benefit the dwelling unit (as explained
in the line 2a instructions).
|
| |
|
|
|
|
| Line 4e. |
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.*
|
| |
|
|
|
|
| Line 6a. |
To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. |
| |
A. |
Enter the amount from Form 4684, line 10 |
|
|
| |
B. |
Enter the rental portion of line A |
|
|
| |
C. |
Enter the amount from line 2c of this worksheet |
|
|
| |
D. |
Subtract line C from line B. Enter the result here and on line 6a of this worksheet |
|
|
| |
|
|
|
|
| Line 6e. |
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.*
|
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