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1040x Electronic Filing

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1040x Electronic Filing

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The 1040x Electronic Filing

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