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Extention Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. Extention Property not disposed of or abandoned. Extention Special rule for normal retirements from item accounts. Extention Abandoned property. Extention Single item accounts. Extention Multiple property account. Extention Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. Extention If your property qualified for MACRS, you must depreciate it under MACRS. Extention See Publication 946. Extention However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Extention Also, you can elect to exclude certain property from being depreciated under MACRS. Extention Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. Extention Intangible property. Extention You cannot depreciate intangible property under ACRS or MACRS. Extention You depreciate intangible property using any other reasonable method, usually, the straight line method. Extention Note. Extention The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Extention For more information, see chapter 12 of Publication 535. Extention Public utility property. Extention The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Extention This type of property is subject to depreciation under a special rule. Extention Videocassettes. Extention If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Extention You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. Extention The straight line method, salvage value, and useful life are discussed later under Methods To Use. Extention You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. Extention How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Extention These methods are straight line and declining balance. Extention To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Extention They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Extention The amount of the deduction in any year also depends on which method of depreciation you choose. Extention Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Extention The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Extention Your original basis is usually the purchase price. Extention However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. Extention Adjusted basis. Extention Events will often change the basis of property. Extention When this occurs, the changed basis is called the adjusted basis. Extention Some events, such as improvements you make, increase basis. Extention Events such as deducting casualty losses and depreciation decrease basis. Extention If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. Extention Publication 551 explains how to figure basis for property acquired in different ways. Extention It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. Extention Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. Extention It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Extention It is how long it will continue to be useful to you, not how long the property will last. Extention Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Extention The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Extention Consider all these factors before you arrive at a useful life for your property. Extention The useful life of the same type of property varies from user to user. Extention When you determine the useful life of your property, keep in mind your own experience with similar property. Extention You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. Extention Change in useful life. Extention You base your estimate of useful life on certain facts. Extention If these facts change significantly, you can adjust your estimate of the remaining useful life. Extention However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Extention Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Extention You generally cannot depreciate property below a reasonable salvage value. Extention Determining salvage value. Extention Salvage value is the estimated value of property at the end of its useful life. Extention It is what you expect to get for the property if you sell it after you can no longer use it productively. Extention You must estimate the salvage value of a piece of property when you first acquire it. Extention Salvage value is affected both by how you use the property and how long you use it. Extention If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Extention However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Extention Changing salvage value. Extention Once you determine the salvage value for property, you should not change it merely because prices have changed. Extention However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Extention When you redetermine the salvage value, take into account the facts that exist at the time. Extention Net salvage. Extention Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Extention You can choose either salvage value or net salvage when you figure depreciation. Extention You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Extention However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Extention Your salvage value can never be less than zero. Extention Ten percent rule. Extention If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. Extention You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Extention If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Extention Methods To Use Two methods of depreciation are the straight line and declining balance methods. Extention If ACRS or MACRS does not apply, you can use one of these methods. Extention The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. Extention Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Extention One of these methods was the straight line method. Extention This method was also used for intangible property. Extention It lets you deduct the same amount of depreciation each year. Extention To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Extention Subtract the salvage value, if any, from the adjusted basis. Extention The balance is the total amount of depreciation you can take over the useful life of the property. Extention Divide the balance by the number of years remaining in the useful life. Extention This gives you the amount of your yearly depreciation deduction. Extention Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. Extention If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Extention Example. Extention In April 1994, Frank bought a franchise for $5,600. Extention It expires in 10 years. Extention This property is intangible property that cannot be depreciated under MACRS. Extention Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Extention He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Extention He must prorate the $560 for his 9 months of use in 1994. Extention This gives him a deduction of $420 ($560 ÷ 9/12). Extention In 1995, Frank can deduct $560 for the full year. Extention Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. Extention The rate cannot be more than twice the straight line rate. Extention Rate of depreciation. Extention Under this method, you must determine your declining balance rate of depreciation. Extention The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Extention (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Extention ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Extention Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Extention Depreciation deductions. Extention After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Extention This gives you the amount of your deduction. Extention For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). Extention To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Extention Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Extention Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Extention Your depreciation deduction for the second year is $1,600. Extention As you can see from this example, your adjusted basis in the property gets smaller each year. Extention Also, under this method, deductions are larger in the earlier years and smaller in the later years. Extention You can make a change to the straight line method without consent. Extention Salvage value. Extention Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Extention However, you cannot depreciate the property below its reasonable salvage value. Extention Determine salvage value using the rules discussed earlier, including the special 10% rule. Extention Example. Extention If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Extention But if your estimate of salvage value was $900, you can only deduct $100. Extention This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Extention Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Extention You can group the videocassettes by title for making this projection. Extention You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Extention The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Extention For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Extention How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Extention If you change your method of depreciation, it is generally a change in your method of accounting. Extention You must get IRS consent before making the change. Extention However, you do not need permission for certain changes in your method of depreciation. Extention The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Extention For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Extention Change to the straight line method. Extention You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. Extention However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Extention When the change is made, figure depreciation based on your adjusted basis in the property at that time. Extention Your adjusted basis takes into account all previous depreciation deductions. Extention Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Extention You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. Extention You cannot make the change on an amended return filed after the due date of the original return (including extensions). Extention When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. Extention After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. Extention Changes that require permission. Extention For most other changes in method of depreciation, you must get permission from the IRS. Extention To request a change in method of depreciation, file Form 3115. Extention File the application within the first 180 days of the tax year the change is to become effective. Extention In most cases, there is a user fee that must accompany Form 3115. Extention See the instructions for Form 3115 to determine if a fee is required. Extention Changes granted automatically. Extention The IRS automatically approves certain changes of a method of depreciation. Extention But, you must file Form 3115 for these automatic changes. Extention However, IRS can deny permission if Form 3115 is not filed on time. Extention For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Extention B. Extention 420. Extention Changes for which approval is not automatic. Extention The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. Extention You must request and receive permission for these changes. Extention To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. Extention Change from an improper method. Extention If the IRS disallows the method you are using, you do not need permission to change to a proper method. Extention You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Extention If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. Extention However, you must file the amended return before the filing date for the next tax year. Extention Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Extention You can do this by selling, exchanging, or abandoning the item of property. Extention You can also withdraw it from use without disposing of it. Extention For example, you could place it in a supplies or scrap account. Extention Retirements can be either normal or abnormal depending on all facts and circumstances. Extention The rules discussed next do not apply to MACRS and ACRS property. Extention Normal retirement. Extention A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. Extention A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. Extention Abnormal retirement. Extention A retirement can be abnormal if you withdraw the property early or under other circumstances. Extention For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Extention Gain or loss on retirement. Extention There are special rules for figuring the gain or loss on retirement of property. Extention The gain or loss will depend on several factors. Extention These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. Extention A single property account contains only one item of property. Extention A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Extention Sale or exchange. Extention If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. Extention See Publication 544. Extention Property not disposed of or abandoned. Extention If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Extention You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. Extention However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. Extention To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. Extention Special rule for normal retirements from item accounts. Extention You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. Extention However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Extention If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. Extention Abandoned property. Extention If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Extention However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. Extention Basis of property retired. Extention The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. Extention Single item accounts. Extention If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. Extention This is generally the cost or other basis of the item of property less depreciation. Extention See Publication 551. Extention Multiple property account. Extention For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. Extention If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. Extention You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. Extention The method of depreciation used for the multiple property account is used. Extention You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. Extention Prev Up Next Home More Online Publications
IRS Offers New Streamlined Option to Certain 501(c)(4) Groups Caught in Application Backlog
FS-2013-8, June 2013
Following a review of internal procedures to reduce the backlog of tax-exempt applications, the IRS is offering certain organizations that have applied for 501(c)(4) status a faster, optional method to gain tax-exempt status.
The IRS will start mailing about 80 letters this week offering the expedited option to groups that have had their applications pending for more than 120 days and involve possible political campaign intervention or issue advocacy. This effort is part of an internal review of IRS operations, processes and practices at the IRS announced today.
“The IRS is committed to improving our tax-exempt review process,” said IRS Principal Deputy Commissioner Danny Werfel. “This new streamlined option gives certain groups that have waited far too long a quick and clear path to get their status resolved.”
This “safe-harbor” option will provide certain groups an approved determination letter granting them 501(c)(4) status within two weeks if they certify they devote 60 percent or more of both their spending and time on activities that promote social welfare as defined by Section 501(c)(4). At the same time, they must certify that political campaign intervention involves less than 40 percent of both their spending and time. These thresholds apply for past, current and future years of operation. Solely for the purpose of determining eligibility for the expedited procedure, an organization must count, among other things, any public communication identifying a candidate that occurred within 60 days prior to a general election or 30 days prior to a primary as political campaign intervention.
“The IRS will treat these groups fairly and review applications promptly, a step that will immediately reduce the backlog of these cases,” Werfel said. “At the same time, the IRS will work to ensure 501(c)(4) groups follow the law set by Congress. As part of our efforts, the IRS will continue to look for ways to improve its processes going forward.”
The IRS also emphasized that any eligible organizations that do not choose the expedited option will be treated fairly and expeditiously through the regular review process.
Full details of the expedited process and specific instructions for the groups qualifying for the option can be found in IRS Letter 5228.
Related Item: New Review Process and Expedited Self-Certification Option
Page Last Reviewed or Updated: 19-Dec-2013
Extention 3. Extention Reporting Rental Income, Expenses, and Losses Table of Contents Which Forms To UseSchedule E (Form 1040) Schedule C (Form 1040), Profit or Loss From Business Qualified Joint Venture Limits on Rental LossesAt-Risk Rules Passive Activity Limits Casualties and Thefts Example Figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on Schedule E (Form 1040). Extention There are activities which do not qualify to use Schedule E, such as when the activity is not engaged in to make a profit or when you provide substantial services in conjunction with the property. Extention There are also the limitations which may need to be applied if you have a net loss on Schedule E. Extention There are two: (1) the limitation based on the amount of investment you have at risk in your rental activity, and (2) the special limits imposed on passive activities. Extention You may also have a gain or loss related to your rental property from a casualty or theft. Extention This is considered separately from the income and expense information you report on Schedule E. Extention Which Forms To Use The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Extention However, do not use that schedule to report a not-for-profit activity. Extention See Not Rented for Profit , in chapter 4. Extention There are also other rental situations in which forms other than Schedule E would be used. Extention Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Extention , you normally report your rental income and expenses on Schedule E, Part I. Extention List your total income, expenses, and depreciation for each rental property. Extention Be sure to enter the number of fair rental and personal use days on line 2. Extention If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Extention Complete lines 1 and 2 for each property. Extention However, fill in lines 23a through 26 on only one Schedule E. Extention On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Extention To find out if you need to attach Form 4562, see Form 4562 , later. Extention If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Extention Form 6198, At-Risk Limitations. Extention See At-Risk Rules , later. Extention Also see Publication 925. Extention Form 8582, Passive Activity Loss Limitations. Extention See Passive Activity Limits , later. Extention Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Extention If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. Extention Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Extention Form 4562. Extention You must complete and attach Form 4562 for rental activities only if you are claiming: Depreciation, including the special depreciation allowance, on property placed in service during 2013; Depreciation on listed property (such as a car), regardless of when it was placed in service; or Any other car expenses, including the standard mileage rate or lease expenses. Extention Otherwise, figure your depreciation on your own worksheet. Extention You do not have to attach these computations to your return, but you should keep them in your records for future reference. Extention See Publication 946 for information on preparing Form 4562. Extention Schedule C (Form 1040), Profit or Loss From Business Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer. Extention Providing substantial services. Extention If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Extention Use Form 1065, U. Extention S. Extention Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Extention Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Extention For information, see Publication 334, Tax Guide for Small Business. Extention Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Extention For a discussion of “substantial services,” see Real Estate Rents in Publication 334, chapter 5. Extention Qualified Joint Venture If you and your spouse each materially participate (see Material participation under Passive Activity Limits, later) as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. Extention This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. Extention If you make this election, you must report rental real estate income on Schedule E (or Schedule C if you provide substantial services). Extention You will not be required to file Form 1065 for any year the election is in effect. Extention Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive activity limits. Extention If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect. Extention For more information on qualified joint ventures, go to IRS. Extention gov and enter “qualified joint venture” in the search box. Extention Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. Extention You must consider these rules in the order shown below. Extention Both are discussed in this section. Extention At-risk rules. Extention These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Extention This applies only if the real property was placed in service after 1986. Extention Passive activity limits. Extention Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. Extention However, there are exceptions. Extention At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. Extention Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Extention In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. Extention You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. Extention Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. Extention See Publication 925 for a discussion of the at-risk rules. Extention Form 6198. Extention If you are subject to the at-risk rules, file Form 6198, At-Risk Limitations, with your tax return. Extention Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Extention For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. Extention For a discussion of activities that are not considered rental activities, see Rental Activities in Publication 925. Extention Deductions or losses from passive activities are limited. Extention You generally cannot offset income, other than passive income, with losses from passive activities. Extention Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Extention Any excess loss or credit is carried forward to the next tax year. Extention Exceptions to the rules for figuring passive activity limits for personal use of a dwelling unit and for rental real estate with active participation are discussed later. Extention For a detailed discussion of these rules, see Publication 925. Extention Real estate professionals. Extention If you are a real estate professional, complete line 43 of Schedule E. Extention You qualify as a real estate professional for the tax year if you meet both of the following requirements. Extention More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate. Extention You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. Extention If you qualify as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Extention For purposes of determining whether you materially participated in your rental real estate activities, each interest in rental real estate is a separate activity unless you elect to treat all your interests in rental real estate as one activity. Extention Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. Extention You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest. Extention Do not count your spouse's personal services to determine whether you met the requirements listed earlier to qualify as a real estate professional. Extention However, you can count your spouse's participation in an activity in determining if you materially participated. Extention Real property trades or businesses. Extention A real property trade or business is a trade or business that does any of the following with real property. Extention Develops or redevelops it. Extention Constructs or reconstructs it. Extention Acquires it. Extention Converts it. Extention Rents or leases it. Extention Operates or manages it. Extention Brokers it. Extention Choice to treat all interests as one activity. Extention If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. Extention You can make this choice for any year that you qualify as a real estate professional. Extention If you forgo making the choice for one year, you can still make it for a later year. Extention If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. Extention This is true even if you are not a real estate professional in any intervening year. Extention (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules. Extention ) See the Instructions for Schedule E for information about making this choice. Extention Material participation. Extention Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. Extention For details, see Publication 925 or the Instructions for Schedule C. Extention Participating spouse. Extention If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. Extention Do this even if your spouse owns no interest in the activity or files a separate return for the year. Extention Form 8582. Extention You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. Extention See Form 8582 not required , later in this chapter, to determine if you must complete Form 8582. Extention If you are required to complete Form 8582 and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible loss) in column (b) of Form 8582, Worksheet 1 or 3, as required. Extention Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. Extention Instead, follow the rules explained in chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Extention Exception for Rental Real Estate With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. Extention This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Extention Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Extention Example. Extention Jane is single and has $40,000 in wages, $2,000 of passive income from a limited partnership, and $3,500 of passive loss from a rental real estate activity in which she actively participated. Extention $2,000 of Jane's $3,500 loss offsets her passive income. Extention The remaining $1,500 loss can be deducted from her $40,000 wages. Extention The special allowance is not available if you were married, lived with your spouse at any time during the year, and are filing a separate return. Extention Active participation. Extention You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Extention Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions. Extention Example. Extention Mike is single and had the following income and losses during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss was from the rental of a house Mike owned. Extention Mike had advertised and rented the house to the current tenant himself. Extention He also collected the rents, which usually came by mail. Extention All repairs were either made or contracted out by Mike. Extention Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other income. Extention Maximum special allowance. Extention The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. Extention If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. Extention If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. Extention Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Extention Modified adjusted gross income (MAGI). Extention This is your adjusted gross income from Form 1040, U. Extention S. Extention Individual Income Tax Return, line 38, or Form 1040NR, U. Extention S. Extention Nonresident Alien Income Tax Return, line 37, figured without taking into account: The taxable amount of social security or equivalent tier 1 railroad retirement benefits, The deductible contributions to traditional individual retirement accounts (IRAs) and section 501(c)(18) pension plans, The exclusion from income of interest from Series EE and I U. Extention S. Extention savings bonds used to pay higher educational expenses, The exclusion of amounts received under an employer's adoption assistance program, Any passive activity income or loss included on Form 8582, Any rental real estate loss allowed to real estate professionals, Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582), The deduction allowed for one-half of self-employment tax, The deduction allowed for interest paid on student loans, The deduction for qualified tuition and related fees, and The domestic production activities deduction (see the Instructions for Form 8903). Extention Form 8582 not required. Extention Do not complete Form 8582 if you meet all of the following conditions. Extention Your only passive activities were rental real estate activities in which you actively participated. Extention Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately and you lived apart from your spouse all year). Extention If married filing separately, you lived apart from your spouse all year. Extention You have no prior year unallowed losses from these (or any other passive) activities. Extention You have no current or prior year unallowed credits from passive activities. Extention Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year). Extention You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust. Extention If you meet all of the conditions listed above, your rental real estate activities are not limited by the passive activity rules and you do not have to complete Form 8582. Extention On lines 23a through 23e of your Schedule E, enter the applicable amounts. Extention Casualties and Thefts As a result of a casualty or theft, you may have a loss related to your rental property. Extention You may be able to deduct the loss on your income tax return. Extention Casualty. Extention This is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Extention Such events include a storm, fire, or earthquake. Extention Theft. Extention This is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it. Extention Gain from casualty or theft. Extention It is also possible to have a gain from a casualty or theft if you receive money, including insurance, that is more than your adjusted basis in the property. Extention Generally, you must report this gain. Extention However, under certain circumstances, you may defer paying tax by choosing to postpone reporting the gain. Extention To do this, you generally must buy replacement property within 2 years after the close of the first tax year in which any part of your gain is realized. Extention In certain circumstances, the replacement period can be greater than 2 years; see Replacement Period in Publication 547 for more information. Extention The cost of the replacement property must be equal to or more than the net insurance or other payment you received. Extention More information. Extention For information on business and nonbusiness casualty and theft losses, see Publication 547. Extention How to report. Extention If you had a casualty or theft that involved property used in your rental activity, figure the net gain or loss in Section B of Form 4684, Casualties and Thefts. Extention Follow the Instructions for Form 4684 for where to carry your net gain or loss. Extention Example In February 2008, Marie Pfister bought a rental house for $135,000 (house $120,000 and land $15,000) and immediately began renting it out. Extention In 2013, she rented it all 12 months for a monthly rental fee of $1,125. Extention In addition to her rental income of $13,500 (12 x $1,125), Marie had the following expenses. Extention Mortgage interest $8,000 Fire insurance (1-year policy) 250 Miscellaneous repairs 400 Real estate taxes imposed and paid 500 Maintenance 200 Marie depreciates the residential rental property under MACRS GDS. Extention This means using the straight line method over a recovery period of 27. Extention 5 years. Extention She uses Table 2-2d to find her depreciation percentage. Extention Because she placed the property in service in February 2008, she continues to use that row of Table 2-2d. Extention For year 6, the rate is 3. Extention 636%. Extention Marie figures her net rental income or loss for the house as follows: Total rental income received ($1,125 × 12) $13,500 Minus: Expenses Mortgage interest $8,000 Fire insurance 250 Miscellaneous repairs 400 Real estate taxes 500 Maintenance 200 Total expenses 9,350 Balance $4,150 Minus: Depreciation ($120,000 x 3. Extention 636%) 4,363 Net rental (loss) for house ($213) Marie had a net loss for the year. Extention Because she actively participated in her passive rental real estate activity and her loss was less than $25,000, she can deduct the loss on her return. Extention Marie also meets all of the requirements for not having to file Form 8582. Extention She uses Schedule E, Part I, to report her rental income and expenses. Extention She enters her income, expenses, and depreciation for the house in the column for Property A and enters her loss on line 22. Extention Form 4562 is not required. Extention Prev Up Next Home More Online Publications