Keyword: Rental Property
This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
10.1 Capital Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.)
I lived in a home as my principal residence for the first 2 of the
last 5 years. For the last 3 years, the home was a rental property before
selling it. Can I still avoid the capital gains tax and, if so, how should
I deal with the depreciation I took while it was rented out?
If, during the 5-year period ending on the date of sale, you owned the
home for at least 2 years and lived in it as your main home for at least 2
years, you can exclude up to $250,000 of the gain ($500,000 on a joint return
in most cases). However, you cannot exclude the portion of the gain equal
to depreciation allowed or allowable for periods after May 6, 1997. This gain
is reported on Form 4797. If you can show by adequate records or other evidence
that the depreciation allowed was less than the amount allowable, the amount
you cannot exclude is the amount allowed. Refer toPublication 523 , Selling
Your Main Home and Form 4797 (PDF), Sale
of Business Property for specifics on calculating and reporting the amount
of the eligible exclusion.
References:
11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture
Can the entire acquisition cost of a computer that I purchased for
my business be deducted as a business expense or do I have to use depreciation?
A deduction for depreciation of a computer for business use can be expensed
in the first year if qualified, or depreciated over the recovery period. To
claim the expense in the first year, the property must be used more than 50%
for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 raised the
aggregate cost that can be expensed for any tax year after 2002 and before
2006 to $100,000. The new law also expanded the definition of Code Section
179 property to include off-the shelf computer software. See Code Section 179 for the expanded definition.
If you make a choice to depreciate the property you can claim a special
depreciation allowance for qualified property you acquired in service after
September 10, 2001 and before January 1, 2005. The allowance is a depreciation
deduction equal to 30% of the property's depreciable basis. The special depreciation
is figured before you calculate your regular depreciation. To qualify for
the special deduction the property must:
Be new property this is depreciated under MACRS with a recovery period
of 20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service and before January 1, 2005.
Be property the original use of which began after September 10, 2001
See Publication 946, How to Depreciate Property for
additional information on the special deduction.
The 2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 modified
the bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation is not eligible
for the 30% additional first-year depreciation. However, an election can be
made to have the 30% additional first-year depreciation deduction apply to
the 50% depreciation property instead of the 50% additional firs-year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation.
References:
I have a rental property. Do I have to take depreciation on it?
You do not have to claim depreciation on your rental property on your tax
return. However, when reporting the sale of the rental property you are required
to reduce the basis of the property for allowable depreciation regardless
of whether the depreciation deduction was taken or not. For more information,
refer to Publication 544, Sale or Other Dispositions of Assets,
the
Instructions for Form 4797, Sale of Business Property,
and Publication 527, Residential Rental Property (including
vacation homes).
References:
In calculating depreciation on both my rental apartment building
and its furniture, what depreciation type, asset class, depreciation method,
and recovery period should be used?
You can claim a special depreciation allowance for qualified property you
acquired after September 10, 2001 and before January 1, 2005. The allowance
is a depreciation deduction equal to 30% of the property's depreciable basis.
The special depreciation is figured before you calculate your regular depreciation.
To qualify for the special deduction the property must:
Be new property that is depreciated under MACRS with recovery period of
20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service Before January 1, 2005.
Be property that the original use began after September 10, 2001.
See Publication 946, How to Depreciate Property for
additional information on the special deduction.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 modified the
bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation is not eligible
for the 30% additional first-year depreciation. However, an election can be
made to have the 30% additional first-year depreciation deduction apply to
50% depreciation property instead of the 50% additional first year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation deduction.
References:
We replaced the roof on a residential rental property and need to
know what to use for the classification and recovery period to calculate depreciation?
Replacement of a roof on a residential rental property is a capital improvement
to the structure. The roof is in the same class of property as the property
to which it is attached. Since the property is residential rental property,
the roof is generally depreciated over a residential rental property recovery
period of 27.5 years using the straight line method of depreciation and a
mid-month convention. You cannot write off (or take a loss on) any remaining
basis in the replaced roof. For more information, refer to Publication 527, Residential
Rental Property, and Publication 946, How to Depreciate Property.
References:
On residential rental property, would new windows and siding be
considered a repair that could be deducted against income, or would they be
capitalized as an improvement?
Replacement of windows and siding on a residential rental property is a
capital improvement to the structure, provided the replacement improves the
value of this property or substantiality prolongs its life. The windows and
siding, in that event, are in the same class of property as the property to
which they are affixed. In this case, the windows and siding are generally
depreciated over a recovery period of 27.5 years using the straight line method
of depreciation and a mid-month convention. For more information, refer to Publication 527, Residential Rental Property, and Publication 946, How
to Depreciate Property.
References:
We have incurred substantial repairs to our rental property: new
roof, gutters, windows, furnace, and outside paint. What are the IRS rules
concerning depreciation?
Replacements of roof, rain gutters, windows, and furnace on a residential
rental property are capital improvements to the structure because they materially
add to the value of your property or substantially prolong its life. The items
would be in the same class of property as the rental property to which to
which they are attached. Since the property is residential rental property,
the items are generally depreciated over 27.5 years using the straight line
method of depreciation and a mid-month convention.
Repairs, such as repainting the house, are currently deductible expenses.
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. In that case, you should capitalize and depreciate
the repair costs as the same class of property that you have restored or remodeled
as discussed above. For more information, refer to Publication 527, Residential
Rental Property, and Publication 946, How to Depreciate Property.
References:
How many years do I depreciate a new furnace installed as an improvement
on residential rental property and what method do I use to compute the depreciation?
Replacement of a furnace in a residential rental property is a capital
improvement to the structure. The furnace is in the same class of property
as the property in which it is installed. Since the property is residential
rental property, the furnace is, generally, depreciated over a recovery period
of 27.5 years using the straight line method of depreciation and a mid-month
convention. For more information, refer to Publication 527, Residential
Rental Property, and Publication 946, How to Depreciate Property.
References:
I purchased a snowblower and a lawn mower strictly for use at a
residential apartment building I own. Can I elect the section 179 deduction
to fully deduct the costs of the snowblower and lawn mower?
You cannot claim section 179 expense for property held to produce rental
income (since it is use in connection with the furnishing of lodging). These
assets are classified as 5-year property and must be depreciated under MACRS
(Modified Accelerated Cost Recovery System).
You can claim a special depreciation allowance for qualified property you
acquired service after September 10, 2001 and before January 1, 2005. The
allowance is a depreciation deduction equal to 30% of the property's depreciable
basis. The special depreciation is figured before you calculate your regular
depreciation. To qualify for the special deduction the property must:
Be new property that is depreciated under MACRS with a recovery period
of 20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service Before January 1, 2005.
Be property that the original use began after September 10, 2001.
See Publication 946 , How to Depreciate Property for
additional information on the special deduction.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 modified the
bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation deduction
is not eligible for the 30% additional first-year depreciation deduction apply
to 50% depreciation property instead of the 50% additional first-year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation.
References:
When an individual sells a building, what depreciation is being
recaptured? Is it the amount of depreciation taken in the prior years or the
depreciation left?
Generally, the amount of depreciation you must recapture for residential
rental or nonresidential real property is the excess of the depreciation allowed
or allowable over straight line depreciation for the property. Thus, if you
sell a building placed in service after 1986 which required the use of the
straight-line method, you would not have any depreciation to recapture. However,
if you took the 30% special depreciation allowance for your building, this
allowance may be subject to recapture. For property placed in service in 1986
and earlier, see Publication 946, How to Depreciate Property.
For further information, refer to Publication 544, Sales or Other
Disposition of Assets, and Supplement to Publication 946, How
to Depreciate Property.
References:
How do I recapture depreciation on rental property that has been
sold?
If you dispose of residential rental property placed in service after 1986
(or after July 31, 1986, if the election to use MACRS was made), you would
not have any depreciation to recapture because you used a straight-line method.
If you do have depreciation to recapture resulting from a gain on the sale,
or because you did not meet the condition above, use Form 4797 (PDF), Sale of Business Property, to compute the amount of
depreciation recapture.
References:
11.2 Sale or Trade of Business, Depreciation, Rentals: Rental Expenses v Passive Activity Losses (PALs)
I purchased a rental property last year. What closing costs can
I deduct?
The only deductible closing costs are those for interest, and deductible
real estate taxes. Other settlement fees and closing costs for buying the
property become additions to your basis in the property. These basis adjustments
include:
Abstract fees,
Charges for installing utility services,
Legal fees,
Recording fees,
Surveys,
Transfer taxes,
Title insurance, and
Any amounts the seller owes that you agree to pay, such as back taxes
or interest, recording or mortgage fees, charges for improvements or repairs,
and sales commissions.
Fees related to obtaining a loan are capital expenses and should be amortized
over the life of the loan.
For additional information, refer to Publication 527, Residential
Rental Property, Publication 17, Your Individual Income Tax Guide,
and Publication 535, Business Expenses.
References:
I own a duplex. I live on one side and rent out the other. Are my
mortgage interest and property taxes fully deductible on Schedule E?
No. Assuming that the loan is secured by the duplex, only the mortgage
interest and property taxes for the portion you are renting are deductible
on Form 1040, Schedule E (PDF), Supplemental
Income and Loss. If you receive one bill, you should prorate the rental
portion based on square footage. Your portion can be deducted on Form 1040, Schedule A (PDF), Itemized Deductions,
if you itemize and meet the requirements for Deductible Home Mortgage Interest.
For more information, refer to Publication 527, Residential Rental
Property (including Vacation Homes), Instructions for Form 1040, Schedule
E, Supplemental Income and Loss, and Publication 936, Home Mortgage
Interest.
References:
Can you deduct Private Mortgage Insurance (PMI) premiums on rental
property? If so, which line item on Schedule E?
Yes. You can deduct Private Mortgage Insurance premium on line 9 of Form 1040, Schedule E (PDF), Supplemental Income and
Loss. Write "PMI" on the dotted line.
References:
Where on Schedule E do you put costs paid (points, fees, etc.) to
refinance a rental property?
Expenses you pay to obtain a mortgage on your rental property cannot be
deducted as interest. These expenses, which include mortgage commissions,
abstract fees, and recording fees, are capital expenses. You may amortize
them over the life of the mortgage on line 18 of Form 1040, Schedule E (PDF), Supplemental Income and Loss.
References:
I have losses from a passive rental real estate activity in which
I actively participate. Can I offset the losses against my nonpassive income?
Generally, if your rental of real estate is a passive activity, you may
offset a loss of up to $25,000 against your nonpassive income subject to certain
income limitations, if you actively participate in the activity. However,
married persons filing separate returns who lived together at any time during
the year may not claim this offset. Married persons filing separate returns
who lived apart at all times during the year are each allowed a $12,500 maximum
offset for passive real estate activities. For additional information on limits
on rental losses, refer to Chapter 10 of Publication 17, Your Federal
Income Tax, and Tax Topic 425, Passive Activities - Losses
and Credits, as well as
Instructions for Form 1040, Schedule E, Supplemental
Income and Loss.
References:
11.3 Sale or Trade of Business, Depreciation, Rentals: Personal Use of Business Property (Condo, Timeshare, etc.)
I received income for renting out my timeshare for a week. I understand
that I don't have to report income from any rental less than 15 days, but
the property management company reported that income to the IRS. Do I have
to report it when I file?
If you use the dwelling unit as a home (based on degree of personal use)
and you rent it for fewer than 15 days during the year, do not include any
of the rent in your income and do not deduct any of the rental expenses. If
you do not meet the tests for using your timeshare as your home, the income
is reportable on Form 1040, Schedule E (PDF), Supplemental
Income and Loss.
References:
I rent my home out for two weeks each year. Do I have to show the
income on my return?
You must first consider if you use your dwelling as home. You are considered
to use a home as a dwelling if you use it for personal purposes during the
tax year for more than the greater of 14 days or 10% of the total days it
is rented to others at a fair rental price. It is possible that you will use
more than one dwelling unit as a home during the year. For example, if you
live in your main home for 11 months and in your vacation home for 30 days,
your home is a dwelling unit and your vacation home is also a dwelling unit,
unless you rent your vacation home to others at a fair rental value for more
than 300 days during the year.
There is a special rule if you use a dwelling as a home and rent it for
fewer than 15 days. In this case, do not report any of the rental income and
do not deduct any expenses as rental expenses. If you itemize your deduction
on Form 1040, Schedule A (PDF), Itemized
Deductions , you may be able to deduct mortgage interest, property taxes,
and any casualty losses. For additional information, refer to Tax Topic 415, Renting
Vacation Property/Renting to Relatives and Publication 527 , Residential
Rental Property (including Rental of Vacation Homes) .
References:
I am renting a house to my son and daughter-in-law. Can I claim
rental expenses?
In general, if you receive income from the rental of a dwelling unit, such
as a house, apartment, or duplex, there are certain expenses you may deduct.
Besides knowing which expenses may be deductible, it is important to understand
potential limitations on the amounts of rental expenses that may be deducted
in a tax year.
There are several types of limitations that may apply.
Passive Activity losses : In general, you can deduct
passive activity losses only from passive activity income (a limit on loss
deductions). You carry any excess loss forward to the following year or years
until used, or until deducted in the year you dispose of your entire interest
in the activity in a fully taxable transaction. There are several exceptions
that may apply to the passive activity limitations. Refer toPublication 527 , Residential Rental Property andPublication 925 , Passive Activity and At-Risk Rules .
At risk rules: The at-risk rules limit your losses
from most activities to your amount at risk in the activity. You treat any
loss that is disallowed because of the at-risk limits as a deduction from
the same activity in the next tax year. If your losses from an at-risk activity
are allowed, they are subject to recapture in later years if your amount at
risk is reduced below zero. Refer to Publication 925 , Passive
Activity and At-Risk Rules.
Not for profit 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. Any rental expenses in excess of rental
income cannot be carried forward to the next year. Refer to Publication 527 , Residential Rental Property and Publication 535 , Business Expenses .
Rental of a dwelling unit: The tax treatment of
rental income and expenses for a dwelling unit that you also use for personal
purposes (renting to a relative may be considered personal use even if they
are paying you rent) depends on whether you use it as a home. Refer to Publication 527 , Residential Rental Property .
Expenses in connection with rental of a dwelling unit
for less than 15 days per year . Refer to Publication 527 , Residential
Rental Property .
References:
11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges
What form(s) do we need to fill out to report the sale of rental
property?
The gain or loss on the sale of rental property is reported on Form 4797 (PDF), Sale of Business Property. Form 1040, Schedule D (PDF), Capital Gains and Losses,
is often used in conjunction with Form 4797. For further information, refer
to Publication 544, Sale on Other Disposition of Assets,Publication 550, Investment Income and Expense, the Instructions to Form 4797 (PDF), Sale of Business Property, and
the Instructions to Form 1040, Schedule D, Capital Gain and Losses.
References:
We are selling rental property and have never claimed depreciation.
What do we do about this when we file our taxes?
When reporting the sale of or computing gain or loss on rental property,
you are required to make an adjustment to your basis for allowable depreciation
regardless of whether the deduction was taken. For more information refer
to Publication 544, Sale or Other Dispositions of Assets, and
the
Instructions for Form 4797, Sales of Business Property.
If you have unclaimed depreciation for two or more years, you must use Form 3115 (PDF), Application for Change in Accounting
Method, to claim the depreciation that should have been taken. The Form
3115 must be timely filed for the same tax year in which you sell the rental
property or an earlier tax year. If you placed in service the rental property
only one year prior to selling it, you may amend your income tax returns using Form 1040X (PDF), Amended U.S. Individual Income Tax
Return, to take deductions for the claimed depreciation.
References:
I am selling my rental property and was asked to pay the buyer's
closing costs. Is all or part of the costs deductible for me?
In computing your gain or loss on the sale, reduce your proceeds from the
sale by your selling expenses, including the buyer's closing costs that you
agree to pay. Refer to Publication 544, Sales and Other Dispositions
of Assets, for additional information.
References:
How do I file the gain on an installment sale of business property
in each year? What form do I use?
Use Form 6252 (PDF), Installment Sale Income,
to figure your installment sale income each year. This form does not account
for taxable interest income from the sale that needs to be reported each year
by the seller, usually on Form 1040, Schedule B (PDF),
Interest and Ordinary Dividends.
You may also need Form 1040, Schedule D (PDF), Capital
Gains and Losses, and Form 4797 (PDF), Sales
of Business Property. For additional information including forms and
instructions, refer to Publication 537, Installment Sales
References:
What forms do we file to report a loss on the sale of a rental property?
The loss on the sale of rental property is reported on Form 4797 (PDF), (Sale of Business Property) as ordinary loss.
References:
I sold a rental property in which I had previous years' loss carryover
due to the loss limitation rules. Can I recover the total carryover since
the property has been disposed of?
The losses (but not credits) that have not been allowed from your rental
property in previous years including the current year generally are allowed
in full in the tax year you dispose of the entire interest in the property.
More than one form or schedule may be required for reporting the loss.
See Publication 525, Passive Activity and At-Risk Rules and Publication 544 , Sales and Other Disposition of Assets for
information on the reporting of the sale of activities with unallowed losses.
References:
Can you sell rental property and reinvest it into rental property
without paying capital gains tax?
No. A deferred exchange will be treated as a sale rather than a tax free
exchange if the taxpayer actually or constructively receives money on other
property in full consideration of the relinguished property. However, rental
property may be exchanged directly for other rental property of like kind.
Gain realized from such an exchange is deferred. For additional information
on like-kind exchanges, refer to Publication 544, Sales and Other
Dispositions of Assets.
References:
I have heard that I can sell my rental property and use the proceeds
to purchase rental property of equal or greater value and the transaction
is viewed just like an exchange in that the tax is deferred until the new
property is sold. Is this true?
What you have heard about is a like-kind exchange. A like-kind exchange,
when properly executed, represents a way to postpone the recognition (taxation)
of gain essentially by shifting the basis of old property to new property.
If, in addition to giving up like-kind property, you pay money in a like-kind
exchange, you still have no recognized gain or loss. The basis of the property
received is the basis of the property given up, increased by the money paid.
There are several rules and restrictions that must be strictly adhered to
in order for a successful exchange to take place. Deferred exchanges will
be treated as a sale rather than an exchange to the extent that the taxpayer
actually or constructively receives money or other (not like kind) property
in exchange for the like-kind property given up. For more information refer
to .Publication 544, Sales and Other Disposition of Assets ,
and Form 8824 (PDF) Instructions, Like-Kind
Exchanges .
References:
We sold a rental property last year and used the 1031 Tax Deferred
Exchange law to defer the gain into another like-kind property. How do I report
this transaction on my tax return?
Report the exchange of like-kind property on Form 8824 (PDF), Like-Kind Exchanges. The instructions for the form
explain how to report the details of the exchange. Report the exchange even
though no gain or loss is recognized.
If you have any taxable gain, resulting from the transaction, because you
had a partially deferred exchange or otherwise received money or unlike property,
report it on Form 4797 (PDF), Sale of Business
Property, and Form 1040, Schedule D (PDF), Capital
Gains and Losses. Refer to Publication 544, Sales and Other Dispositions
of Assets, which has a detailed section on qualifying like-kind exchanges.
References:
Can we move into our rental property, live there as our main home
for two years, and sell it without having to pay capital gains tax?
You may be able to exclude your gain from the sale of your main home that
you have also used for business or to produce rental income if you meet the
ownership and use tests, detailed in Publication 523, Sale of Your
Home.
However, if you were entitled to take depreciation deductions because you
used your home for business purposes or as rental property, you cannot exclude
the part of your gain equal to any depreciation allowed or allowable as a
deduction for periods after May 6, 1997. (Note: If you can show by adequate
records or other evidence that the depreciation deduction allowed (did deduct)
was less than the amount allowable (could have deducted), the amount you cannot
exclude is the smaller of those two figures.)
The gain, exclusion, and depreciation recapture should be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses,
as described in Publication 523, Selling Your Home.
References:
I just sold a commercial rental property my wife and I had purchased
thirty years ago (before she passed away) and I want to know how to figure
my cost basis. Is it the full appraised value at the time of her death, or
is it just half?
The answer depends on in which state you live in. Generally, the basis
of property you inherit is its Fair Market Value (FMV) at the date of the
decedent's death. If you live in a community property state (Arizona, California,
Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), and
inherit your spouse's interest in a property held as community property, then
the basis for the entire property becomes the FMV at the date of your spouse's
death. This also assumes that at least half the value of the community property
interest is included in the deceased spouse's gross estate. In other states,
where the property is owned by you and your spouse as joint tenants, tenants
by the entireties, or tenants-in-common, the basis of the one-half that your
spouse owned would be increased to one-half of the FMV of the property at
the date of death. The basis in the one-half that you owned would remain at
the one-half of the pre-death adjusted basis. The new adjusted basis is, naturally,
subject to all future routine basis adjustments until the property is either
sold or otherwise disposed of.
References:
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