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Home , Cost basis, Gross income, Recreation room, Rental value, Renting, Tax deduction

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Publication 527 Cat. No. 15052W Contents

What’s New ...... 1 Department of the Residential Reminders ...... 2 Treasury Internal Introduction ...... 2 Rental Service Chapter 1. Rental and Expenses (If No Personal Use of Dwelling) ...... 2 Rental Income ...... 2 (Including Rental of Rental Expenses ...... 3 Chapter 2. of Vacation ) Rental Property ...... 5 The Basics ...... 6 Special Depreciation Allowance .... 8 MACRS Depreciation ...... 8 For use in preparing Claiming the Correct Amount of Depreciation ...... 12 Returns Chapter 3. Reporting Rental 2020 Income, Expenses, and Losses ...... 12 Which Forms To Use ...... 12 Limits on Rental Losses ...... 12 At-Risk Rules ...... 13 Passive Activity Limits ...... 13 Casualties and Thefts ...... 14 Example ...... 14

Chapter 4. Special Situations ...... 14 ...... 15 Cooperatives ...... 15 Property Changed to Rental Use ... 15 Part of Property ...... 16 Not Rented for ...... 16 Example—Property Changed to Rental Use ...... 16

Chapter 5. Personal Use of Dwelling Unit (Including Vacation ) ...... 17 Dividing Expenses ...... 17 Dwelling Unit Used as a Home .... 18 Reporting Income and Deductions ...... 19 Worksheet 5-1. Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home ...... 20

Chapter 6. How To Get Help .... 23

Index ...... 26

Future Developments For the latest information about developments related to Pub. 527, such as legislation enacted after it was published, go to IRS.gov/Pub527.

Get forms and other information faster and easier at: What’s New • IRS.gov (English) • IRS.gov/Korean (한국어) Excess business loss limitation. The excess • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский) business loss limitation under section 461(l) has • IRS.gov/Chinese (中文) • IRS.gov/Vietnamese (TiếngViệt) been retroactively repealed and will not apply for 2020.

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Tax-free exchange of rental property oc- Form (and Instructions) casionally used for personal purposes. If 4562 4562 Depreciation and Amortization Reminders you meet certain qualifying use standards, you

Net Investment (NIIT). You may may qualify for a tax-free exchange (a like-kind 5213 5213 Election To Postpone Determination be subject to the NIIT. NIIT is a 3.8% tax on the or section 1031 exchange) of one piece of as To Whether the Presumption lesser of net investment income or the excess rental property you own for a similar piece of Applies That an Activity Is Engaged of modified adjusted (MAGI) over rental property, even if you have used the rental in for Profit property for personal purposes. the threshold amount. Net investment income 8582 8582 Passive Activity Loss Limitations may include rental income and other income For information on the qualifying use stand-

Schedule E (Form 1040) Supplemental from passive activities. Use Form 8960 to figure ards, see Revenue Procedure 2008-16, Schedule E (Form 1040) Income and Loss this tax. For more information on NIIT, go to 2008-10 I.R.B. 547, available at IRS.gov/irb/ IRS.gov/NIIT. 2008-10_IRB#RP-2008-16. For more informa- Photographs of missing children. The Inter- tion on like-kind exchanges, see chapter 1 of nal is a proud partner with the Pub. 544. National Center for Missing & Exploited Comments and suggestions. We welcome Children®(NCMEC). Photographs of missing your comments about this publication and sug- children selected by the Center may appear in gestions for future editions. this publication on pages that would otherwise 1. be blank. You can help bring these children You can send us comments through home by looking at the photographs and calling IRS.gov/FormComments. Or, you can write to 800-THE-LOST (800-843-5678) if you recog- the , Tax Forms and Rental Income nize a child. Publications, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224. Although we can’t respond individually to and Expenses (If Introduction each comment received, we do appreciate your feedback and will consider your comments and Do you own a second that you rent out suggestions as we revise our tax forms, instruc- No Personal Use all the time? Do you own a vacation home that tions, and publications. Do not send tax ques- you rent out when you or your family isn't using tions, tax returns, or payments to the above ad- it? dress. of Dwelling) These are two common types of residential rental activities discussed in this publication. In Getting answers to your tax questions. This chapter discusses the various types of most cases, all rental income must be reported If you have a tax question not answered by this rental income and expenses for a residential on your tax return, but there are differences in publication or the How To Get Tax Help section rental activity with no personal use of the dwell- the expenses you are allowed to deduct and in at the end of this publication, go to the IRS In- ing. Generally, each year you will report all in- the way the rental activity is reported on your re- teractive Tax Assistant page at IRS.gov/ come and deduct all out-of-pocket expenses in turn. Help/ITA where you can find topics by using the full. The deduction to recover the cost of your Chapter 1 discusses rental-for-profit activity search feature or viewing the categories listed. rental property—depreciation—is taken over a in which there is no personal use of the prop- prescribed number of years, and is discussed in erty. It examines some common types of rental Getting tax forms, instructions, and pub- chapter 2. income and when each is reported, as well as lications. Visit IRS.gov/Forms to download some common types of expenses and which current and prior-year forms, instructions, and If your rental income is from property are deductible. publications. ! you also use personally or rent to Chapter 2 discusses depreciation as it ap- CAUTION someone at less than a fair rental price, Ordering tax forms, instructions, and first read chapter 5. plies to your rental activity—what publications. Go to IRS.gov/OrderForms to property can be depreciated and how much it order current forms, instructions, and publica- can be depreciated. tions; call 800-829-3676 to order prior-year Chapter 3 covers the reporting of your rental forms and instructions. The IRS will process Rental Income income and deductions, including casualties your order for forms and publications as soon and thefts, limitations on losses, and claiming as possible. Do not resubmit requests you’ve In most cases, you must include in your gross the correct amount of depreciation. already sent us. You can get forms and publica- income all amounts you receive as rent. Rental Chapter 4 discusses special rental situa- tions faster online. income is any payment you receive for the use tions. These include condominiums, coopera- or occupation of property. It isn’t limited to tives, property changed to rental use, renting Useful Items amounts you receive as normal rental pay- only part of your property, and a not-for-profit ments. rental activity. You may want to see: Chapter 5 discusses the rules for rental in- come and expenses when there is also per- Publication When To Report sonal use of the dwelling unit, such as a vaca- tion home. 463 463 Travel, Gift, and Expenses When you report rental income on your tax re- Finally, chapter 6 explains how to get tax turn generally depends on whether you are a 523 523 Selling Your Home help from the IRS. cash or an accrual basis taxpayer. Most individ-

534 534 Depreciating Property Placed in ual taxpayers use the cash method. Sale or exchange of rental property. For in- Service Before 1987 formation on how to figure and report any gain Cash method. You are a cash basis taxpayer or loss from the sale, exchange, or other dispo- 535 535 Business Expenses if you report income on your return in the year sition of your rental property, see Pub. 544. you actually or constructively receive it, regard- 544 544 and Other Dispositions of Assets less of when it was earned. You constructively Sale of main home used as rental prop- receive income when it is made available to erty. For information on how to figure and re- 547 547 Casualties, Disasters, and Thefts you, for example, by being credited to your port any gain or loss from the sale or other dis- bank account. position of your main home that you also used 551 551 Basis of Assets as rental property, see Pub. 523. Accrual method. If you are an accrual basis 925 925 Passive Activity and At-Risk Rules taxpayer, you generally report income when

946 946 How To Depreciate Property you earn it, rather than when you receive it. You

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generally deduct your expenses when you incur can deduct that same amount as a rental ex- If you use the accrual method, see Pub. 538 them, rather than when you pay them. pense for painting your property. for more information.

More information. See Pub. 538, Accounting Security deposits. Don’t include a security Periods and Methods, for more information deposit in your income when you receive it if Types of Expenses about when you constructively receive income you plan to return it to your tenant at the end of Listed below are the most common rental ex- and accrual methods of accounting. the . But if you keep part or all of the se- penses. curity deposit during any year because your Advertising. tenant doesn’t live up to the terms of the lease, • Auto and travel expenses. Types of Income include the amount you keep in your income in • Cleaning and maintenance. that year. • The following are common types of rental in- • Commissions. come. If an amount called a security deposit is to • Depreciation. be used as a final payment of rent, it is advance • . Advance rent. Advance rent is any amount rent. Include it in your income when you receive • Interest (other). you receive before the period that it covers. In- it. • Legal and other professional . clude advance rent in your rental income in the • Local transportation expenses. year you receive it regardless of the period cov- Other Sources of Rental Income • Management fees. ered or the method of accounting you use. • Mortgage interest paid to banks, etc. Lease with option to buy. If the rental agree- • Points. Example. On March 18, 2020, you signed ment gives your tenant the right to buy your • Rental payments. a 10-year lease to rent your property. During rental property, the payments you receive under • Repairs. 2020, you received $9,600 for the first year's the agreement are generally rental income. If • . rent and $9,600 as rent for the last year of the your tenant exercises the right to buy the prop- • Utilities. lease. You must include $19,200 in your rental erty, the payments you receive for the period af- income in 2020. ter the date of sale are considered part of the Some of these expenses, as well as other less selling price. common ones, are discussed below. Canceling a lease. If your tenant pays you to cancel a lease, the amount you receive is rent. Part interest. If you own a part interest in Depreciation. Depreciation is a capital ex- Include the payment in your rental income in the rental property, you must report your part of the pense. It is the mechanism for recovering your year you receive it regardless of your method of rental income from the property. cost in an income-producing property and must accounting. be taken over the expected life of the property. Rental of property also used as your home. You can begin to depreciate rental property Expenses paid by tenant. If your tenant pays If you rent property that you also use as your when it is ready and available for rent. See any of your expenses, those payments are home and you rent it less than 15 days during Placed in Service under When Does Deprecia- rental income. Because you must include this the tax year, don’t include the rent you receive tion Begin and End? in chapter 2. amount in income, you can also deduct the ex- in your income. Also, expenses from this activ- penses if they are deductible rental expenses. ity are not considered rental expenses. For Insurance premiums paid in advance. If you For more information, see Rental Expenses, more information, see Used as a home but ren- pay an insurance premium for more than 1 year later. ted less than 15 days under Reporting Income in advance, you can’t deduct the total premium and Deductions in chapter 5. in the year you pay it. For each year of cover- Example 1. Your tenant pays the water and age, you can deduct only the part of the pre- sewage bill for your rental property and deducts mium payment that applies to that year. See the amount from the normal rent payment. Un- Rental Expenses chapter 6 of Pub. 535 for information on deduc- der the terms of the lease, your tenant doesn’t tible premiums. have to pay this bill. Include the utility bill paid In most cases, the expenses of renting your Interest expense. You can deduct mortgage by the tenant and any amount received as a property, such as maintenance, insurance, rent payment in your rental income. You can de- interest you pay on your rental property. When taxes, and interest, can be deducted from your you refinance a rental property for more than duct the utility payment made by your tenant as rental income. a rental expense. the previous outstanding balance, the portion of the interest allocable to loan proceeds not rela- Personal use of rental property. If you ted to rental use generally can’t be deducted as Example 2. While you are out of town, the sometimes use your rental property for personal furnace in your rental property stops working. a rental expense. Chapter 4 of Pub. 535 ex- purposes, you must divide your expenses be- plains mortgage interest in detail. Your tenant pays for the necessary repairs and tween rental and personal use. Also, your rental deducts the repair bill from the rent payment. In- expense deductions may be limited. See chap- Expenses paid to obtain a mortgage. clude the repair bill paid by the tenant and any ter 5. Certain expenses you pay to obtain a mortgage amount received as a rent payment in your on your rental property can’t be deducted as in- rental income. You can deduct the repair pay- Part interest. If you own a part interest in terest. These expenses, which include mort- ment made by your tenant as a rental expense. rental property, you can deduct expenses you gage commissions, abstract fees, and record- paid according to your percentage of owner- ing fees, are capital expenses that are part of Property or services. If you receive property ship. your basis in the property. or services as rent, instead of money, include the fair value of the property or services Example. Roger owns a one-half undivided Form 1098, Mortgage Interest State- in your rental income. interest in a rental house. Last year, he paid ment. If you paid $600 or more of mortgage in- If the services are provided at an agreed $968 for necessary repairs on the property. terest on your rental property to any one per- upon or specified price, that price is the fair Roger can deduct $484 (50% × $968) as a son, you should receive a Form 1098 or similar market value unless there is evidence to the rental expense. He is entitled to reimbursement statement showing the interest you paid for the contrary. for the remaining half from the co-owner. year. If you and at least one other person (other than your spouse if you file a joint return) were Example. Your tenant is a house painter. liable for, and paid interest on, the mortgage, He offers to paint your rental property instead of When To Deduct and the other person received the Form 1098, paying 2 months rent. You accept his offer. report your share of the interest on Schedule E Include in your rental income the amount the You generally deduct your rental expenses in (Form 1040), line 13. Attach a statement to your tenant would have paid for 2 months rent. You the year you pay them. return showing the name and address of the

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other person. On the dotted line next to line 13, from home if the primary purpose of the trip is to De minimis OID. The OID is de minimis if it is enter “See attached.” collect rental income or to manage, conserve, less than one-fourth of 1% (0.0025) of the sta- or maintain your rental property. You must prop- ted redemption price at maturity (principal Legal and other professional fees. You can erly allocate your expenses between rental and amount of the loan) multiplied by the number of deduct, as a rental expense, legal and other nonrental activities. You can’t deduct the cost of full years from the date of original issue to ma- professional expenses such as tax return prep- traveling away from home if the primary pur- turity (term of the loan). aration fees you paid to prepare Schedule E, pose of the trip is to improve the property. The If the OID is de minimis, you can choose one Part I. For example, on your 2020 Schedule E cost of improvements is recovered by taking of the following ways to figure the amount of you can deduct fees paid in 2020 to prepare depreciation. For information on travel expen- points you can deduct each year. Part I of your 2019 Schedule E. You can also ses, see chapter 1 of Pub. 463. • On a constant-yield basis over the term of deduct, as a rental expense, any expense To deduct travel expenses, you must the loan. (other than federal taxes and penalties) you keep records that follow the rules in • On a straight line basis over the term of the paid to resolve a tax underpayment related to chapter 5 of Pub. 463. loan. your rental activities. • In proportion to stated interest payments. • In its entirety at maturity of the loan. Local benefit taxes. In most cases, you can’t Uncollected rent. If you are a cash basis tax- deduct charges for local benefits that increase payer, don’t deduct uncollected rent. Because You make this choice by deducting the OID the value of your property, such as charges for you haven’t included it in your income, it’s not (points) in a manner consistent with the method putting in streets, sidewalks, or water and deductible. chosen on your timely filed tax return for the tax year in which the loan is issued. sewer systems. These charges are nondepreci- If you use an accrual method, report income able capital expenditures and must be added to when you earn it. If you are unable to collect the Example. Carol took out a $100,000 mort- the basis of your property. However, you can rent, you may be able to deduct it as a business gage loan on January 1, 2020, to buy a house deduct local benefit taxes that are for maintain- bad debt. See chapter 10 of Pub. 535 for more she will use as a rental during 2020. The loan is ing, repairing, or paying interest charges for the information about business bad debts. benefits. to be repaid over 30 years. During 2020, Carol paid $10,000 of mortgage interest (stated inter- Vacant rental property. If you hold property est) to the lender. When the loan was made, Local transportation expenses. You may be for rental purposes, you may be able to deduct she paid $1,500 in points to the lender. The able to deduct your ordinary and necessary lo- your ordinary and necessary expenses (includ- points reduced the principal amount of the loan cal transportation expenses if you incur them to ing depreciation) for managing, conserving, or from $100,000 to $98,500, resulting in $1,500 collect rental income or to manage, conserve, maintaining the property while the property is of OID. Carol determines that the points (OID) or maintain your rental property. However, vacant. However, you can’t deduct any loss of she paid are de minimis based on the following transportation expenses incurred to travel be- rental income for the period the property is va- computation. tween your home and a rental property gener- cant. ally constitute nondeductible commuting costs unless you use your home as your principal Vacant while listed for sale. If you sell Redemption price at maturity (principal place of business. See Pub. 587, Business Use property you held for rental purposes, you can amount of the loan) ...... $100,000 of Your Home, for information on determining if deduct the ordinary and necessary expenses Multiplied by: The term of the loan in complete years ...... × 30 your home office qualifies as a principal place of for managing, conserving, or maintaining the Multiplied by ...... × 0.0025 business. property until it is sold. If the property isn’t held $ 7,500 Generally, if you use your personal car, out and available for rent while listed for sale, De minimis amount ...... the expenses aren’t deductible rental expenses. pickup truck, or light van for rental activities, you The points (OID) she paid ($1,500) are less can deduct the expenses using one of two than the de minimis amount ($7,500). There- methods: actual expenses or the standard mile- Points fore, Carol has de minimis OID and she can age rate. For 2020, the standard mileage rate choose one of the four ways discussed earlier The term “points” is often used to describe for business use is 57.5 cents a mile. For more to figure the amount she can deduct each year. some of the charges paid, or treated as paid, by information, see chapter 4 of Pub. 463. Under the straight line method, she can deduct a borrower to take out a loan or a mortgage. $50 each year for 30 years. To deduct car expenses under either These charges are also called loan origination method, you must keep records that fees, maximum loan charges, or premium RECORDS Constant-yield method. If the OID isn’t de follow the rules in chapter 5 of Pub. charges. Any of these charges (points) that are minimis, you must use the constant-yield 463. In addition, you must complete Form 4562, solely for the use of money are interest. Be- method to figure how much you can deduct Part V, and attach it to your tax return. cause points are prepaid interest, you generally each year. can’t deduct the full amount in the year paid, but Pre-rental expenses. You can deduct your or- must deduct the interest over the term of the You figure your deduction for the first year in dinary and necessary expenses for managing, loan. the following manner. conserving, or maintaining rental property from 1. Determine the issue price of the loan. If the time you make it available for rent. The method used to figure the amount of you paid points on the loan, the issue price points you can deduct each year follows the is generally the difference between the Rental of equipment. You can deduct the rent original issue discount (OID) rules. In this case, principal and the points. you pay for equipment that you use for rental points are equivalent to OID, which is the differ- 2. Multiply the result in (1) by the yield to ma- purposes. However, in some cases, lease con- ence between: turity (defined later). tracts are actually purchase . If so, you • The amount borrowed (redemption price at can’t deduct these payments. You can recover maturity, or principal); and 3. Subtract any qualified stated interest pay- the cost of purchased equipment through de- • The proceeds (issue price). ments (defined later) from the result in (2). preciation. This is the OID you can deduct in the first The first step is to determine whether your year. Rental of property. You can deduct the rent total OID (which you may have on bonds or you pay for property that you use for rental pur- other investments in addition to the mortgage Yield to maturity (YTM). This rate is gen- poses. If you buy a leasehold for rental purpo- loan), including the OID resulting from the erally shown in the literature you receive from ses, you can deduct an equal part of the cost points, is insignificant or de minimis. If the OID your lender. If you don’t have this information, each year over the term of the lease. isn’t de minimis, you must use the con- consult your lender or tax advisor. In general, stant-yield method to figure how much you can the YTM is the discount rate that, when used in Travel expenses. You can deduct the ordi- deduct. computing the present value of all principal and nary and necessary expenses of traveling away interest payments, produces an amount equal to the principal amount of the loan.

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Qualified stated interest (QSI). In gen- Improvements. You must capitalize any ex- eral, this is the stated interest that is uncondi- pense you pay to improve your rental property. tionally payable in cash or property (other than An expense is for an improvement if it results in another loan of the issuer) at least annually over a betterment to your property, restores your 2. the term of the loan at a fixed rate. property, or adapts your property to a new or different use. Table 1-1 shows examples of Example—Year 1. The facts are the same many improvements. as in the previous example. The yield to matur- Depreciation of ity on Carol's loan is 10.2467%, compounded Betterments. Expenses that may result in annually. a betterment to your property include expenses Rental Property She figured the amount of points (OID) she for fixing a pre-existing defect or condition, en- could deduct in 2020 as follows. larging or expanding your property, or increas- ing the capacity, strength, or quality of your You recover the cost of income-producing prop- property. erty through yearly tax deductions. You do this Principal amount of the loan ...... $100,000 by depreciating the property; that is, by deduct- Minus: Points (OID) ...... – 1,500 Restoration. Expenses that may be for re- ing some of the cost each year on your tax re- Issue price of the loan ...... $ 98,500 storation include expenses for replacing a sub- turn. Multiplied by: YTM ...... × 0.102467 stantial structural part of your property, repairing Three factors determine how much depreciation Total ...... 10,093 damage to your property after you properly ad- you can deduct each year: (1) your basis in the Minus: QSI ...... –10,000 justed the basis of your property as a result of a property, (2) the recovery period for the prop- Points (OID) deductible in 2020 .... $ 93 casualty loss, or rebuilding your property to a erty, and (3) the depreciation method used. You like-new condition. can’t simply deduct your mortgage or principal To figure your deduction in any subsequent payments, or the cost of , fixtures, and year, you start with the adjusted issue price. To Adaptation. Expenses that may be for equipment, as an expense. get the adjusted issue price, add to the issue adaptation include expenses for altering your price figured in Year 1 any OID previously de- property to a use that isn’t consistent with the You can deduct depreciation only on the part of ducted. Then follow steps (2) and (3), earlier. intended ordinary use of your property when your property used for rental purposes. Depre- you began renting the property. ciation reduces your basis for figuring gain or Example—Year 2. Carol figured the de- loss on a later sale or exchange. De minimis safe harbor for tangible duction for 2021 as follows. property. If you elect this de minimis safe har- You may have to use Form 4562 to figure and bor for your rental activity for the tax year, you report your depreciation. See Which Forms To Issue price ...... $98,500 aren’t required to capitalize the de minimis Use in chapter 3. Also, see Pub. 946. Plus: Points (OID) deducted + 93 costs of acquiring or producing certain real and in 2020 ...... tangible and may deduct Section 179 deduction. The section 179 de- Adjusted issue price ...... $98,593 duction is a means of recovering part or all of Multiplied by: YTM ...... × 0.102467 these amounts as rental expenses on line 19 of Schedule E. For more information on electing the cost of certain qualifying property in the year Total ...... 10,103 you place the property in service. It is separate Minus: QSI ...... –10,000 and using the de minimis safe harbor for tangi- ble property, see chapter 1 of Pub. 535. from your depreciation deduction. See chap- $ 103 Points (OID) deductible in 2021 .... ter 2 of Pub. 946 for more information about Safe harbor for routine maintenance. If claiming this deduction. Loan or mortgage ends. If your loan or mort- you determine that your cost was for an im- gage ends, you may be able to deduct any re- provement to a or equipment, you may (AMT). If you use maining points (OID) in the tax year in which the still be able to deduct your cost under the rou- accelerated depreciation, you may be subject to loan or mortgage ends. A loan or mortgage may tine maintenance safe harbor. See Pub. 535 for the AMT. Accelerated depreciation allows you end due to a , prepayment, foreclo- more information. to deduct more depreciation earlier in the recov- sure, or similar event. However, if the refinanc- Separate the costs of repairs and im- ery period than you could deduct using a ing is with the same lender, the remaining provements, and keep accurate re- straight line method (same deduction each points (OID) generally aren’t deductible in the RECORDS cords. You will need to know the cost year). year in which the refinancing occurs, but may of improvements when you sell or depreciate The prescribed depreciation methods for be deductible over the term of the new mort- your property. rental real estate aren’t accelerated, so the de- gage or loan. preciation deduction isn’t adjusted for the AMT. However, accelerated methods are generally Points when loan refinance is more than The expenses you capitalize for improving used for other property connected with rental the previous outstanding balance. When your property can generally be depreciated as if activities (for example, appliances and you refinance a rental property for more than the improvement were separate property. -to-wall carpeting). the previous outstanding balance, the portion of the points allocable to loan proceeds not rela- Table 1-1. Examples of Improvements ted to rental use generally can’t be deducted as a rental expense. Additions Miscellaneous Storm , Septic system Example. Charles refinanced a loan with a New Water heater balance of $100,000. The amount of the new Central vacuum Soft water system loan was $120,000. Charles used the additional Wiring upgrades Filtration system $20,000 to purchase a car. The points allocable Satellite dish to the $20,000 would be treated as nondeducti- Security system Interior Improvements ble personal interest. Built-in appliances Lawn & Grounds Heating & Air Conditioning modernization Repairs and Improvements Landscaping Heating system Flooring Driveway Central air conditioning Wall-to-wall carpeting Generally, an expense for repairing or maintain- Walkway Furnace ing your rental property may be deducted if you Fence Duct work Insulation aren’t required to capitalize the expense. Retaining wall Central humidifier Sprinkler system Filtration system , Pipes, duct work

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To find out if you are subject to the AMT, bushes and trees were planted right next to the property is considered placed in service on Oc- see the Instructions for Form 6251. house, while others were planted around the tober 1, the date when it was available for rent. outer border of the lot. If you replace the house, you would have to destroy the bushes and trees Conversion to business use. If you place The Basics right next to it. These bushes and trees are property in service in a personal activity, you closely associated with the house, so they have can’t claim depreciation. However, if you The following section discusses the information a determinable useful life. Therefore, you can change the property's use to business or the you will need to have about the rental property depreciate them. Add your other land prepara- production of income, you can begin to depreci- and the decisions to be made before figuring tion costs to the basis of your land because ate it at the time of the change. You place the your depreciation deduction. they have no determinable life and you can’t de- property in service for business or income-pro- preciate them. ducing use on the date of the change.

What Rental Property Can Be Excepted property. Even if the property Example. You bought a house and used it Depreciated? meets all the requirements listed earlier under as your personal home several years before What Rental Property Can Be Depreciated, you you converted it to rental property. Although its You can depreciate your property if it meets all can’t depreciate the following property. specific use was personal and no depreciation the following requirements. • Property placed in service and disposed of was allowable, you placed the home in service • You own the property. (or taken out of business use) in the same when you began using it as your home. You can • You use the property in your business or year. begin to claim depreciation in the year you con- income-producing activity (such as rental • Equipment used to build capital improve- verted it to rental property because at that time property). ments. You must add otherwise allowable its use changed to the production of income. • The property has a determinable useful depreciation on the equipment during the life. period of construction to the basis of your Idle Property • The property is expected to last more than improvements. 1 year. For more information, see chapter 1 of Pub. Continue to claim a deduction for depreciation 946. on property used in your rental activity even if it Property you own. To claim depreciation, you is temporarily idle (not in use). For example, if must usually be the owner of the property. You you must make repairs after a tenant moves are considered to be the owner of property When Does Depreciation out, you still depreciate the rental property dur- even if it’s subject to a debt. Begin and End? ing the time it isn’t available for rent. Rented property. Generally, if you pay rent for property, you can’t depreciate that property. You begin to depreciate your rental property Cost or Other Basis Fully Usually, only the owner can depreciate it. How- when you place it in service for the production Recovered ever, if you make permanent improvements to of income. You stop depreciating it either when leased property, you may be able to depreciate you have fully recovered your cost or other ba- You must stop depreciating property when the the improvements. See Additions or improve- sis, or when you retire it from service, whichever total of your yearly depreciation deductions ments to property, later in this chapter, under happens first. equals your cost or other basis of your property. Recovery Periods Under GDS. For this purpose, your yearly depreciation de- Placed in Service ductions include any depreciation that you were Cooperative . If you are a ten- allowed to claim, even if you didn’t claim it. See ant-stockholder in a cooperative corpo- You place property in service in a rental activity Basis of Depreciable Property, later. ration and rent your cooperative to when it is ready and available for a specific use others, you can depreciate your stock in the in that activity. Even if you aren’t using the prop- Retired From Service corporation. See chapter 4. erty, it is in service when it is ready and availa- ble for its specific use. You stop depreciating property when you retire Property having a determinable useful life. it from service, even if you haven’t fully recov- To be depreciable, your property must have a Example 1. On November 22 of last year, ered its cost or other basis. You retire property determinable useful life. This means that it must you purchased a dishwasher for your rental from service when you permanently withdraw it be something that wears out, decays, gets used property. The appliance was delivered on De- from use in a trade or business or from use in up, becomes obsolete, or loses its value from cember 7, but wasn’t installed and ready for use the production of income because of any of the natural causes. until January 3 of this year. Because the dish- following events. washer wasn’t ready for use last year, it isn’t • You sell or exchange the property. What Rental Property Can’t Be considered placed in service until this year. • You convert the property to personal use. Depreciated? If the appliance had been installed and • You abandon the property. ready for use when it was delivered in Decem- • The property is destroyed. Certain property can’t be depreciated. This in- ber of last year, it would have been considered cludes land and certain excepted property. placed in service in December, even if it wasn’t actually used until this year. Depreciation Methods Land. You can’t depreciate the cost of land be- cause land generally doesn’t wear out, become Example 2. On April 6, you purchased a Generally, you must use the Modified Acceler- obsolete, or get used up. But if it does, the loss house to use as residential rental property. You ated Cost Recovery System (MACRS) to de- is accounted for upon disposition. The costs of made extensive repairs to the house and had it preciate residential rental property placed in clearing, grading, planting, and landscaping are ready for rent on July 5. You began to advertise service after 1986. usually all part of the cost of land and can’t be the house for rent in July and actually rented it If you placed rental property in service be- depreciated. You may, however, be able to de- beginning September 1. The house is consid- fore 1987, you are using one of the following preciate certain land preparation costs if the ered placed in service in July when it was ready methods. costs are so closely associated with other de- and available for rent. You can begin to depreci- • Accelerated Cost Recovery System preciable property that you can determine a life ate the house in July. (ACRS) for property placed in service after for them along with the life of the associated 1980 but before 1987. Example 3. You moved from your home in property. • Straight line or declining balance method July. During August and September, you made over the useful life of property placed in Example. You built a new house to use as several repairs to the house. On October 1, you service before 1981. a rental and paid for grading, clearing, seeding, listed the property for rent with a real estate and planting bushes and trees. Some of the company, which rented it on December 1. The

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See MACRS Depreciation, later, for more infor- part of your cost basis the sales taxes you de- Example. You buy a building for $60,000 mation. ducted. Such taxes were deductible before cash and assume a mortgage of $240,000 on it. 1987 and after 2003. Your basis is $300,000. Rental property placed in service before 2020. Continue to use the same method of fig- Loans with low or no interest. If you buy Separating cost of land and . If uring depreciation that you used in the past. property on any payment plan that charges little you buy buildings and your cost includes the or no interest, the basis of your property is your cost of the land on which they stand, you must Use of changed. Generally, stated purchase price, less the amount consid- divide the cost between the land and the build- you must use MACRS to depreciate real prop- ered to be unstated interest. See Unstated In- ings to figure the basis for depreciation of the erty that you acquired for personal use before terest and Original Issue Discount (OID) in Pub. buildings. The part of the cost that you allocate 1987 and changed to business or income-pro- 537, Installment Sales. to each asset is the ratio of the fair market value ducing use after 1986. This includes your resi- of that asset to the fair market value of the dence that you changed to rental use. See Real property. If you buy real property, such whole property at the time you buy it. Property Owned or Used in 1986 in chapter 1 of as a building and land, certain fees and other If you aren’t certain of the fair market values Pub. 946 for those situations in which MACRS expenses you pay are part of your cost basis in of the land and the buildings, you can divide the isn’t allowed. the property. cost between them based on their assessed values for real estate tax purposes. Improvements made after 1986. Treat an im- Real estate taxes. If you buy real property provement made after 1986 to property you and agree to pay real estate taxes on it that Example. You buy a house and land for placed in service before 1987 as separate de- were owed by the seller and the seller doesn’t $200,000. The purchase doesn’t spec- preciable property. As a result, you can depreci- reimburse you, the taxes you pay are treated as ify how much of the purchase price is for the ate that improvement as separate property un- part of your basis in the property. You can’t de- house and how much is for the land. der MACRS if it is the type of property that duct them as taxes paid. The latest real estate tax assessment on the otherwise qualifies for MACRS depreciation. If you reimburse the seller for real estate property was based on an assessed value of For more information about improvements, see taxes the seller paid for you, you can usually $160,000, of which $136,000 was for the house Additions or improvements to property, later in deduct that amount. Don’t include that amount and $24,000 was for the land. this chapter, under Recovery Periods Under in your basis in the property. You can allocate 85% ($136,000 ÷ GDS. $160,000) of the purchase price to the house Settlement fees and other costs. The fol- and 15% ($24,000 ÷ $160,000) of the purchase This publication discusses MACRS de- lowing settlement fees and costs for price to the land. ! preciation only. If you need information buying the property are part of your basis in the Your basis in the house is $170,000 (85% of CAUTION about depreciating property placed in property. $200,000) and your basis in the land is $30,000 service before 1987, see Pub. 534. • Abstract fees. (15% of $200,000). • Charges for installing utility services. • Legal fees. Basis of Depreciable • Recording fees. Basis Other Than Cost Property • Surveys. • Transfer taxes. You can’t use cost as a basis for property that • . you received: The basis of property used in a rental activity is • Any amounts the seller owes that you • In return for services you performed; generally its adjusted basis when you place it in agree to pay, such as back taxes or inter- • In an exchange for other property; service in that activity. This is its cost or other est, recording or mortgage fees, charges • As a gift; basis when you acquired it, adjusted for certain for improvements or repairs, and sales • From your spouse, or from your former items occurring before you place it in service in commissions. spouse as the result of a ; or the rental activity. • As an inheritance. The following are settlement fees and clos- If you depreciate your property under ing costs you can’t include in your basis in the If you received property in one of these MACRS, you may also have to reduce your ba- property. ways, see Pub. 551 for information on how to sis by certain deductions and credits with re- 1. Fire insurance premiums. figure your basis. spect to the property. 2. Rent or other charges relating to occu- Basis and adjusted basis are explained in pancy of the property before closing. Adjusted Basis the following discussions. 3. Charges connected with getting or refi- To figure your property's basis for depreciation, If you used the property for personal nancing a loan, such as: you may have to make certain adjustments (in- purposes before changing it to rental creases and decreases) to the basis of the a. Points (discount points, loan origina- use, its basis for depreciation is the property for events occurring between the time tion fees), lesser of its adjusted basis or its fair market you acquired the property and the time you value when you change it to rental use. See Ba- b. premiums, placed it in service for business or the produc- sis of Property Changed to Rental Use in chap- tion of income. The result of these adjustments c. Loan assumption fees, ter 4. to the basis is the adjusted basis. d. Cost of a credit report, and Increases to basis. You must increase the Cost Basis e. Fees for an appraisal required by a basis of any property by the cost of all items lender. properly added to a capital account. These in- The basis of property you buy is usually its cost. Also, don’t include amounts placed in es- clude the following. The cost is the amount you pay for it in cash, in crow for the future payment of items such as • The cost of any additions or improvements debt obligation, in other property, or in services. taxes and insurance. made before placing your property into Your cost also includes amounts you pay for: service as a rental that have a useful life of • Sales tax charged on the purchase (but Assumption of a mortgage. If you buy more than 1 year. see Exception next), property and become liable for an existing mort- • Amounts spent after a casualty to restore • Freight charges to obtain the property, and gage on the property, your basis is the amount the damaged property. • Installation and testing charges. you pay for the property plus the amount re- • The cost of extending utility service lines to maining to be paid on the mortgage. Exception. If you deducted state and local the property. general sales taxes as an itemized deduction on Schedule A (Form 1040), don’t include as

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• Legal fees, such as the cost of defending • Residential energy credits you were al- Depreciation System (ADS). You must use and perfecting title, or settling is- lowed before 1986 or after 2005 if you GDS unless you are specifically required by law sues. added the cost of the energy items to the to use ADS or you elect to use ADS. basis of your home. Additions or improvements. Add to the • Exclusion from income of subsidies for en- Excluded Property basis of your property the amount an addition or ergy conservation measures. improvement actually costs you, including any • Special depreciation allowance or a sec- You can’t use MACRS for certain personal amount you borrowed to make the addition or tion 179 deduction claimed on qualified improvement. This includes all direct costs, property (such as furniture or appliances) property. placed in service in your rental property in 2020 such as material and labor, but doesn’t include • Depreciation you deducted or could have your own labor. It also includes all expenses re- if it had been previously placed in service be- deducted on your tax returns under the fore 1987, when MACRS became effective. lated to the addition or improvement. method of depreciation you chose. If you For example, if you had an architect draw up didn’t deduct enough or deducted too plans for remodeling your property, the archi- In most cases, personal property is exclu- much in any year, see Depreciation under ded from MACRS if you (or a person related to tect's is a part of the cost of the remodeling. Decreases to Basis in Pub. 551. Or, if you had your lot surveyed to put up a you) owned or used it in 1986 or if your tenant is fence, the cost of the survey is a part of the cost If your rental property was previously used a person (or someone related to the person) of the fence. as your main home, you must also decrease the who owned or used it in 1986. However, the Keep separate accounts for depreciable ad- basis by the following. property isn’t excluded if your 2020 deduction ditions or improvements made after you place • Gain you postponed from the sale of your under MACRS (using a half-year convention) is the property in service in your rental activity. For main home before May 7, 1997, if the re- less than the deduction you would have under information on depreciating additions or im- placement home was converted to your ACRS. For more information, see What Method provements, see Additions or improvements to rental property. Can You Use To Depreciate Your Property? in property, later in this chapter, under Recovery • District of Columbia first-time homebuyer chapter 1 of Pub. 946. Periods Under GDS. credit allowed on the purchase of your main home after August 4, 1997, and be- Electing ADS The cost of landscaping improvements fore January 1, 2012. is usually treated as an addition to the ! • Amount of qualified principal residence in- If you choose, you can use the ADS method for CAUTION basis of the land, which isn’t deprecia- debtedness discharged on or after January most property. Under ADS, you use the straight ble. However, see What Rental Property Can’t 1, 2007. line method of depreciation. Be Depreciated, earlier. Assessments for local improvements. Special Depreciation The election of ADS for one item in a class Assessments for items which tend to increase of property generally applies to all property in the value of property, such as streets and side- Allowance that class placed in service during the tax year walks, must be added to the basis of the prop- of the election. However, the election applies on a property-by-property basis for residential erty. For example, if your installs curbing on For 2020, some used in connection rental property and nonresidential real property. the street in front of your house, and assesses with residential real property activities may you and your neighbors for its cost, you must qualify for a special depreciation allowance. add the assessment to the basis of your prop- This allowance is figured before you figure your If you choose to use ADS for your residential erty. Also, add the cost of legal fees paid to ob- regular depreciation deduction. See chapter 3 rental property, the election must be made in tain a decrease in an assessment levied against of Pub. 946 for details. Also, see the instruc- the first year the property is placed in service. property to pay for local improvements. You tions for Form 4562, line 14. Once you make this election, you can never re- can’t deduct these items as taxes or depreciate voke it. them. If you qualify for, but choose not to take, a However, you can deduct assessments for special depreciation allowance, you must attach For property placed in service during 2020, the purpose of maintenance or repairs or for the a statement to your return. The details of this you make the election to use ADS by entering purpose of meeting interest charges related to election are in chapter 3 of Pub. 946 and the in- the depreciation on Form 4562, Part III, Sec- the improvements. Don’t add them to your basis structions for Form 4562, line 14. tion C, line 20c. in the property. Deducting vs. capitalizing costs. Don’t MACRS Depreciation Property Classes Under GDS add to your basis costs you can deduct as cur- rent expenses. However, there are certain costs Each item of property that can be depreciated Most business and investment property placed you can choose either to deduct or to capitalize. under MACRS is assigned to a property class, in service after 1986 is depreciated using If you capitalize these costs, include them in determined by its class life. The property class MACRS. your basis. If you deduct them, don’t include generally determines the depreciation method, them in your basis. This section explains how to determine recovery period, and convention. The costs you may choose to deduct or cap- which MACRS depreciation system applies to italize include carrying charges, such as interest your property. It also discusses other informa- The property classes under GDS are: and taxes, that you must pay to own property. tion you need to know before you can figure de- • 3-year property, For more information about deducting or preciation under MACRS. This information in- • 5-year property, capitalizing costs and how to make the election, cludes the property's: • 7-year property, see Carrying Charges in chapter 7 of Pub. 535. • Recovery class, • 10-year property, • Applicable recovery period, • 15-year property, Decreases to basis. You must decrease the • Convention, • 20-year property, basis of your property by any items that repre- • Placed-in-service date, • Nonresidential real property, and sent a return of your cost. These include the fol- • Basis for depreciation, and • Residential rental property. lowing. • Depreciation method. • Insurance or other payment you receive as Under MACRS, property that you placed in the result of a casualty or theft loss. service during 2020 in your rental activities gen- • Casualty loss not covered by insurance for Depreciation Systems erally falls into one of the following classes. which you took a deduction. • 5-year property. This class includes com- • Amount(s) you receive for granting an MACRS consists of two systems that determine puters and peripheral equipment, office easement. how you depreciate your property—the General machinery (typewriters, calculators, cop- Depreciation System (GDS) and the Alternative iers, etc.), automobiles, and light trucks.

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This class also includes appliances, • The date the property to which the addition Mid-month convention. A mid-month conven- carpeting, and furniture used in a residen- or improvement was made is placed in tion is used for all residential rental property and tial rental real estate activity. service. nonresidential real property. Under this conven- Depreciation is limited on automobiles tion, you treat all property placed in service, or and other property used for transportation Example. You own a residential rental disposed of, during any month as placed in and property of a type generally used for house that you have been renting since 1986 service, or disposed of, at the midpoint of that entertainment, recreation, or amusement. and depreciating under ACRS. You built an ad- month. See chapter 5 of Pub. 946. dition onto the house and placed it in service in 2020. You must use MACRS for the addition. Mid-quarter convention. A mid-quarter con- • 7-year property. This class includes of- Under GDS, the addition is depreciated as resi- vention must be used if the mid-month conven- fice furniture and equipment (desks, file dential rental property over 27.5 years. tion doesn’t apply and the total depreciable ba- cabinets, and similar items). This class sis of MACRS property placed in service in the also includes any property that doesn’t Conventions last 3 months of a tax year (excluding nonresi- have a class life and that hasn’t been des- dential real property, residential rental property, and property placed in service and disposed of ignated by law as being in any other class. A convention is a method established under in the same year) is more than 40% of the total • 15-year property. This class includes MACRS to set the beginning and end of the re- basis of all such property you place in service roads, fences, and shrubbery (if deprecia- covery period. The convention you use deter- during the year. ble). mines the number of months for which you can • Residential rental property. This class claim depreciation in the year you place prop- Under this convention, you treat all property includes any real property that is a rental erty in service and in the year you dispose of placed in service, or disposed of, during any building or structure (including a mobile the property. quarter of a tax year as placed in service, or dis- home) for which 80% or more of the gross posed of, at the midpoint of the quarter. rental income for the tax year is from dwell- ing units. It doesn’t include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a Table 2-1. MACRS Recovery Periods for transient basis. If you live in any part of the Property Used in building or structure, the gross rental in- Rental Activities Keep for Your Records come includes the fair of the part you live in. MACRS Recovery Period The other property classes generally General Alternative ! don’t apply to property used in rental Depreciation Depreciation CAUTION activities. These classes aren’t dis- Type of Property System System cussed in this publication. See Pub. 946 for and their peripheral equipment ...... 5 years 5 years more information. Office machinery, such as: • Typewriters Recovery Periods Under • Calculators GDS • Copiers ...... 5 years 6 years Automobiles ...... 5 years 5 years The recovery period of property is the number Light trucks ...... 5 years 5 years of years over which you recover its cost or other Appliances, such as: basis. The recovery periods are generally lon- • Stoves ger under ADS than GDS. • Refrigerators ...... 5 years 9 years The recovery period of property depends on Carpets ...... 5 years 9 years its property class. Under GDS, the recovery pe- Furniture used in rental property ...... 5 years 9 years riod of an asset is generally the same as its property class. Office furniture and equipment, such as: • Desks Class lives and recovery periods for most • Files ...... 7 years 10 years assets are listed in Appendix B of Pub. 946. Any property that doesn’t have a class life and that hasn’t been See Table 2-1 for recovery periods of property designated by law as being in any other class ...... 7 years 12 years commonly used in residential rental activities. Roads ...... 15 years 20 years Qualified Indian reservation property. Shrubbery ...... 15 years 20 years Shorter recovery periods are provided under Fences ...... 15 years 20 years MACRS for qualified Indian reservation prop- erty placed in service on Indian reservations. Residential rental property (buildings or structures) and For more information, see Pub. 946. structural components such as furnaces, waterpipes, venting, etc...... 27.5 years 30 years1 Additions or improvements to property. Additions and improvements, such as a new roof ...... The same recovery period as Treat additions or improvements you make to that of the property to which the your depreciable rental property as separate addition or improvement is property items for depreciation purposes. made, determined as if the The property class and recovery period of property were placed in service the addition or improvement is the one that at the same time as the addition would apply to the original property if you had or improvement. placed it in service at the same time as the ad- dition or improvement. 1 The recovery period for an addition or im- 40 years for property placed in service before January 1, 2018. However, the ADS recovery period for provement to property begins on the later of: residential rental property placed in service before January 1, 2018, is 30 years if the property is held by an • The date the addition or improvement is electing real property trade or business (as defined in section 163(j)(7)(B)) and sections 168(g)(1)(A), (B), placed in service, or (C), (D), or (E) did not apply to the property before January 1, 2018.

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Example. During the tax year, Tom pur- Residential rental property. You must use for complete tables. The percentages in Tables chased the following items to use in his rental the straight line method and a mid-month con- 2-2a, 2-2b, and 2-2c make the change from de- property. He elects not to claim the special de- vention for residential rental property. In the first clining balance to straight line in the year that preciation allowance discussed earlier. year that you claim depreciation for residential straight line will give a larger deduction. • A dishwasher for $400 that he placed in rental property, you can claim depreciation only service in January. for the number of months the property is in use. If you elect to use the straight line method • Used furniture for $100 that he placed in Use the mid-month convention (explained un- for 5-, 7-, or 15-year property, or the 150% de- service in September. der Conventions, earlier). clining balance method for 5- or 7-year prop- • A refrigerator for $800 that he placed in erty, use the tables in Appendix A of Pub. 946. service in October. 5-, 7-, or 15-year property. For property in the 5- or 7-year class, use the 200% declining bal- Tom uses the calendar year as his tax year. How to use the percentage tables. You must ance (DB) method and a half-year convention. The total basis of all property placed in service apply the table rates to your property's unadjus- However, in limited cases you must use the that year is $1,300. The $800 basis of the refrig- ted basis (defined later) each year of the recov- mid-quarter convention, if it applies. For prop- erator placed in service during the last 3 months ery period. erty in the 15-year class, use the 150% declin- of his tax year exceeds $520 (40% × $1,300). Once you begin using a percentage table to ing balance method and a half-year convention. Tom must use the mid-quarter convention in- figure depreciation, you must continue to use it stead of the half-year convention for all three You can also choose to use the 150% de- for the entire recovery period unless there is an items. clining balance method for property in the 5- or adjustment to the basis of your property for a 7-year class. The choice to use the 150% reason other than: Half-year convention. The half-year conven- method for one item in a class of property ap- 1. Depreciation allowed or allowable, or tion is used if neither the mid-quarter conven- plies to all property in that class that is placed in tion nor the mid-month convention applies. Un- service during the tax year of the election. You 2. An addition or improvement that is depre- der this convention, you treat all property make this election on Form 4562. In Part III, col- ciated as a separate item of property. placed in service, or disposed of, during a tax umn (f), enter “150 DB.” Once you make this year as placed in service, or disposed of, at the election, you can’t change to another method. If there is an adjustment for any reason midpoint of that tax year. If you use either the 200% or 150% declin- other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use If this convention applies, you deduct a half ing balance method, figure your deduction us- the table. For the year of the adjustment and for year of depreciation for the first year and the ing the straight line method in the first tax year the remaining recovery period, figure deprecia- last year that you depreciate the property. You that the straight line method gives you an equal tion using the property's adjusted basis at the deduct a full year of depreciation for any other or larger deduction. end of the year and the appropriate deprecia- year during the recovery period. You can also choose to use the straight line method with a half-year or mid-quarter conven- tion method, as explained earlier under Figuring tion for 5-, 7-, or 15-year property. The choice to Your Depreciation Deduction. See Figuring the Figuring Your Depreciation use the straight line method for one item in a Deduction Without Using the Tables in chap- Deduction class of property applies to all property in that ter 4 of Pub. 946. class that is placed in service during the tax Unadjusted basis. This is the same basis You can figure your MACRS depreciation de- year of the election. You elect the straight line you would use to figure gain on a sale (see Ba- duction in one of two ways. The deduction is method on Form 4562. In Part III, (f), sis of Depreciable Property, earlier), but without substantially the same both ways. You can fig- enter “S/L.” Once you make this election, you reducing your original basis by any MACRS de- ure the deduction using either: can’t change to another method. preciation taken in earlier years. • The depreciation method and convention However, you do reduce your original basis that apply over the recovery period of the MACRS Percentage Tables by other amounts claimed on the property, in- property, or cluding: • The percentage from the MACRS percent- You can use the percentages in Table 2-2 to • Any amortization, age tables. compute annual depreciation under MACRS. • Any section 179 deduction, and The tables show the percentages for the first Any special depreciation allowance. In this publication, we will use the percent- • few years or until the change to the straight line age tables. For instructions on how to compute For more information, see chapter 4 of Pub. method is made. See Appendix A of Pub. 946 the deduction, see chapter 4 of Pub. 946. 946.

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Example 1. You purchased a stove and re- $192 ($600 × 0.32) for the stove and $320 Tables 2-2a, 2-2b, and 2-2c. The percen- frigerator and placed them in service in June. ($1,000 × 0.32) for the refrigerator. tages in these tables take into account the Your basis in the stove is $600 and your basis half-year and mid-quarter conventions. Use Ta- in the refrigerator is $1,000. Both are 5-year Example 2. Assume the same facts as in ble 2-2a for 5-year property, Table 2-2b for property. Using the half-year convention col- Example 1, except you buy the refrigerator in 7-year property, and Table 2-2c for 15-year umn in Table 2-2a, the depreciation percentage October instead of June. Since the refrigerator property. Use the percentage in the second col- for Year 1 is 20%. For that year, your deprecia- was placed in service in the last 3 months of the umn (half-year convention) unless you are re- tion deduction is $120 ($600 × 0.20) for the tax year, and its basis ($1,000) is more than quired to use the mid-quarter convention (ex- stove and $200 ($1,000 × 0.20) for the refriger- 40% of the total basis of all property placed in plained earlier). If you must use the mid-quarter ator. service during the year ($1,600 × 0.40 = $640), convention, use the column that corresponds to For Year 2, the depreciation percentage is you are required to use the mid-quarter conven- the calendar year quarter in which you placed 32%. That year's depreciation deduction will be tion to figure depreciation on both the stove and the property in service. refrigerator. Because you placed the refrigerator in serv- Table 2-2. Optional MACRS GDS Percentage Tables ice in October, you use the fourth quarter col- umn of Table 2-2a and find the depreciation a. MACRS 5-Year Property (200% DB) percentage for Year 1 is 5%. Your depreciation Half-year convention Mid-quarter convention deduction for the refrigerator is $50 ($1,000 x 0.05). Year First Second Third Fourth Because you placed the stove in service in quarter quarter quarter quarter June, you use the second quarter column of Ta- ble 2-2a and find the depreciation percentage 1 20.00% 35.00% 25.00% 15.00% 5.00% for Year 1 is 25%. For that year, your deprecia- 2 32.00 26.00 30.00 34.00 38.00 tion deduction for the stove is $150 ($600 x 3 19.20 15.60 18.00 20.40 22.80 0.25). 4 11.52 11.01 11.37 12.24 13.68 5 11.52 11.01 11.37 11.30 10.94 Table 2-2d. Use this table when you are using 6 5.76 1.38 4.26 7.06 9.58 the GDS 27.5-year option for residential rental b. MACRS 7-Year Property (200% DB) property. Find the row for the month that you placed the property in service. Use the percen- Half-year convention Mid-quarter convention tages listed for that month to figure your depre- ciation deduction. The mid-month convention is Year First Second Third Fourth taken into account in the percentages shown in quarter quarter quarter quarter the table. Continue to use the same row (month) under the column for the appropriate 1 14.29% 25.00% 17.85% 10.71% 3.57% year. 2 24.49 21.43 23.47 25.51 27.55 3 17.49 15.31 16.76 18.22 19.68 Example. You purchased a single family 4 12.49 10.93 11.97 13.02 14.06 rental house for $185,000 and placed it in serv- 5 8.93 8.75 8.87 9.30 10.04 ice on February 8. The sales contract showed 6 8.92 8.74 8.87 8.85 8.73 that the building cost $160,000 and the land 7 8.93 8.75 8.87 8.86 8.73 cost $25,000. Your basis for depreciation is its c. MACRS 15-Year Property (150% DB) original cost, $160,000. This is the first year of service for your residential rental property and Half-year convention Mid-quarter convention you decide to use GDS, which has a recovery Year First Second Third Fourth period of 27.5 years. Using Table 2-2d, you find quarter quarter quarter quarter that the percentage for property placed in serv- ice in February of Year 1 is 3.182%. That year's 1 5.00% 8.75% 6.25% 3.75% 1.25% depreciation deduction is $5,091 ($160,000 x 2 9.50 9.13 9.38 9.63 9.88 0.03182). 3 8.55 8.21 8.44 8.66 8.89 4 7.70 7.39 7.59 7.80 8.00 5 6.93 6.65 6.83 7.02 7.20 Figuring MACRS 6 6.23 5.99 6.15 6.31 6.48 Depreciation Under ADS 7 5.90 5.90 5.91 5.90 5.90 8 5.90 5.91 5.90 5.90 5.90 Table 2-1 shows the ADS recovery periods for d. Residential Rental Property-GDS (27.5-year S/L with mid-month convention) property used in rental activities. Use the row for the month of the taxable year placed in service. See Appendix B of Pub. 946 for other prop- erty. If your property isn’t listed in Appendix B, it Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 is considered to have no class life. Under ADS, Jan. 3.485% 3.636% 3.636% 3.636% 3.636% 3.636% personal property with no class life is depreci- Feb. 3.182 3.636 3.636 3.636 3.636 3.636 ated using a recovery period of 12 years. March 2.879 3.636 3.636 3.636 3.636 3.636 Use the mid-month convention for residen- Apr. 2.576 3.636 3.636 3.636 3.636 3.636 May 2.273 3.636 3.636 3.636 3.636 3.636 tial rental property and nonresidential real prop- erty. For all other property, use the half-year or June 1.970 3.636 3.636 3.636 3.636 3.636 mid-quarter convention, as appropriate. July 1.667 3.636 3.636 3.636 3.636 3.636 Aug. 1.364 3.636 3.636 3.636 3.636 3.636 See Pub. 946 for ADS depreciation tables. Sept. 1.061 3.636 3.636 3.636 3.636 3.636 Oct. 0.758 3.636 3.636 3.636 3.636 3.636 Nov. 0.455 3.636 3.636 3.636 3.636 3.636 Dec. 0.152 3.636 3.636 3.636 3.636 3.636

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Schedule E (Form 1040) property or the rental is part of a trade or busi- Claiming the Correct ness as a real estate dealer. If you rent buildings, , or apartments, and Amount of Depreciation provide basic services such as heat and light, Providing substantial services. If you pro- trash collection, etc., you normally report your vide substantial services that are primarily for your tenant's convenience, such as regular You should claim the correct amount of depreci- rental income and expenses on Schedule E, Part I. cleaning, changing linen, or maid service, you ation each tax year. If you didn’t claim all the report your rental income and expenses on depreciation you were entitled to deduct, you List your total income, expenses, and depre- Schedule C. Use Form 1065, U.S. Return of must still reduce your basis in the property by ciation for each rental property. Be sure to enter Income, if your rental activity is a the full amount of depreciation that you could the number of fair rental and personal-use days partnership (including a partnership with your have deducted. For more information, see De- on line 2. spouse unless it is a qualified joint venture). preciation under Decreases to Basis in Pub. Substantial services don’t include the furnishing 551. If you have more than three rental or royalty of heat and light, cleaning of public areas, trash If you deducted an incorrect amount of de- properties, complete and attach as many collection, etc. For more information, see Pub. preciation for property in any year, you may be Schedules E as are needed to separately list all 334, Tax Guide for Small Business. Also, you able to make a correction by filing Form 1040-X, of the properties. However, fill in lines 23a may have to pay self-employment tax on your Amended U.S. Individual Income Tax Return. If through 26 on only one Schedule E. The figures rental income using Schedule SE (Form 1040), you aren’t allowed to make the correction on an on lines 23a through 26 on that Schedule E Self-Employment Tax. For a discussion of “sub- amended return, you may be able to change should be the combined totals for all properties stantial services,” see Real Estate Rents in your accounting method to claim the correct reported on your Schedules E. chapter 5 of Pub. 334. amount of depreciation. See How Do You Cor- On Schedule E, page 1, line 18, enter the rect Depreciation Deductions? in Pub. 946 for depreciation you are claiming for each property. Qualified Joint Venture more information. You may also need to attach Form 4562 to claim some or all of your depreciation. See If you and your spouse each materially partici- Form 4562, later, for more information. pate (see Material participation under Passive Activity Limits, later) as the only members of a If you have a loss from your rental real es- jointly owned and operated real estate busi- tate activity, you may also need to complete ness, and you file a joint return for the tax year, one or both of the following forms. you can make a joint election to be treated as a 3. • Form 6198, At-Risk Limitations. See qualified joint venture instead of a partnership. At-Risk Rules, later. Also, see Pub. 925. This election, in most cases, won’t increase the • Form 8582, Passive Activity Loss Limita- total tax owed on the joint return, but it does tions. See Passive Activity Limits, later. give each of you credit for social security earn- Reporting ings on which retirement benefits are based Page 2 of Schedule E is used to report in- and for Medicare coverage if your rental income come or loss from , S corporations, is subject to self-employment tax. Rental Income, estates, trusts, and real estate mortgage invest- ment conduits. If you need to use page 2 of If you make this election, you must report Expenses, and Schedule E and you have more than three rental real estate income on Schedule E (or rental or royalty properties, be sure to use Schedule C, if you provide substantial serv- page 2 of the same Schedule E you used to en- ices). You won’t be required to file Form 1065 Losses ter the combined totals for your rental activity on for any year the election is in effect. Rental real page 1. Also, include the amount from line 26 estate income generally isn’t included in net Figuring the or loss for a residential (Part I) in the “Total income or (loss)” on line 41 earnings from self-employment subject to rental activity may involve more than just listing (Part V). self-employment tax and is generally subject to the income and deductions on Schedule E the passive activity limits. (Form 1040). There are activities that don’t Form 4562. You must complete and attach qualify to use Schedule E, such as when the ac- Form 4562 if you are claiming the following de- If you and your spouse filed a Form 1065 for tivity isn’t engaged in to make a profit or when preciation in your rental activity. the year prior to the election, the partnership you provide substantial services in conjunction • Depreciation, including the special depre- terminates at the end of the tax year immedi- with the property. ciation allowance, on property placed in ately preceding the year the election takes ef- service during 2020. fect. There are also the limitations that may need to • Depreciation on listed property (such as a For more information on qualified joint ven- be applied if you have a net loss on Schedule E. car), regardless of when it was placed in tures, go to IRS.gov/QJV. There are two: (1) the limitation based on the service. amount of investment you have at risk in your rental activity, and (2) the special limits imposed Otherwise, figure your depreciation on your own on passive activities. worksheet. You don’t have to attach these com- Limits on putations to your return, but you should keep You may also have a gain or loss related to your them in your records for future reference. Rental Losses rental property from a casualty or theft. This is You may also need to attach Form 4562 if considered separately from the income and ex- you are claiming a section 179 deduction, am- If you have a loss from your rental real estate pense information you report on Schedule E. ortizing costs that began during 2020, or claim activity, two sets of rules may limit the amount any other deduction for a vehicle, including the of loss you can report on Schedule E. You must standard mileage rate or lease expenses. consider these rules in the order shown below. Which Forms To Use See Pub. 946 for information on preparing Both are discussed in this section. Form 4562. 1. At-risk rules. These rules are applied first if The basic form for reporting residential rental in- there is investment in your rental real es- come and expenses is Schedule E (Form tate activity for which you aren’t at risk. 1040). However, don’t use that schedule to re- Schedule C (Form 1040), This applies only if the real property was port a not-for-profit activity. See Not Rented for Profit or Loss From Business placed in service after 1986. Profit, later, in chapter 4. There are also other rental situations in which forms other than Generally, Schedule C is used when you pro- 2. Passive activity limits. Generally, rental Schedule E would be used. vide substantial services in conjunction with the real estate activities are considered

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passive activities and losses aren’t deduc- the tax year are performed in real property Form 8582. You may have to complete Form tible unless you have income from other trades or businesses in which you materi- 8582 to figure the amount of any passive activ- passive activities to offset them. However, ally participate. ity loss for the current tax year for all activities there are exceptions. • You perform more than 750 hours of serv- and the amount of the passive activity loss al- ices during the tax year in real property lowed on your tax return. See Form 8582 not re- Excess business loss limitation. The excess trades or businesses in which you materi- quired, later in this chapter, to determine if you business loss limitation under section 461(l) is ally participate. must complete Form 8582. not available for the 2020 tax year as it has If you qualify as a real estate professional, If you are required to complete Form 8582 been retroactively repealed. rental real estate activities in which you materi- and are also subject to the at-risk rules, include ally participated aren’t passive activities. For the amount from Form 6198, line 21 (deductible At-Risk Rules purposes of determining whether you materially loss), in column (b) of Form 8582, Worksheet 1 participated in your rental real estate activities, or 3, as required. You may be subject to the at-risk rules if you each interest in rental real estate is a separate have: activity unless you elect to treat all your inter- Exception for Personal Use of • A loss from an activity carried on as a trade ests in rental real estate as one activity. Dwelling Unit or business or for the production of in- Don’t count personal services you perform come, and as an employee in real property trades or busi- If you used the rental property as a home during • Amounts invested in the activity for which nesses unless you are a 5% owner of your em- the year, any income, deductions, gain, or loss you aren’t fully at risk. ployer. You are a 5% owner if you own (or are allocable to such use is not to be taken into ac- considered to own) more than 5% of your em- count for purposes of the passive activity loss Losses from holding real property (other ployer's outstanding stock, or capital or profits limitation. Instead, follow the rules explained in than mineral property) placed in service before interest. chapter 5. 1987 aren’t subject to the at-risk rules. Don’t count your spouse's personal services In most cases, any loss from an activity sub- to determine whether you met the requirements Exception for Rental Real Estate ject to the at-risk rules is allowed only to the ex- listed earlier to qualify as a real estate profes- With Active Participation tent of the total amount you have at risk in the sional. However, you can count your spouse's activity at the end of the tax year. You are con- participation in an activity in determining if you If you or your spouse actively participated in a sidered at risk in an activity to the extent of cash materially participated. passive rental real estate activity, you may be and the adjusted basis of other property you able to deduct up to $25,000 of loss from the Real property trades or businesses. A contributed to the activity and certain amounts activity from your nonpassive income. This spe- real property trade or business is a trade or borrowed for use in the activity. Any loss that is cial allowance is an exception to the general business that does any of the following with real disallowed because of the at-risk limits is trea- rule disallowing losses in excess of income property. ted as a deduction from the same activity in the from passive activities. Similarly, you may be Develops or redevelops it. next tax year. See Pub. 925 for a discussion of • able to offset credits from the activity against Constructs or reconstructs it. the at-risk rules. • the tax on up to $25,000 of nonpassive income Acquires it. • after taking into account any losses allowed un- Converts it. Form 6198. If you are subject to the at-risk • der this exception. rules, file Form 6198 with your tax return. • Rents or it. • Operates or manages it. Example. Jane is single and has $40,000 • Brokers it. Passive Activity Limits in wages, $2,000 of passive income from a limi- ted partnership, and $3,500 of passive loss Choice to treat all interests as one activity. from a rental real estate activity in which she ac- In most cases, all rental real estate activities If you were a real estate professional and had tively participated. $2,000 of Jane's $3,500 loss (except those of certain real estate professio- more than one rental real estate interest during offsets her passive income. The remaining nals, discussed later) are passive activities. For the year, you can choose to treat all the inter- $1,500 loss can be deducted from her $40,000 this purpose, a rental activity is an activity from ests as one activity. You can make this choice wages. which you receive income mainly for the use of for any year that you qualify as a real estate tangible property, rather than for services. For a professional. If you forgo making the choice for The special allowance isn’t available if discussion of activities that aren’t considered one year, you can still make it for a later year. ! you were married, lived with your rental activities, see Rental Activities in Pub. If you make the choice, it is binding for the CAUTION spouse at any time during the year, 925. tax year you make it and for any later year that and are filing a separate return. Deductions or losses from passive activities you are a real estate professional. This is true are limited. You generally can’t offset income, even if you aren’t a real estate professional in Active participation. You actively participated other than passive income, with losses from any intervening year. (For that year, the excep- in a rental real estate activity if you (and your passive activities. Nor can you offset taxes on tion for real estate professionals won’t apply in spouse) owned at least 10% of the rental prop- income, other than passive income, with credits determining whether your activity is subject to erty and you made management decisions or resulting from passive activities. Any excess the passive activity rules.) arranged for others to provide services (such as loss or credit is carried forward to the next tax See the Instructions for Schedule E for infor- repairs) in a significant and bona fide sense. year. Exceptions to the rules for figuring passive mation about making this choice. Management decisions that may count as ac- activity limits for personal use of a dwelling unit tive participation include approving new ten- and for rental real estate with active participa- Material participation. Generally, you materi- ants, deciding on rental terms, approving ex- tion are discussed later. ally participated in an activity for the tax year if penditures, and other similar decisions. you were involved in its operations on a regular, For a detailed discussion of these rules, see continuous, and substantial basis during the Example. Mike is single and had the follow- Pub. 925. year. For details, see Pub. 925 or the Instruc- ing income and losses during the tax year. tions for Schedule C. Real estate professionals. If you are a real ...... $42,300 estate professional, complete line 43 of Sched- Participating spouse. If you are married, ...... 300 ule E. determine whether you materially participated in Interest ...... 1,400 Rental loss ...... (4,000 ) You qualify as a real estate professional for an activity by also counting any participation in the activity by your spouse during the year. Do the tax year if you meet both of the following re- The rental loss was from the rental of a quirements. this even if your spouse owns no interest in the activity or files a separate return for the year. house Mike owned. Mike had advertised and • More than half of the personal services you rented the house to the current tenant himself. perform in all trades or businesses during

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He also collected the rents, which usually came Form 8582 not required. Don’t complete Instructions for Form 4684 for where to carry by mail. All repairs were either made or contrac- Form 8582 if you meet all of the following condi- your net gain or loss. ted out by Mike. tions. Although the rental loss is from a passive • Your only passive activities were rental real activity, because Mike actively participated in estate activities in which you actively par- Example the rental he can use the ticipated. entire $4,000 loss to offset his other income. • Your overall net loss from these activities is In February 2015, Marie bought a rental house $25,000 or less ($12,500 or less if married for $135,000 (house $120,000 and land Maximum special allowance. The maximum filing separately and you lived apart from $15,000) and immediately began renting it out. special allowance is: your spouse all year). In 2020, she rented it all 12 months for a • $25,000 for single individuals and married • If married filing separately, you lived apart monthly rental fee of $1,125. In addition to her individuals filing a joint return for the tax from your spouse all year. rental income of $13,500 (12 x $1,125), Marie year, • You have no prior year unallowed losses had the following expenses. • $12,500 for married individuals who file from these (or any other passive) activities. separate returns for the tax year and lived • You have no current or prior year unal- Mortgage interest ...... $8,000 apart from their spouses at all times during lowed credits from passive activities. Fire insurance (1-year policy) ...... 250 the tax year, and • Your MAGI is $100,000 or less ($50,000 or Miscellaneous repairs ...... 400 • $25,000 for a qualifying estate reduced by less if married filing separately and you Real estate taxes imposed and paid ...... 500 the special allowance for which the surviv- lived apart from your spouse all year). Maintenance ...... 200 ing spouse qualified. • You don’t hold any interest in a rental real Marie depreciates the residential rental If your modified estate activity as a limited partner or as a beneficiary of an estate or a trust. property under MACRS GDS. This means using (MAGI) is $100,000 or less ($50,000 or less if the straight line method over a recovery period married filing separately), you can deduct your If you meet all of the conditions listed above, of 27.5 years. loss up to the amount specified above. If your your rental real estate activities aren’t limited by MAGI is more than $100,000 (more than the passive activity rules and you don’t have to She uses Table 2-2d to find her depreciation $50,000 if married filing separately), your spe- complete Form 8582. On lines 23a through 23e percentage. Because she placed the property cial allowance is limited to 50% of the difference of your Schedule E, enter the applicable in service in February 2015, she continues to between $150,000 ($75,000 if married filing amounts. use that row of Table 2-2d. For year 6, the rate separately) and your MAGI. is 3.636%. Generally, if your MAGI is $150,000 or more Marie figures her net rental income or loss ($75,000 or more if you are married filing sepa- for the house as follows. rately), there is no special allowance. Casualties and Thefts Total rental income received Modified adjusted gross income (MAGI). ($1,125 × 12) ...... $13,500 This is your adjusted gross income from Form Minus: Expenses As a result of a casualty or theft, you may have 1040, 1040-SR, or 1040-NR, line 11, figured Mortgage interest ...... $8,000 a loss related to your rental property. You may without taking into account: Fire insurance ...... 250 be able to deduct the loss on your income tax Miscellaneous repairs ...... 400 1. The taxable amount of social security or return. Real estate taxes ...... 500 equivalent tier 1 railroad retirement bene- Maintenance ...... 200 fits, Casualty. This is the damage, destruction, or Total expenses ...... 9,350 loss of property resulting from an identifiable 2. The deductible contributions to traditional Balance ...... $4,150 event that is sudden, unexpected, or unusual. individual retirement accounts (IRAs) and Minus: Depreciation ($120,000 x 3.636% Such events include a storm, fire, or earth- (0.03636)) ...... 4,363 section 501(c)(18) pension plans, quake. Net rental (loss) for house ...... ($213) 3. The exclusion from income of interest from series EE and I U.S. savings bonds used Theft. This is defined as the unlawful taking to pay higher educational expenses, and removing of your money or property with Marie had a net loss for the year. Because the intent to deprive you of it. she actively participated in her passive rental 4. The exclusion of amounts received under real estate activity and her loss was less than an employer's adoption assistance pro- Gain from casualty or theft. It is also possi- $25,000, she can deduct the loss on her return. gram, ble to have a gain from a casualty or theft if you Marie also meets all of the requirements for not 5. Any passive activity income or loss inclu- receive money, including insurance, that is having to file Form 8582. She uses Schedule E, ded on Form 8582, more than your adjusted basis in the property. Part I, to report her rental income and expen- Generally, you must report this gain. However, ses. She enters her income, expenses, and de- 6. Any rental real estate loss allowed to real under certain circumstances, you may defer preciation for the house in the column for Prop- estate professionals, paying tax by choosing to postpone reporting erty A and enters her loss on line 22. Form 4562 7. Any overall loss from a publicly traded the gain. To do this, you must generally buy re- isn’t required. partnership (see Publicly Traded Partner- placement property within 2 years after the ships (PTPs) in the Instructions for Form close of the first tax year in which any part of 8582), your gain is realized. In certain circumstances, the replacement period can be greater than 2 8. The deduction allowed for one-half of years; see Replacement Period in Pub. 547 for self-employment tax, more information. The cost of the replacement 9. The deduction allowed for interest paid on property must be equal to or more than the net 4. student loans, insurance or other payment you received.

10. The deduction for qualified tuition and re- More information. For information on busi- lated fees, and ness and nonbusiness casualty and theft los- Special 11. The deduction allowed for foreign-derived ses, see Pub. 547. intangible income and global intangible low-taxed income. How to report. If you had a casualty or theft Situations that involved property used in your rental activ- ity, figure the net gain or loss in Section B of This chapter discusses some rental real estate Form 4684, Casualties and Thefts. Follow the activities that are subject to additional rules.

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corporation that can be rented but can’t be started renting it out on June 1. You can deduct lived in by tenant-stockholders. as rental expenses seven-twelfths of your Condominiums yearly expenses, such as taxes and insurance. 3. Divide the number of your shares of stock Starting with June, you can deduct as rental by the total number of shares outstanding, A is most often a dwelling unit in expenses the amounts you pay for items gener- including any shares held by the corpora- a multi-unit building, but can also take other ally billed monthly, such as utilities. tion. forms, such as a or garden apart- When figuring depreciation, treat the prop- ment. 4. Multiply the result of (2) by the percentage erty as placed in service on June 1. you figured in (3). This is your depreciation If you own a condominium, you also own a on the stock. share of the common elements, such as land, Basis of Property lobbies, , and service areas. You and Your depreciation deduction for the year Changed to Rental Use the other condominium owners may pay dues can’t be more than the part of your adjusted ba- or assessments to a special corporation that is sis (defined in chapter 2) in the stock of the cor- When you change property you held for per- organized to take care of the common ele- poration that is allocable to your rental property. sonal use to rental use (for example, you rent ments. your former home), the basis for depreciation Payments added to capital account. Pay- will be the lesser of the fair market value or ad- Special rules apply if you rent your condo- ments earmarked for a capital asset or improve- justed basis on the date of conversion. minium to others. You can deduct as rental ex- ment, or otherwise charged to the corporation's penses all the expenses discussed in chapters capital account are added to the basis of your Fair market value. This is the price at which 1 and 2. In addition, you can deduct any dues stock in the corporation. For example, you can’t the property would change hands between a or assessments paid for maintenance of the deduct a payment used to pave a community willing buyer and a willing seller, neither having common elements. parking lot, install a new roof, or pay the princi- to buy or sell, and both having reasonable pal of the corporation's mortgage. You can’t deduct special assessments you knowledge of all the relevant facts. Sales of Treat as a capital cost the amount you were pay to a condominium management corporation similar property, on or about the same date, assessed for capital items. This can’t be more for improvements. However, you may be able to may be helpful in figuring the fair market value than the amount by which your payments to the recover your share of the cost of any improve- of the property. corporation exceeded your share of the corpo- ment by taking depreciation. ration's mortgage interest and real estate taxes. Figuring the basis. The basis for depreciation Your share of interest and taxes is the is the lesser of: Cooperatives amount the corporation elected to allocate to • The fair market value of the property on the you, if it reasonably reflects those expenses for date you changed it to rental use; or your apartment. Otherwise, figure your share in • Your adjusted basis on the date of the If you live in a cooperative, you don’t own your the following manner. change—that is, your original cost or other apartment. Instead, a corporation owns the basis of the property, plus the cost of per- apartments and you are a tenant-stockholder in 1. Divide the number of your shares of stock manent additions or improvements since the cooperative housing corporation. If you rent by the total number of shares outstanding, you acquired it, minus deductions for any your apartment to others, you can usually de- including any shares held by the corpora- casualty or theft losses claimed on earlier duct, as a rental expense, all the maintenance tion. years' income tax returns and other de- fees you pay to the cooperative housing corpo- 2. Multiply the corporation's deductible inter- creases to basis. For other increases and ration. est by the number you figured in (1). This decreases to basis, see Adjusted Basis in is your share of the interest. In addition to the maintenance fees paid to chapter 2. the cooperative housing corporation, you can 3. Multiply the corporation's deductible taxes deduct your direct payments for repairs, up- by the number you figured in (1). This is Example. You originally built a house for keep, and other rental expenses, including in- your share of the taxes. $140,000 on a lot that cost you $14,000, which terest paid on a loan used to buy your stock in you used as your home for many years. Before the corporation. changing the property to rental use this year, you added $28,000 of permanent improve- ments to the house and claimed a $3,500 casu- Depreciation Property Changed alty loss deduction for damage to the house. Part of the improvements qualified for a $500 You will be depreciating your stock in the corpo- to Rental Use residential energy credit, which you claimed on ration rather than the apartment itself. Figure a prior year tax return. Because land isn’t de- your depreciation deduction as follows. If you change your home or other property (or a preciable, you can only include the cost of the part of it) to rental use at any time other than the house when figuring the basis for depreciation. 1. Figure the depreciation for all the depreci- beginning of your tax year, you must divide The adjusted basis of the house at the time able real property owned by the corpora- yearly expenses, such as taxes and insurance, of the change in its use was $164,000 tion. (Depreciation methods are discussed between rental use and personal use. ($140,000 + $28,000 − $3,500 − $500). in chapter 2 of this publication and Pub. On the date of the change in use, your prop- 946.) If you bought your cooperative stock You can deduct as rental expenses only the erty had a fair market value of $168,000, of after its first offering, figure the deprecia- part of the expense that is for the part of the which $21,000 was for the land and $147,000 ble basis of this property as follows. year the property was used or held for rental was for the house. a. Multiply your cost per share by the to- purposes. The basis for depreciation on the house is tal number of outstanding shares. the fair market value on the date of the change You can’t deduct depreciation or insurance ($147,000) because it is less than your adjusted b. Add to the amount figured in (a) any for the part of the year the property was held for basis ($164,000). mortgage debt on the property on the personal use. However, you can include the date you bought the stock. home mortgage interest, mortgage insurance premiums, and real estate tax expenses for the Cooperatives c. Subtract from the amount figured in part of the year the property was held for per- (b) any mortgage debt that isn’t for the sonal use when figuring the amount you can de- If you change your cooperative apartment to depreciable real property, such as the duct on Schedule A. rental use, figure your allowable depreciation as part for the land. explained earlier. (Depreciation methods are 2. Subtract from the amount figured in (1) Example. Your tax year is the calendar discussed in chapter 2 of this publication and any depreciation for space owned by the year. You moved from your home in May and Pub. 946.) The basis of all the depreciable real

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property owned by the cooperative housing cor- connection with renting a in your home, years out of a period of 5 consecutive years, poration is the smaller of the following amounts. your entire cost is a rental expense. If you install you are presumed to be renting your property to • The fair market value of the property on the a second phone line strictly for your tenant's make a profit. date you change your apartment to rental use, all the cost of the second line is deductible use. This is considered to be the same as as a rental expense. You can deduct deprecia- Postponing decision. If you are starting the corporation's adjusted basis minus tion on the part of the house used for rental pur- your rental activity and don’t have 3 years straight line depreciation, unless this value poses as well as on the furniture and equipment showing a profit, you can elect to have the pre- is unrealistic. you use for rental purposes. sumption made after you have the 5 years of • The corporation's adjusted basis in the experience required by the test. You may property on that date. Don’t subtract de- How to divide expenses. If an expense is for choose to postpone the decision of whether the preciation when figuring the corporation's both rental use and personal use, such as mort- rental is for profit by filing Form 5213. You must adjusted basis. gage interest or heat for the entire house, you file Form 5213 within 3 years after the due date must divide the expense between rental use of your return (determined without extensions) If you bought the stock after its first offering, and personal use. You can use any reasonable for the year in which you first carried on the ac- the corporation's adjusted basis in the property method for dividing the expense. It may be rea- tivity or, if earlier, within 60 days after receiving is the amount figured in (1) under Depreciation sonable to divide the cost of some items (for ex- written notice from the IRS proposing to disal- (under Cooperatives, near the beginning of this ample, water) based on the number of people low deductions attributable to the activity. chapter). The fair market value of the property is using them. The two most common methods for considered to be the same as the corporation's dividing an expense are (1) the number of More information. For more information about adjusted basis figured in this way minus straight rooms in your home, and (2) the square footage the rules for an activity not engaged in for profit, line depreciation, unless the value is unrealistic. of your home. see Not-for-Profit Activities in chapter 1 of Pub. 535. Example. You rent a room in your house. Figuring the Depreciation The room is 12 × 15 feet, or 180 square feet. Deduction Your entire house has 1,800 square feet of floor Example—Property space. You can deduct as a rental expense To figure the deduction, use the depreciation 10% of any expense that must be divided be- Changed to Rental Use system in effect when you convert your resi- tween rental use and personal use. If your heat- dence to rental use. Generally, that will be ing bill for the year for the entire house was In January, Eileen bought a condominium apart- MACRS for any conversion after 1986. Treat $600, $60 ($600 × 0.10) is a rental expense. ment to live in. Instead of selling the house she the property as placed in service on the conver- The balance, $540, is a personal expense that had been living in, she decided to change it to sion date. you can’t deduct. rental property. Eileen selected a tenant and started renting the house on February 1. Eileen Example. Your converted residence (see . A common situation is the duplex charges $750 a month for rent and collects it the previous example under Figuring the basis) where you live in one unit and rent out the other. herself. Eileen also received a $750 security was available for rent on August 1. Using Ta- Certain expenses apply to the entire property, deposit from her tenant. Because she plans to ble 2-2d (see chapter 2), the percentage for such as mortgage interest and real estate return it to her tenant at the end of the lease, Year 1 beginning in August is 1.364% and the taxes, and must be split to determine rental and she doesn’t include it in her income. Her rental depreciation deduction for Year 1 is $2,005 personal expenses. expenses for the year are as follows. ($147,000 × 0.01364). Example. You own a duplex and live in one Mortgage interest ...... $1,800 Fire insurance (1-year policy) ...... 100 half, renting the other half. Both units are ap- Miscellaneous repairs (after renting) ... 297 Renting Part of Property proximately the same size. Last year, you paid Real estate taxes imposed and paid ... 1,200 a total of $10,000 mortgage interest and $2,000 If you rent part of your property, you must divide real estate taxes for the entire property. You Eileen must divide the real estate taxes, certain expenses between the part of the prop- can deduct $5,000 mortgage interest and mortgage interest, and fire insurance between erty used for rental purposes and the part of the $1,000 real estate taxes on Schedule E. If you the personal use of the property and the rental property used for personal purposes, as though itemize your deductions, include the other use of the property. She can deduct you actually had two separate pieces of prop- $5,000 mortgage interest and $1,000 real es- eleven-twelfths of these expenses as rental ex- erty. tate taxes when figuring the amount you can penses. She can include the balance of the real deduct on Schedule A. estate taxes and mortgage interest when figur- You can deduct the expenses related to the ing the amount she can deduct on Schedule A if part of the property used for rental purposes, she itemizes. She can’t deduct the balance of such as home mortgage interest, mortgage in- Not Rented for Profit the fire insurance because it is a personal ex- surance premiums, and real estate taxes, as pense. rental expenses on Schedule E (Form 1040). If you don’t rent your property to make a profit, You can also deduct as rental expenses a por- Eileen bought this house in 1987 for you can’t deduct rental expenses in excess of tion of other expenses that are normally nonde- $35,000. Her was based on as- the amount of your rental income. You can’t de- ductible personal expenses, such as expenses sessed values of $10,000 for the land and duct a loss or carry forward to the next year any for electricity or painting the outside of the $25,000 for the house. Before changing it to rental expenses that are more than your rental house. rental property, Eileen added several improve- income for the year. ments to the house. She figures her adjusted There is no change in the types of expenses basis as follows. deductible for the personal-use part of your Where to report. Report your not-for-profit property. Generally, these expenses may be rental income on Schedule 1 (Form 1040), Improvements Cost deducted only if you itemize your deductions on line 8. If you itemize your deductions, include House ...... $25,000 Schedule A (Form 1040). your mortgage interest and mortgage insurance Remodeled kitchen ...... 4,200 premiums (if you use the property as your main Recreation room ...... 5,800 You can’t deduct any part of the cost of the home or second home), real estate taxes, and New roof ...... 1,600 first phone line even if your tenants have unlimi- casualty losses from your not-for-profit rental Patio and deck ...... 2,400 ted use of it. activity when figuring the amount you can de- Adjusted basis ...... $39,000 You don’t have to divide the expenses that duct on Schedule A. belong only to the rental part of your property. On February 1, when Eileen changed her Presumption of profit. If your rental income is For example, if you paint a room that you rent or house to rental property, the property had a fair more than your rental expenses for at least 3 pay premiums for liability insurance in market value of $152,000. Of this amount,

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$35,000 was for the land and $117,000 was for When dividing your expenses, follow these the house. rules. • Any day that the unit is rented at a fair Because Eileen's adjusted basis is less than 5. rental price is a day of rental use even if the fair market value on the date of the change, you used the unit for personal purposes Eileen uses $39,000 as her basis for deprecia- that day. (This rule doesn’t apply when de- tion. Personal Use of termining whether you used the unit as a As specified for residential rental property, home.) Eileen must use the straight line method of de- • Any day that the unit is available for rent preciation over the GDS or ADS recovery pe- Dwelling Unit but not actually rented isn’t a day of rental riod. She chooses the GDS recovery period of use. 27.5 years. (Including Fair rental price. A fair rental price for your She uses Table 2-2d to find her depreciation property is generally the amount of rent that a percentage. Since she placed the property in person who isn’t related to you would be willing service in February, the percentage is 3.182%. Vacation Home) to pay. The rent you charge isn’t a fair rental price if it is substantially less than the rents On April 1, Eileen bought a new dishwasher If you have any personal use of a dwelling unit charged for other properties that are similar to for the rental property at a cost of $425. The (including a vacation home) that you rent, you your property in your area. dishwasher is personal property used in a rental must divide your expenses between rental use Ask yourself the following questions when real estate activity, which has a 5-year recovery and personal use. In general, your rental expen- comparing another property with yours. period. She uses Table 2-2a to find the percent- ses will be no more than your total expenses • Is it used for the same purpose? age for Year 1 under “Half-year convention” multiplied by a fraction, the denominator of • Is it approximately the same size? (20%) to figure her depreciation deduction. which is the total number of days the dwelling • Is it in approximately the same condition? unit is used and the numerator of which is the On May 1, Eileen paid $4,000 to have a fur- • Does it have similar furnishings? total number of days actually rented at a fair • Is it in a similar location? nace installed in the house. The furnace is resi- rental price. Only your rental expenses may be dential rental property. Because she placed the deducted on Schedule E (Form 1040). Some of If any of the answers are no, the properties property in service in May, the percentage from your personal expenses may be deductible on probably aren’t similar. Table 2-2d is 2.273%. Schedule A (Form 1040) if you itemize your de- Eileen figures her net rental income or loss ductions. Example. Your beach cottage was availa- for the house as follows. ble for rent from June 1 through August 31 (92 You must also determine if the dwelling unit is days). Except for the first week in August (7 considered a home. The amount of rental ex- Total rental income received days), when you were unable to find a renter, penses that you can deduct may be limited if ($750 × 11) ...... $8,250 you rented the cottage at a fair rental price dur- the dwelling unit is considered a home. ing that time. The person who rented the cot- Minus: Expenses Whether a dwelling unit is considered a home tage for July allowed you to use it over the Mortgage interest ($1,800 × depends on how many days during the year are weekend (2 days) without any reduction in or 11 /12) ...... $1,650 considered to be days of personal use. There is refund of rent. Your family also used the cottage Fire insurance ($100 × a special rule if you used the dwelling unit as a during the last 2 weeks of May (14 days). The 11 /12) ...... 92 home and you rented it for less than 15 days cottage wasn’t used at all before May 17 or af- Miscellaneous repairs ...... 297 during the year. ter August 31. Real estate taxes ($1,200 × 11/12) ...... 1,100 Dwelling unit. A dwelling unit includes a You figure the part of the cottage expenses Total expenses ...... 3,139 house, apartment, condominium, , to treat as rental expenses as follows. Balance ...... $5,111 boat, vacation home, or similar property. It also • The cottage was used for rental a total of includes all structures or other property belong- 85 days (92 − 7). The days it was available Minus: Depreciation ing to the dwelling unit. A dwelling unit has ba- for rent but not rented (7 days) aren’t days House ($39,000 × sic living accommodations, such as sleeping of rental use. The July weekend (2 days) 0.03182) ...... $1,241 space, a , and cooking facilities. you used it is rental use because you re- Dishwasher ($425 × A dwelling unit doesn’t include property (or ceived a fair rental price for the weekend. 0.20) ...... 85 part of the property) used solely as a hotel, mo- • You used the cottage for personal purpo- Furnace ($4,000 × tel, inn, or similar establishment. Property is ses for 14 days (the last 2 weeks in May). 0.02273) ...... 91 used solely as a hotel, motel, inn, or similar es- • The total use of the cottage was 99 days Total depreciation ...... 1,417 tablishment if it is regularly available for occu- (14 days personal use + 85 days rental Net rental income for pancy by paying customers and isn’t used by use). $3,694 house ...... an owner as a home during the year. • Your rental expenses are 85/99 (86%) of the cottage expenses. Eileen uses Schedule E, Part I, to report her Example. You rent a room in your home rental income and expenses. She enters her in- that is always available for short-term occu- Note. When determining whether you used come, expenses, and depreciation for the pancy by paying customers. You don’t use the the cottage as a home, the July weekend (2 house in the column for Property A. Since all room yourself and you allow only paying cus- days) you used it is considered personal use property was placed in service this year, Eileen tomers to use the room. This room is used even though you received a fair rental price for must use Form 4562 to figure the depreciation. solely as a hotel, motel, inn, or similar establish- the weekend. Therefore, you had 16 days of See the Instructions for Form 4562 for more in- ment and isn’t a dwelling unit. personal use and 83 days of rental use for this formation on preparing the form. purpose. Because you used the cottage for per- sonal purposes more than 14 days and more Dividing Expenses 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 ex- If you use a dwelling unit for both rental and per- penses. See Dwelling Unit Used as a Home sonal purposes, divide your expenses between next. the rental use and the personal use based on the number of days used for each purpose.

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Examples. The following examples show you may not have to count days you used the how to determine if you have days of personal property as your main home before or after rent- Dwelling Unit Used as a use. ing it or offering it for rent as days of personal Home use. Don’t count them as days of personal use Example 1. You and your neighbor are if: co-owners of a condominium at the beach. Last • You rented or tried to rent the property for If you use a dwelling unit for both rental and per- year, you rented the unit to vacationers when- 12 or more consecutive months, or sonal purposes, the tax treatment of the rental ever possible. The unit wasn’t used as a main • You rented or tried to rent the property for expenses you figured earlier under Dividing Ex- home by anyone. Your neighbor used the unit a period of less than 12 consecutive penses and rental income depends on whether for 2 weeks last year; you didn’t use it at all. months and the period ended because you you are considered to be using the dwelling unit Because your neighbor has an interest in sold or exchanged the property. as a home. the unit, both of you are considered to have However, this special rule doesn’t apply when used the unit for personal purposes during You use a dwelling unit as a home during dividing expenses between rental and personal those 2 weeks. the tax year if you use it for personal purposes use. See Property Changed to Rental Use in chapter 4. more than the greater of: Example 2. You and your neighbors are co-owners of a house under a shared equity fi- 1. 14 days, or Example 1. On February 29, 2019, you nancing agreement. Your neighbors live in the moved out of the house you had lived in for 6 2. 10% of the total days it is rented to others house and pay you a fair rental price. years because you accepted a job in another at a fair rental price. Even though your neighbors have an inter- town. You rented your house at a fair rental est in the house, the days your neighbors live See What is a day of personal use, later. price from March 15, 2019, to May 14, 2020 (14 there aren’t counted as days of personal use by months). On June 1, 2020, you moved back you. This is because your neighbors rent the If a dwelling unit is used for personal purpo- into your old house. house as their main home under a shared ses on a day it is rented at a fair rental price The days you used the house as your main equity financing agreement. (discussed earlier), don’t count that day as a home from January 1 to February 29, 2019, and day of rental use in applying (2) above. Instead, from June 1 to December 31, 2020, aren’t coun- Example 3. You own a rental property that count it as a day of personal use in applying ted as days of personal use. Therefore, you you rent to your son. Your son doesn’t own any both (1) and (2) above. would use the rules in chapter 1 when figuring interest in this property. He uses it as his main your rental income and expenses. What is a day of personal use? A day of per- home and pays you a fair rental price. Your son's use of the property isn’t personal sonal use of a dwelling unit is any day that the Example 2. On January 31, you moved out use by you because your son is using it as his unit is used by any of the following persons. of the condominium where you had lived for 3 main home, he owns no interest in the property, years. You offered it for rent at a fair rental price 1. You or any other person who owns an in- and he is paying you a fair rental price. terest in it, unless you rent it to another beginning on February 1. You were unable to rent it until April. On September 15, you sold the owner as his or her main home under a Example 4. You rent your beach house to condominium. shared equity financing agreement (de- Rosa. Rosa rents her cabin in the mountains to The days you used the condominium as fined later). However, see Days used as a you. You each pay a fair rental price. your main home from January 1 to January 31 main home before or after renting, later. You are using your beach house for per- aren’t counted as days of personal use when sonal purposes on the days that Rosa uses it 2. A member of your family or a member of determining whether you used it as a home. the family of any other person who owns because your house is used by Rosa under an arrangement that allows you to use her cabin. an interest in it, unless the family member Examples. The following examples show how uses the dwelling unit as his or her main to determine whether you used your rental Example 5. You rent an apartment to your home and pays a fair rental price. Family property as a home. includes only your spouse, brothers and mother at less than a fair rental price. You are using the apartment for personal purposes on sisters, half brothers and half sisters, an- Example 1. You converted the the days that your mother rents it because you cestors (parents, grandparents, etc.), and of your home into an apartment with a bedroom, rent it for less than a fair rental price. lineal descendants (children, grandchil- a bathroom, and a small kitchen. You rented the dren, etc.). Days used for repairs and maintenance. basement apartment at a fair rental price to col- 3. Anyone under an arrangement that lets Any day that you spend working substantially lege students during the regular school year. you use some other dwelling unit. full time repairing and maintaining (not improv- You rented to them on a 9-month lease (273 ing) your property isn’t counted as a day of per- days). You figured 10% of the total days rented 4. Anyone at less than a fair rental price. sonal use. Don’t count such a day as a day of to others at a fair rental price is 27 days. During June (30 days), your brothers stayed Main home. If the other person or member personal use even if family members use the with you and lived in the basement apartment of the family in (1) or (2) has more than one property for recreational purposes on the same rent free. home, his or her main home is ordinarily the day. Your basement apartment was used as a one he or she lived in most of the time. Example. Corey owns a cabin in the moun- home because you used it for personal purpo- Shared equity financing agreement. This tains that he rents for most of the year. He ses for 30 days. Rent-free use by your brothers is an agreement under which two or more per- spends a week at the cabin with family mem- is considered personal use. Your personal use sons acquire undivided interests for more than bers. Corey works on maintenance of the cabin (30 days) is more than the greater of 14 days or 50 years in an entire dwelling unit, including the 3 or 4 hours each day during the week and 10% of the total days it was rented (27 days). land, and one or more of the co-owners is enti- spends the rest of the time fishing, hiking, and tled to occupy the unit as his or her main home relaxing. Corey's family members, however, Example 2. You rented the guest bedroom upon payment of rent to the other co-owner or work substantially full time on the cabin each in your home at a fair rental price during the lo- owners. day during the week. The main purpose of be- cal college's homecoming, commencement, ing at the cabin that week is to do maintenance and football weekends (a total of 27 days). Your Donation of use of the property. You use work. Therefore, the use of the cabin during the sister-in-law stayed in the room, rent free, for a dwelling unit for personal purposes if: week by Corey and his family won’t be consid- the last 3 weeks (21 days) in July. You figured • You donate the use of the unit to a charita- ered personal use by Corey. 10% of the total days rented to others at a fair ble organization, rental price is 3 days. • The organization sells the use of the unit at Days used as a main home before or af- The room was used as a home because you a fundraising event, and ter renting. For purposes of determining used it for personal purposes for 21 days. That • The “purchaser” uses the unit. whether a dwelling unit was used as a home,

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is more than the greater of 14 days or 10% of year will be subject to any limits that apply for Used as a home but rented less than 15 the 27 days it was rented (3 days). that year. This limitation will apply to expenses days. If you use a dwelling unit as a home and carried forward to another year even if you don’t you rent it less than 15 days during the year, its Example 3. You own a condominium apart- use the property as your home for that subse- primary function isn’t considered to be rental ment in a resort area. You rented it at a fair quent year. and it shouldn’t be reported on Schedule E rental price for a total of 170 days during the To figure your deductible rental expenses (Form 1040). You aren’t required to report the year. For 12 of these days, the tenant wasn’t for this year and any carryover to next year, use rental income and rental expenses from this ac- able to use the apartment and allowed you to Worksheet 5-1. tivity. Any expenses related to the home, such use it even though you didn’t refund any of the as mortgage interest, property taxes, and any rent. Your family actually used the apartment for qualified casualty loss, will be reported as nor- 10 of those days. Therefore, the apartment is Reporting Income and mally allowed on Schedule A (Form 1040). See treated as having been rented for 160 (170 – the Instructions for Schedule A for more infor- 10) days. You figured 10% of the total days ren- Deductions mation on deducting these expenses. ted to others at a fair rental price is 16 days. Your family also used the apartment for 7 other Property not used for personal purposes. If Used as a home and rented 15 days or days during the year. you don’t use a dwelling unit for personal purpo- more. If you use a dwelling unit as a home and You used the apartment as a home because ses, see chapter 3 for how to report your rental rent it 15 days or more during the year, include you used it for personal purposes for 17 days. income and expenses. all your rental income in your income. Since you That is more than the greater of 14 days or 10% used the dwelling unit for personal purposes, of the 160 days it was rented (16 days). Property used for personal purposes. If you you must divide your expenses between the do use a dwelling unit for personal purposes, rental use and the personal use as described Minimal rental use. If you use the dwelling then how you report your rental income and ex- earlier in this chapter under Dividing Expenses. unit as a home and you rent it less than 15 days penses depends on whether you used the The expenses for personal use aren’t deducti- during the year, that period isn’t treated as dwelling unit as a home. ble as rental expenses. rental activity. See Used as a home but rented If you had a net profit from renting the dwell- less than 15 days, later, for more information. Not used as a home. If you use a dwelling ing unit for the year (that is, if your rental income unit for personal purposes, but not as a home, is more than the total of your rental expenses, Limit on deductions. Renting a dwelling unit report all the rental income in your income. Be- including depreciation), deduct all of your rental that is considered a home isn’t a passive activ- cause you used the dwelling unit for personal expenses. You don’t need to use Worksheet ity. Instead, if your rental expenses are more purposes, you must divide your expenses be- 5-1. than your rental income, some or all of the ex- tween the rental use and the personal use as However, if you had a net loss from renting cess expenses can’t be used to offset income described earlier in this chapter under Dividing the dwelling unit for the year, your deduction for from other sources. The excess expenses that Expenses. The expenses for personal use certain rental expenses is limited. To figure your can’t be used to offset income from other sour- aren’t deductible as rental expenses. deductible rental expenses and any carryover ces are carried forward to the next year and Your deductible rental expenses can be to next year, use Worksheet 5-1. treated as rental expenses for the same prop- more than your gross rental income; however, erty. Any expenses carried forward to the next see Limits on Rental Losses in chapter 3.

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Worksheet 5-1. Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Keep for Your Records 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 a 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 deductible real estate taxes. See instructions ...... 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. Enter the rental portion of excess real estate taxes. See instructions ...... c. d. Carryover of operating expenses from 2019 worksheet ...... d. e. Add lines 4a–4d ...... e. f. Allowable expenses. Enter the smaller of line 3 or line 4e. See instructions ...... 4f. 5. Subtract line 4f 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 rental portion of depreciation of the dwelling unit ...... b. c. Carryover of excess casualty and theft losses and depreciation from 2019 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 4f from line 4e ...... 7a. b. Excess casualty and theft losses and depreciation to be carried over to next year. Subtract line 6e from line 6d ...... b.

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Worksheet 5-1 Instructions. Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Keep for Your Records Caution. Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4c, and 6a–6b of Part II. Line 2a. If you are claiming the standard deduction, do not report an amount on line 2a; instead, report the rental portion of your mortgage interest and mortgage insurance premiums on line 4b. If you are itemizing your deductions on Schedule A, figure the amount of mortgage interest to include on line 2a by using the following steps. Step 1. Treat all the mortgage interest you paid for mortgages secured by your home(s) as a personal expense and figure the amount that would be deductible as an itemized expense on Schedule A. See Pub. 936 for more information about figuring the home mortgage interest deduction and the limits that may apply. Step 2. Include on line 2a the rental portion of deductible mortgage interest figured in Step 1 that is attributable to the home you are renting. Note. Be sure to claim only the personal portion of your deductible mortgage interest on Schedule A. The personal portion of mortgage interest on the dwelling unit doesn't include the rental portion you reported on line 2a of this Worksheet 5-1 or any portion that you deducted on other forms, such as Schedule C or F. If you are itemizing your deductions on Schedule A, figure the amount of qualified mortgage insurance premiums to include on line 2a by using the following steps. Step 1. Treat all the mortgage insurance premiums you paid under a mortgage insurance contract issued after December 31, 2006, and secured by your home(s) as a personal expense and complete a separate Mortgage Insurance Premiums Deduction Worksheet in the Instructions for Schedule A for Worksheet 5-1. When completing line 2 of this worksheet for Worksheet 5-1, enter your adjusted gross income excluding the gross income and deductions attributable to the rental or business use of the home. Step 2. Include on line 2a the rental portion of deductible mortgage insurance premiums figured in Step 1 that are attributable to the home you are renting. Note. Be sure to use only the personal portion of your mortgage insurance premiums when completing the Mortgage Insurance Premiums Deduction Worksheet for line 8d of Schedule A. The personal portion of mortgage insurance premiums on the dwelling unit doesn’t include the rental portion or business portion of mortgage insurance premiums attributable to the home in which you conducted rental or business activities.

Line 2b. If you are claiming the standard deduction, do not report an amount on line 2b; instead, report the rental portion of your real estate taxes on line 4c. If you are itemizing your deductions on Schedule A, figure the amount to report on line 2b by using the following steps. Step 1. If the total of your state and local income (or, if elected on your Schedule A, general sales) taxes, real estate taxes, and personal property taxes is not more than $10,000 ($5,000 if married filing separately), enter the rental portion of the real estate taxes attributable to the dwelling unit you are renting on line 2b. Step 2. If you do not meet the condition of Step 1, use the following worksheet to figure the amount to include on line 2b. Line 2b Worksheet 1. Enter your state and local income taxes (or, if you elect on Schedule A, your state and local general sales taxes) that are personal expenses ...... 2. Enter all the state and local real estate taxes you paid on the dwelling unit you are renting ...... 3. Enter any other state and local real estate taxes you paid that are a personal expense and not included in line 2 ...... 4. Enter your state and local personal property taxes that are a personal expense ...... 5. Add lines 1 through 4 ...... 6. Multiply line 2 by the percentage of expenses allowed for rental (Part I, line F) ...... 7. Subtract line 6 from line 5 ...... 8. Subtract line 7 from $10,000 ($5,000 if married filing separately). If zero or less, enter -0- ...... 9. Real estate taxes reported on line 2b. Enter the smaller of line 6 or line 8 here and on line 2b ...... 10. Excess real estate taxes reported on line 4c. Subtract line 9 from line 6 ...... Note. Be sure to report only the personal portion of your real estate taxes on line 5b of Schedule A. The personal portion of real estate taxes on the dwelling unit doesn't include the rental portion you reported on line 2b of this Worksheet 5-1 or any portion that you deducted on other forms, such as Schedule C or F.

Line 2c. If you are claiming the standard deduction and you are not increasing your standard deduction by a net qualified disaster loss, do not report an amount on line 2c; instead, report the rental portion of your casualty losses on line 6a. If you are itemizing your deductions on Schedule A or filing a Schedule A to increase your standard deduction by a net qualified disaster loss, figure the amount to report on line 2c by using the following steps. Step 1. Complete a worksheet version of Section A of Form 4684 treating all your casualty losses (and gains) as personal expenses. If you are itemizing your deductions, when completing line 17 of this worksheet version of Form 4684, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Don't file this worksheet version of Form 4684; instead, keep it for your records. You will complete a separate Form 4684 to attach to your return using only the personal portion of your casualty losses (and gains) for Section A. Step 2. Include on line 2c the rental portion of the loss amounts from lines 15 and 18 of this worksheet version of Form 4684 that are the result of a federally declared disaster. If you are claiming an increased standard deduction instead of itemizing your deductions, only use the rental portion of a net qualified disaster loss on line 15 of the worksheet version of Form 4684 for this Step 2. Note. Be sure to use only the personal portion of your casualty losses (and gains) when completing Section A of the separate Form 4684 you attach to your return. The separate Form 4684 you attach to your return is used to figure the casualty losses you can include on line 15 of Schedule A and the net qualified disaster losses you can include on line 16 of Schedule A. You will report casualty and theft losses attributable to your rental activity in Section B of the separate Form 4684 you attach to your return.

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Worksheet 5-1 Instructions—Continued 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 even if your rental expenses are more than your rental income. Enter the amounts on lines 2a, 2b, and 2d on the appropriate lines of Schedule E. Include the amount from line 2c with the casualty loss from line 6e, if any, in Section B of Form 4684, on line 27, and enter “see attached statement” above line 27. Attach a statement to your tax return showing how you calculated the deductible loss (you can use the worksheet as your attachment).

Line 4b. If you are claiming the standard deduction, enter the rental portion of all the home mortgage interest and qualified mortgage insurance premiums paid for loans used to buy, build, or substantially improve the dwelling unit you are renting on line 4b. Do not include mortgage interest or qualified mortgage insurance premiums on a loan that did not benefit the dwelling unit (for example, a used to pay off credit card bills, to buy a car, or to pay tuition costs).

If you are itemizing your deductions and the amount you figured in either Step 1 under Line 2a was less than the full amount of interest or insurance premiums you paid because of the limits on deducting home mortgage interest and qualified mortgage insurance premiums as a personal expense, include on line 4b the rental portion of the excess attributable to the loans used to buy, build, or substantially improve the dwelling unit you rented.

Line 4c. If you are claiming the standard deduction, enter the rental portion of all the real estate taxes paid on the dwelling unit you rented.

If you are itemizing your deductions and you used the Line 2b Worksheet to figure the amount to include on line 2b, then include the amount from line 10 of the Line 2b Worksheet on line 4c; otherwise, do not enter an amount on line 4c.

Line 4f. You can deduct the amounts on lines 4a, 4b, 4c, and 4d as rental expenses on Schedule E only to the extent they aren’t more than the amount on line 4f.*

Line 6a. If you are claiming the standard deduction and not increasing it by a net qualified disaster loss, enter the rental portion of all casualty losses attributable to the dwelling unit you rented. If you are itemizing your deductions on Schedule A or filing a Schedule A to increase your standard deduction by a net qualified disaster loss, enter the rental portion of the casualty losses attributable to the dwelling unit you rented that are in excess of the amount you figured on lines 15 and 18 of your worksheet version of Form 4684.

Line 6e. You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses only to the extent they aren’t more than the amount on line 6e.* Include the depreciation from line 6e, if any, on the appropriate line of Schedule E. Include the casualty loss from line 6e, if any, with the casualty loss from line 2c in Section B of Form 4684, on line 27, and enter “see attached statement” above line 27. Attach a statement to your tax return showing how you calculated the deductible loss (you can use the worksheet as your attachment).

* Allocating the limited deduction. If you can’t deduct all of the amount on line 4e or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4e or 6d. Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I, or if a casualty loss, as instructed earlier on Form 4684, line 27.

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Using online tools to help prepare your re- prepare tax returns for others should have a turn. Go to IRS.gov/Tools for the following. thorough understanding of tax matters. For • The Earned Income Assistant more information on how to choose a tax pre- 6. (IRS.gov/EITCAssistant) determines if parer, go to Tips for Choosing a Tax Preparer you’re eligible for the earned income credit on IRS.gov. (EIC). • The Online EIN Application (IRS.gov/EIN) Coronavirus. Go to IRS.gov/Coronavirus for How To Get Tax helps you get an employer identification links to information on the impact of the corona- number (EIN). virus, as well as tax relief available for individu- Help • The Estimator (IRS.gov/ als and families, small and large businesses, W4app) makes it easier for everyone to and tax-exempt organizations. If you have questions about a tax issue, need pay the correct amount of tax during the help preparing your tax return, or want to down- year. The tool is a convenient, online way . Tax reform legislation affects indi- load free publications, forms, or instructions, go to check and tailor your withholding. It’s viduals, businesses, and tax-exempt and gov- to IRS.gov and find resources that can help you more user-friendly for taxpayers, including ernment entities. Go to IRS.gov/TaxReform for right away. retirees and self-employed individuals. The information and updates on how this legislation features include the following. affects your taxes. Preparing and filing your tax return. After – Easy to understand language. receiving all your wage and earnings state- – The ability to switch between screens, Employers can register to use Business ments (Form W-2, W-2G, 1099-R, 1099-MISC, correct previous entries, and skip Services Online. The Social Security Adminis- 1099-NEC, etc.); unemployment compensation screens that don’t apply. tration (SSA) offers online service at SSA.gov/ statements (by mail or in a digital format) or – Tips and links to help you determine if employer for fast, free, and secure online W-2 other government payment statements (Form you qualify for tax credits and deduc- filing options to CPAs, accountants, enrolled 1099-G); and interest, , and retirement tions. agents, and individuals who process Form W-2, statements from banks and investment firms – A progress tracker. Wage and Tax Statement, and Form W-2c, (Forms 1099), you have several options to – A self-employment tax feature. Corrected Wage and Tax Statement. choose from to prepare and file your tax return. – Automatic calculation of taxable social IRS social media. Go to IRS.gov/SocialMedia You can prepare the tax return yourself, see if security benefits. to see the various social media tools the IRS you qualify for free tax preparation, or hire a tax • The First Time Homebuyer Credit Account uses to share the latest information on tax professional to prepare your return. Look-up (IRS.gov/HomeBuyer) tool pro- changes, scam alerts, initiatives, products, and vides information on your repayments and services. At the IRS, privacy and security are Free options for tax preparation. Go to account balance. IRS.gov to see your options for preparing and paramount. We use these tools to share public • The Sales Calculator information with you. Don’t post your SSN or filing your return online or in your local commun- (IRS.gov/SalesTax) figures the amount you ity, if you qualify, which include the following. other confidential information on social media can claim if you itemize deductions on sites. Always protect your identity when using Free File. This program lets you prepare • Schedule A (Form 1040). any social networking site. and file your federal individual income tax return for free using brand-name tax-prep- Getting answers to your tax ques- The following IRS YouTube channels pro- aration-and-filing software or Free File filla- tions. On IRS.gov, you can get vide short, informative videos on various tax-re- ble forms. However, state tax preparation up-to-date information on current lated topics in English, Spanish, and ASL. may not be available through Free File. Go events and changes in tax law. • Youtube.com/irsvideos. • Youtube.com/irsvideosmultilingua. to IRS.gov/FreeFile to see if you qualify for IRS.gov/Help: A variety of tools to help you • • Youtube.com/irsvideosASL. free online federal tax preparation, e-filing, get answers to some of the most common and direct deposit or payment options. tax questions. Watching IRS videos. The IRS Video portal • VITA. The Volunteer Income Tax Assis- • IRS.gov/ITA: The Interactive Tax Assistant, (IRSVideos.gov) contains video and audio pre- tance (VITA) program offers free tax help a tool that will ask you questions on a num- sentations for individuals, small businesses, to people with low-to-moderate , ber of tax law topics and provide answers. and tax professionals. persons with disabilities, and limited-Eng- • IRS.gov/Forms: Find forms, instructions, lish-speaking taxpayers who need help and publications. You will find details on Online tax information in other languages. preparing their own tax returns. Go to 2020 tax changes and hundreds of interac- You can find information on IRS.gov/ IRS.gov/VITA, download the free IRS2Go tive links to help you find answers to your MyLanguage if English isn’t your native lan- app, or call 800-906-9887 for information questions. guage. on free tax return preparation. • You may also be able to access tax law in- TCE. The Tax Counseling for the Elderly • formation in your electronic filing software. Free interpreter service. Multilingual assis- (TCE) program offers free tax help for all tance, provided by the IRS, is available at Tax- taxpayers, particularly those who are 60 payer Assistance Centers (TACs) and other years of age and older. TCE volunteers Need someone to prepare your tax return? IRS offices. Over-the-phone interpreter service specialize in answering questions about There are various types of tax return preparers, is accessible in more than 350 languages. pensions and retirement-related issues including tax preparers, enrolled agents, certi- fied public accountants (CPAs), attorneys, and unique to seniors. Go to IRS.gov/TCE, Getting tax forms and publications. Go to many others who don’t have professional cre- download the free IRS2Go app, or call IRS.gov/Forms to view, download, or print all of dentials. If you choose to have someone pre- 888-227-7669 for information on free tax the forms, instructions, and publications you pare your tax return, choose that preparer return preparation. may need. You can also download and view wisely. A paid tax preparer is: • MilTax. Members of the U.S. Armed popular tax publications and instructions (in- Primarily responsible for the overall sub- Forces and qualified veterans may use Mil- • cluding the Instructions for Forms 1040 and stantive accuracy of your return, Tax, a free tax service offered by the De- 1040-SR) on mobile devices as an eBook at Required to sign the return, and partment of Defense through Military One- • IRS.gov/eBooks. Or you can go to IRS.gov/ Required to include their preparer tax iden- Source. • OrderForms to place an order. Also, the IRS offers Free Fillable tification number (PTIN). Forms, which can be completed online and then filed electronically regardless of in- Although the tax preparer always signs the re- come. turn, you're ultimately responsible for providing all the information required for the preparer to accurately prepare your return. Anyone paid to

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Access your online account (individual tax- Making a tax payment. The IRS uses the lat- Contacting your local IRS office. Keep in payers only). Go to IRS.gov/Account to se- est encryption technology to ensure your elec- mind, many questions can be answered on curely access information about your federal tax tronic payments are safe and secure. You can IRS.gov without visiting an IRS Taxpayer Assis- account. make electronic payments online, by phone, tance Center (TAC). Go to IRS.gov/LetUsHelp • View the amount you owe, pay online, or and from a mobile device using the IRS2Go for the topics people ask about most. If you still set up an online payment agreement. app. Paying electronically is quick, easy, and need help, IRS TACs provide tax help when a • Access your tax records online. faster than mailing in a check or money order. tax issue can’t be handled online or by phone. • Review your payment history. Go to IRS.gov/Payments for information on how All TACs now provide service by appointment, • Go to IRS.gov/SecureAccess to review the to make a payment using any of the following so you’ll know in advance that you can get the required identity authentication process. options. service you need without long wait times. Be- • IRS Direct Pay: Pay your individual tax bill fore you visit, go to IRS.gov/TACLocator to find Using direct deposit. The fastest way to re- or estimated tax payment directly from the nearest TAC and to check hours, available ceive a is to file electronically and your checking or savings account at no services, and appointment options. Or, on the choose direct deposit, which securely and elec- cost to you. IRS2Go app, under the Stay Connected tab, tronically transfers your refund directly into your • Debit or Credit Card: Choose an approved choose the Contact Us option and click on “Lo- financial account. Direct deposit also avoids the payment processor to pay online, by cal Offices.” possibility that your check could be lost, stolen, phone, or by mobile device. or returned undeliverable to the IRS. Eight in 10 • Electronic Funds Withdrawal: Offered only taxpayers use direct deposit to receive their re- when filing your federal taxes using tax re- The Taxpayer Advocate funds. The IRS issues more than 90% of re- turn preparation software or through a tax funds in less than 21 days. professional. Service (TAS) Is Here To • Electronic Federal Tax Payment System: Getting a transcript of your return. The Best option for businesses. Enrollment is Help You quickest way to get a copy of your tax transcript required. is to go to IRS.gov/Transcripts. Click on either • Check or Money Order: Mail your payment What Is TAS? “Get Transcript Online” or “Get Transcript by to the address listed on the notice or in- Mail” to order a free copy of your transcript. If structions. TAS is an independent organization within the you prefer, you can order your transcript by call- • Cash: You may be able to pay your taxes IRS that helps taxpayers and protects taxpayer ing 800-908-9946. with cash at a participating store. rights. Their job is to ensure that every taxpayer • Same-Day Wire: You may be able to do is treated fairly and that you know and under- Reporting and resolving your tax-related same-day wire from your financial institu- stand your rights under the Taxpayer Bill of identity theft issues. tion. Contact your financial institution for Rights. • Tax-related identity theft happens when availability, cost, and cut-off times. someone steals your personal information to commit tax fraud. Your taxes can be af- What if I can’t pay now? Go to IRS.gov/ How Can You Learn About Your fected if your SSN is used to file a fraudu- Payments for more information about your op- Taxpayer Rights? lent return or to claim a refund or credit. tions. • Apply for an online payment agreement The Taxpayer Bill of Rights describes 10 basic • The IRS doesn’t initiate contact with tax- rights that all taxpayers have when dealing with payers by email, text messages, telephone (IRS.gov/OPA) to meet your tax obligation in monthly installments if you can’t pay the IRS. Go to TaxpayerAdvocate.IRS.gov to calls, or social media channels to request help you understand what these rights mean to personal or financial information. This in- your taxes in full today. Once you complete the online process, you will receive imme- you and how they apply. These are your rights. cludes requests for personal identification Know them. Use them. numbers (PINs), passwords, or similar in- diate notification of whether your agree- formation for credit cards, banks, or other ment has been approved. financial accounts. • Use the Offer in Compromise Pre-Qualifier What Can TAS Do For You? • Go to IRS.gov/IdentityTheft, the IRS Iden- to see if you can settle your tax debt for tity Theft Central webpage, for information less than the full amount you owe. For TAS can help you resolve problems that you on identity theft and data security protec- more information on the Offer in Compro- can’t resolve with the IRS. And their service is tion for taxpayers, tax professionals, and mise program, go to IRS.gov/OIC. free. If you qualify for their assistance, you will businesses. If your SSN has been lost or be assigned to one advocate who will work with stolen or you suspect you’re a victim of Filing an amended return. You can now file you throughout the process and will do every- tax-related identity theft, you can learn Form 1040-X electronically with tax filing soft- thing possible to resolve your issue. TAS can what steps you should take. ware to amend 2019 Forms 1040 and 1040-SR. help you if: Your problem is causing financial difficulty • Get an Identity Protection PIN (IP PIN). IP To do so, you must have e-filed your original • for you, your family, or your business; PINs are six-digit numbers assigned to eli- 2019 return. Amended returns for all prior years gible taxpayers to help prevent the misuse must be mailed. See Tips for taxpayers who • You face (or your business is facing) an of their SSNs on fraudulent federal income need to file an amended tax return and go to immediate threat of adverse action; or tax returns. When you have an IP PIN, it IRS.gov/Form1040X for information and up- • You’ve tried repeatedly to contact the IRS prevents someone else from filing a tax re- dates. but no one has responded, or the IRS turn with your SSN. To learn more, go to hasn’t responded by the date promised. IRS.gov/IPPIN. Checking the status of your amended re- turn. Go to IRS.gov/WMAR to track the status How Can You Reach TAS? Checking on the status of your refund. of Form 1040-X amended returns. Please note • Go to IRS.gov/Refunds. that it can take up to 3 weeks from the date you TAS has offices in every state, the District of • The IRS can’t issue refunds before filed your amended return for it to show up in Columbia, and Puerto Rico. Your local advo- mid-February 2021 for returns that claimed our system, and processing it can take up to 16 cate’s number is in your local directory and at the EIC or the additional weeks. TaxpayerAdvocate.IRS.gov/Contact-Us. You (ACTC). This applies to the entire refund, can also call them at 877-777-4778. not just the portion associated with these Understanding an IRS notice or letter credits. you’ve received. Go to IRS.gov/Notices to find additional information about responding to How Else Does TAS Help • Download the official IRS2Go app to your Taxpayers? mobile device to check your refund status. an IRS notice or letter. • Call the automated refund hotline at TAS works to resolve large-scale problems that 800-829-1954. affect many taxpayers. If you know of one of

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these broad issues, please report it to them at Low Income Taxpayer collection disputes. In addition, clinics can pro- IRS.gov/SAMS. vide information about taxpayer rights and re- Clinics (LITCs) sponsibilities in different languages for individu- als who speak English as a second language. TAS for Tax Professionals LITCs are independent from the IRS. LITCs Services are offered for free or a small fee for represent individuals whose income is below a eligible taxpayers. To find a clinic near you, visit TAS can provide a variety of information for tax certain level and need to resolve tax problems www.TaxpayerAdvocate.IRS.gov/about-us/ professionals, including tax law updates and with the IRS, such as audits, appeals, and tax guidance, TAS programs, and ways to let TAS Low-Income-Taxpayer-Clinics-LITC/ or see IRS know about systemic problems you’ve seen in Pub. 4134, Low Income Taxpayer Clinic List. your practice.

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To help us develop a more useful index, please let us know if you have ideas for index entries. Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Mortgages, payments to Fees: Charges connected with getting obtain 3 Loan origination fees 4, 7 or refinancing, cost basis 7 A : Points (See Points) Low or no interest 7 Accelerated Cost Recovery MACRS recovery periods 9 Settlement fees and other Origination fees 4 System (ACRS) 8 Cash method taxpayers 2 costs 7 Local assessments 8 (See also Modified Accelerated Casualty losses 14 Tax return preparation fees 4 Losses (See Gains and losses) Cost Recovery System Charitable contributions: First-year expensing 5 (MACRS)) Use of property 18 Form 1040 or 1040-SR: Effective date 6 Cleaning and maintenance 3 Not rented for profit income 16 Accounting methods: Closing costs 7 Part of property rented 16 M Accrual method 2 Commissions 3 Rental income and expenses 12 Missing children, photographs Cash method 2 Computers: Schedule E 12 of 2 Constructive receipt of MACRS recovery periods 9 Form 1098: Modified Accelerated Cost income 2, 3 Condominiums 15, 17 Mortgage interest 3 Recovery System Accrual method taxpayers 2 Constructive receipt of Form 4684: (MACRS) 8–11 ACRS (Accelerated Cost income 2, 3 Casualties and thefts 14 Additions or improvements to Recovery System): Cooperative housing 6, 15, 17 Form 4797: property 9 Effective date 6 Cost basis 7 Sales of business property 14 Adjusted basis 7 Active participation 13 Credit reports 7 Form 8582: Alternative Depreciation System Activities not for profit 16 Credits: Passive activity losses 13, 14 (ADS) 8, 11 Additions to property 9 Residential energy credits 8 Basis other than cost 7 (See also Improvements) Conventions 9 Basis 7, 8 Cost basis 7 MACRS recovery period 9 G Depreciable basis 7 Adjusted basis: D Gains and losses: Effective date 6 MACRS depreciation 7 Days of personal use 18 At-risk rules 13 Excluded property 8 Adjusted gross income (AGI): Days used for repairs and Casualty and theft losses 14 General Depreciation System Modified (See Modified adjusted maintenance 18 Limits on rental losses 12 (GDS) 8, 10 gross income (MAGI)) Deductions: Passive activity losses 13 Nonresidential rental property 8 Advance rent 3 Capitalizing costs vs. effect on Rental real estate activities 13 Property used in rental activities Security deposits 3 basis 8 Sale of rental property 2, 14 (Table 2-1) 9 Advertising 3 Depreciation (See Depreciation) General depreciation system Recovery periods 9, 10 Allocation of expenses: Limitations on 12 (GDS) (See Modified Residential rental property 8–10 Change of property to rental Passive activity Accelerated Cost Recovery Special depreciation use 15 losses (See Passive activity) System (MACRS)) allowances 8 How to divide expenses 17 Depreciation 5 Modified adjusted gross income Part of property rented 16 Alternative Depreciation System (MAGI) 14 Personal use of rental (ADS) (See Modified H Mortgages 3 property 3, 17 Accelerated Cost Recovery Assumption of, cost basis 7 Alternative Depreciation System System (MACRS)) Home: Change of property to rental (ADS): Basis (See Basis) Main home 18 use 15 Election of 8 Change of property to rental Use as rental property (See Use End of, OID 5 MACRS 8, 11 use 15 of home) Interest 3, 15, 16 Alternative minimum tax (AMT): Claiming correct amount of 12 Mortgage insurance Accelerated depreciation Declining balance method 6 premiums 7 methods 5 Duration of property expected to I Part of property rented 16 Apartments: last more than one year 6 Improvements 5 Basement apartments 18 Eligible property 6 (See also Repairs) Dwelling units 17 First-year expensing 5 Assessments for local N Appraisal fees 7 MACRS (See Modified improvements 8 Accelerated Cost Recovery Nonresidential real property 8 Assessments, local (See Local Basis 7, 8 Not-for-profit activities 16 assessments) System (MACRS)) Depreciation of rented Assessments for maintenance 8 Methods 6, 10 property 6 Assistance (See Tax help) Ownership of property 6 MACRS recovery period 9 Assumption of mortgage 7 Rental expense 3 Insurance 3 O Attorneys' fees 7, 8 Rented property 6 Casualty or theft loss Original issue discount (OID) 4, Automobiles: Section 179 deduction 5 payments 8 5 MACRS recovery periods 9 Special depreciation Change of property to rental allowances 8 use 15 Straight line method 6 Fire insurance premiums, cost P B Useful life 6 basis 7 Vacant rental property 4 Part of property rented 16 Part interest: Basis: Discount, bonds and notes Premiums paid in advance 3 Expenses 3 Adjusted basis 7 issued at (See Original issue Title insurance, cost basis 7 Income 3 Assessments for local discount (OID)) Interest payments 3 Passive activity: improvements 8 Dividing of (See also Mortgages) Maximum special allowance 14 Basis other than cost 7 expenses (See Allocation of Loan origination fees 4 Personal property: Cost basis 7 expenses) Rental expenses 3 Rental income from 3 Decreases to 8 Dwelling units: Personal use of rental Deductions: Definition 17 property 15, 17 Capitalization of costs vs. 8 Fair rental price 17 (See also Property changed to Not greater than basis 6 Personal use of 17, 18 L rental use) Fair market value 15 Land: Placed-in-service date 6 Increases to 7 Cost basis 7 Points 3, 4, 7 MACRS depreciable basis 7 Depreciation 6 Pre-rental expenses 4 Property changed to rental E Leases: Principal residence (See Home) use 15 Easements 8 Cancellation payments 3 Profit, property not rented for 16 Equipment rental expense 4 Equipment leasing 4 Property changed to rental Limits: use 15 C Passive activity losses and Basis 15 Capital expenditures: F credits 13 Publications (See Tax help) Deductions vs. effect on basis 8 Fair market value (FMV) 15 Rental losses 12 Fair rental price 17 Loans: Local benefit taxes 4 Assumption fees 7

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Taxes 3 Section 179 deductions 5 Transfer taxes 7 Tax return preparation fees 4 Security deposits 3 Travel and transportation R Tenant, paid by 3 Settlement fees 7 expenses: Real estate professionals 13 Travel expenses 3 Shared equity financing Local transportation Real estate taxes 7 Utilities 3 agreements 18 expenses 3, 4 Real property trades or Vacant rental property 4 Special depreciation Recordkeeping 4 businesses 13 Rental income: allowances 8 Rental expenses 3 Recordkeeping requirements: Advance rent 3 Spouse: Standard mileage rate 4 Travel and transportation Cancellation of lease Material participation 13 expenses 4 payments 3 Standard mileage rates 4 Recovery periods 8 Dwelling unit used as home 18 Surveys 7 Rent 7 Lease with option to buy 3 U Advance rent 3 Not rented for profit 16 Uncollected rent: Fair price 17 Part interest 3 Income 4 Rental expenses 3 Property received from tenant 3 T Use of home: Advertising 3 Reporting 2, 12 Tables and figures: Before or after renting 18 Allocation between rental and Security deposit 3 Improvements, examples of Change to rental use 15 personal uses 17 Services received from tenant 3 (Table 1-1) 5 Days of personal use 18 Change of property to rental Uncollected rent 4 MACRS optional tables Fair rental price 17 use 15 Used as home 3 (Table 2-2d) 11 Passive activity rules Cleaning and maintenance 3 Rental losses 13 MACRS optional tables (Tables exception 13 Commissions 3 (See also Gains and losses) 2-2a, 2-2b, and 2-2c) 11 Personal use as dwelling unit 17 Depreciation 3 (See also Passive activity) MACRS recovery periods for Utilities 3, 7 Dwelling unit used as home 18 Repairs 3, 5 property used in rental Equipment rental 4 (See also Improvements) activities (Table 2-1) 9 Home, property also used as 3 Assessments for maintenance 8 Tax credits: V Improvements 5 Personal use of rental property Residential energy credits, effect on basis 8 Vacant rental property 4 Insurance 3 exception for days used for Vacation homes: Interest payments 3 repairs and maintenance 18 Taxes: Local transportation Deduction of 3 Dwelling unit 17 expenses 3, 4 Local benefit taxes 4 Fair rental price 17 Part of property rented 16 Real estate taxes 7 Personal use of 17 Points 3, 4 S Transfer taxes 7 Valuation: Pre-rental expenses 4 Sale of property: Tax help 23 Fair market value 15 Rental payments 3 Expenses 4 Tax return preparation fees 4 Repairs 3, 5 Gain or loss 2, 14 Theft losses 14 Sale of property 4 Main home 2 Title insurance 7

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