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Form 1040nr

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Form 1040nr

Form 1040nr 3. Form 1040nr   Dispositions of Business Property Table of Contents Introduction Useful Items - You may want to see: What Is a Disposition of Property?Like-kind exchanges. Form 1040nr How Do I Figure a Gain or Loss?Is My Gain or Loss Ordinary or Capital? Is My Capital Gain or Loss Short Term or Long Term? Where Do I Report Gains and Losses? Introduction If you dispose of business property, you may have a gain or loss that you report on Form 1040. Form 1040nr However, in some cases you may have a gain that is not taxable or a loss that is not deductible. Form 1040nr This chapter discusses whether you have a disposition, how to figure the gain or loss, and where to report the gain or loss. Form 1040nr Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property Sch D (Form 1040) Capital Gains and Losses See chapter 12 for information about getting publications and forms. Form 1040nr What Is a Disposition of Property? A disposition of property includes the following transactions. Form 1040nr You sell property for cash or other property. Form 1040nr You exchange property for other property. Form 1040nr You receive money as a tenant for the cancellation of a lease. Form 1040nr You receive money for granting the exclusive use of a copyright throughout its life in a particular medium. Form 1040nr You transfer property to satisfy a debt. Form 1040nr You abandon property. Form 1040nr Your bank or other financial institution forecloses on your mortgage or repossesses your property. Form 1040nr Your property is damaged, destroyed, or stolen, and you receive property or money in payment. Form 1040nr Your property is condemned, or disposed of under the threat of condemnation, and you receive property or money in payment. Form 1040nr For details about damaged, destroyed, or stolen property, see Publication 547, Casualties, Disasters, and Thefts. Form 1040nr For details about other dispositions, see chapter 1 in Publication 544. Form 1040nr Nontaxable exchanges. Form 1040nr   Certain exchanges of property are not taxable. Form 1040nr This means any gain from the exchange is not recognized and you cannot deduct any loss. Form 1040nr Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Form 1040nr Like-kind exchanges. Form 1040nr   A like-kind exchange is the exchange of property for the same kind of property. Form 1040nr It is the most common type of nontaxable exchange. Form 1040nr To be a like-kind exchange, the property traded and the property received must be both of the following. Form 1040nr Business or investment property. Form 1040nr Like property. Form 1040nr   Report the exchange of like-kind property on Form 8824, Like-Kind Exchanges. Form 1040nr For more information about like-kind exchanges, see chapter 1 in Publication 544. Form 1040nr Installment sales. Form 1040nr   An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Form 1040nr If you finance the buyer's purchase of your property, instead of having the buyer get a loan or mortgage from a third party, you probably have an installment sale. Form 1040nr   For more information about installment sales, see Publication 537, Installment Sales. Form 1040nr Sale of a business. Form 1040nr   The sale of a business usually is not a sale of one asset. Form 1040nr Instead, all the assets of the business are sold. Form 1040nr Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. Form 1040nr   Both the buyer and seller involved in the sale of a business must report to the IRS the allocation of the sales price among the business assets. Form 1040nr Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Form 1040nr The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Form 1040nr   For more information about the sale of a business, see chapter 2 of Publication 544. Form 1040nr How Do I Figure a Gain or Loss? Table 3-1. Form 1040nr How To Figure a Gain or Loss IF your. Form 1040nr . Form 1040nr . Form 1040nr THEN you have a. Form 1040nr . Form 1040nr . Form 1040nr Adjusted basis is more than the amount realized Loss. Form 1040nr Amount realized is more than the adjusted basis Gain. Form 1040nr Basis, adjusted basis, amount realized, fair market value, and amount recognized are defined next. Form 1040nr You need to know these definitions to figure your gain or loss. Form 1040nr Basis. Form 1040nr   The cost or purchase price of property is usually its basis for figuring the gain or loss from its sale or other disposition. Form 1040nr However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. Form 1040nr For more information about basis, see Publication 551, Basis of Assets. Form 1040nr Adjusted basis. Form 1040nr   The adjusted basis of property is your original cost or other basis plus certain additions, and minus certain deductions such as depreciation and casualty losses. Form 1040nr In determining gain or loss, the costs of transferring property to a new owner, such as selling expenses, are added to the adjusted basis of the property. Form 1040nr Amount realized. Form 1040nr   The amount you realize from a disposition is the total of all money you receive plus the fair market value of all property or services you receive. Form 1040nr The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Form 1040nr Fair market value. Form 1040nr   Fair market value is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Form 1040nr Amount recognized. Form 1040nr   Your gain or loss realized from a disposition of property is usually a recognized gain or loss for tax purposes. Form 1040nr Recognized gains must be included in gross income. Form 1040nr Recognized losses are deductible from gross income. Form 1040nr However, a gain or loss realized from certain exchanges of property is not recognized. Form 1040nr See  Nontaxable exchanges, earlier. Form 1040nr Also, you cannot deduct a loss from the disposition of property held for personal use. Form 1040nr Is My Gain or Loss Ordinary or Capital? You must classify your gains and losses as either ordinary or capital gains or losses. Form 1040nr You must do this to figure your net capital gain or loss. Form 1040nr Generally, you will have a capital gain or loss if you dispose of a capital asset. Form 1040nr For the most part, everything you own and use for personal purposes or investment is a capital asset. Form 1040nr Certain property you use in your business is not a capital asset. Form 1040nr A gain or loss from a disposition of this property is an ordinary gain or loss. Form 1040nr However, if you held the property longer than 1 year, you may be able to treat the gain or loss as a capital gain or loss. Form 1040nr These gains and losses are called section 1231 gains and losses. Form 1040nr For more information about ordinary and capital gains and losses, see chapters 2 and 3 in Publication 544. Form 1040nr Is My Capital Gain or Loss Short Term or Long Term? If you have a capital gain or loss, you must determine whether it is long term or short term. Form 1040nr Whether a gain or loss is long or short term depends on how long you own the property before you dispose of it. Form 1040nr The time you own property before disposing of it is called the holding period. Form 1040nr Table 3-2. Form 1040nr Do I Have a Short-Term or Long-Term Gain or Loss? IF you hold the property. Form 1040nr . Form 1040nr . Form 1040nr THEN you have a. Form 1040nr . Form 1040nr . Form 1040nr 1 year or less Short-term capital gain or loss. Form 1040nr More than 1 year Long-term capital gain or loss. Form 1040nr For more information about short-term and long-term capital gains and losses, see chapter 4 of Publication 544. Form 1040nr Where Do I Report Gains and Losses? Report gains and losses from the following dispositions on the forms indicated. Form 1040nr The instructions for the forms explain how to fill them out. Form 1040nr Dispositions of business property and depreciable property. Form 1040nr   Use Form 4797. Form 1040nr If you have taxable gain, you may also have to use Schedule D (Form 1040). Form 1040nr Like-kind exchanges. Form 1040nr   Use Form 8824, Like-Kind Exchanges. Form 1040nr You may also have to use Form 4797 and Schedule D (Form 1040). Form 1040nr Installment sales. Form 1040nr   Use Form 6252, Installment Sale Income. Form 1040nr You may also have to use Form 4797 and Schedule D (Form 1040). Form 1040nr Casualties and thefts. Form 1040nr   Use Form 4684, Casualties and Thefts. Form 1040nr You may also have to use Form 4797. Form 1040nr Condemned property. Form 1040nr   Use Form 4797. Form 1040nr You may also have to use Schedule D (Form 1040). Form 1040nr Prev  Up  Next   Home   More Online Publications
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The Form 1040nr

Form 1040nr 1. Form 1040nr   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Form 1040nr Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Form 1040nr The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. Form 1040nr If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Form 1040nr Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Form 1040nr Rental income is any payment you receive for the use or occupation of property. Form 1040nr In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Form 1040nr When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Form 1040nr Most individual taxpayers use the cash method. Form 1040nr Cash method. Form 1040nr   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. Form 1040nr You constructively receive income when it is made available to you, for example, by being credited to your bank account. Form 1040nr Accrual method. Form 1040nr    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Form 1040nr You generally deduct your expenses when you incur them, rather than when you pay them. Form 1040nr More information. Form 1040nr   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Form 1040nr Types of Income The following are common types of rental income. Form 1040nr Advance rent. Form 1040nr   Advance rent is any amount you receive before the period that it covers. Form 1040nr Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Form 1040nr Example. Form 1040nr On March 18, 2013, you signed a 10-year lease to rent your property. Form 1040nr During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Form 1040nr You must include $19,200 in your rental income in the first year. Form 1040nr Canceling a lease. Form 1040nr   If your tenant pays you to cancel a lease, the amount you receive is rent. Form 1040nr Include the payment in your income in the year you receive it regardless of your method of accounting. Form 1040nr Expenses paid by tenant. Form 1040nr   If your tenant pays any of your expenses, those payments are rental income. Form 1040nr Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Form 1040nr For more information, see Rental Expenses , later. Form 1040nr Example 1. Form 1040nr Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Form 1040nr Under the terms of the lease, your tenant does not have to pay this bill. Form 1040nr Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Form 1040nr You can deduct the utility payment made by your tenant as a rental expense. Form 1040nr Example 2. Form 1040nr While you are out of town, the furnace in your rental property stops working. Form 1040nr Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Form 1040nr Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Form 1040nr You can deduct the repair payment made by your tenant as a rental expense. Form 1040nr Property or services. Form 1040nr   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. Form 1040nr   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Form 1040nr Example. Form 1040nr Your tenant is a house painter. Form 1040nr He offers to paint your rental property instead of paying 2 months rent. Form 1040nr You accept his offer. Form 1040nr Include in your rental income the amount the tenant would have paid for 2 months rent. Form 1040nr You can deduct that same amount as a rental expense for painting your property. Form 1040nr Security deposits. Form 1040nr   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Form 1040nr But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Form 1040nr    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Form 1040nr Include it in your income when you receive it. Form 1040nr Other Sources of Rental Income Lease with option to buy. Form 1040nr   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. Form 1040nr If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Form 1040nr Part interest. Form 1040nr   If you own a part interest in rental property, you must report your part of the rental income from the property. Form 1040nr Rental of property also used as your home. Form 1040nr   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Form 1040nr However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Form 1040nr See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Form 1040nr Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Form 1040nr Personal use of rental property. Form 1040nr   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Form 1040nr Also, your rental expense deductions may be limited. Form 1040nr See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Form 1040nr Part interest. Form 1040nr   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Form 1040nr Example. Form 1040nr Roger owns a one-half undivided interest in a rental house. Form 1040nr Last year he paid $968 for necessary repairs on the property. Form 1040nr Roger can deduct $484 (50% × $968) as a rental expense. Form 1040nr He is entitled to reimbursement for the remaining half from the co-owner. Form 1040nr When To Deduct You generally deduct your rental expenses in the year you pay them. Form 1040nr If you use the accrual method, see Publication 538 for more information. Form 1040nr Types of Expenses Listed below are the most common rental expenses. Form 1040nr Advertising. Form 1040nr Auto and travel expenses. Form 1040nr Cleaning and maintenance. Form 1040nr Commissions. Form 1040nr Depreciation. Form 1040nr Insurance. Form 1040nr Interest (other). Form 1040nr Legal and other professional fees. Form 1040nr Local transportation expenses. Form 1040nr Management fees. Form 1040nr Mortgage interest paid to banks, etc. Form 1040nr Points. Form 1040nr Rental payments. Form 1040nr Repairs. Form 1040nr Taxes. Form 1040nr Utilities. Form 1040nr Some of these expenses, as well as other less common ones, are discussed below. Form 1040nr Depreciation. Form 1040nr   Depreciation is a capital expense. Form 1040nr It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Form 1040nr   You can begin to depreciate rental property when it is ready and available for rent. Form 1040nr See Placed in Service under When Does Depreciation Begin and End in chapter 2. Form 1040nr Insurance premiums paid in advance. Form 1040nr   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Form 1040nr You cannot deduct the total premium in the year you pay it. Form 1040nr See chapter 6 of Publication 535 for information on deductible premiums. Form 1040nr Interest expense. Form 1040nr   You can deduct mortgage interest you pay on your rental property. Form 1040nr When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Form 1040nr Chapter 4 of Publication 535 explains mortgage interest in detail. Form 1040nr Expenses paid to obtain a mortgage. Form 1040nr   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Form 1040nr These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Form 1040nr Form 1098, Mortgage Interest Statement. Form 1040nr   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. Form 1040nr If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Form 1040nr Attach a statement to your return showing the name and address of the other person. Form 1040nr On the dotted line next to line 13, enter “See attached. Form 1040nr ” Legal and other professional fees. Form 1040nr   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. Form 1040nr For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Form 1040nr You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Form 1040nr Local benefit taxes. Form 1040nr   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Form 1040nr These charges are nondepreciable capital expenditures and must be added to the basis of your property. Form 1040nr However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Form 1040nr Local transportation expenses. Form 1040nr   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Form 1040nr However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Form 1040nr See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Form 1040nr   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Form 1040nr For 2013, the standard mileage rate for business use is 56. Form 1040nr 5 cents per mile. Form 1040nr For more information, see chapter 4 of Publication 463. Form 1040nr    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Form 1040nr In addition, you must complete Form 4562, Part V, and attach it to your tax return. Form 1040nr Pre-rental expenses. Form 1040nr   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Form 1040nr Rental of equipment. Form 1040nr   You can deduct the rent you pay for equipment that you use for rental purposes. Form 1040nr However, in some cases, lease contracts are actually purchase contracts. Form 1040nr If so, you cannot deduct these payments. Form 1040nr You can recover the cost of purchased equipment through depreciation. Form 1040nr Rental of property. Form 1040nr   You can deduct the rent you pay for property that you use for rental purposes. Form 1040nr If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Form 1040nr Travel expenses. Form 1040nr   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Form 1040nr You must properly allocate your expenses between rental and nonrental activities. Form 1040nr You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Form 1040nr The cost of improvements is recovered by taking depreciation. Form 1040nr For information on travel expenses, see chapter 1 of Publication 463. Form 1040nr    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Form 1040nr Uncollected rent. Form 1040nr   If you are a cash basis taxpayer, do not deduct uncollected rent. Form 1040nr Because you have not included it in your income, it is not deductible. Form 1040nr   If you use an accrual method, report income when you earn it. Form 1040nr If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Form 1040nr See chapter 10 of Publication 535 for more information about business bad debts. Form 1040nr Vacant rental property. Form 1040nr   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Form 1040nr However, you cannot deduct any loss of rental income for the period the property is vacant. Form 1040nr Vacant while listed for sale. Form 1040nr   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Form 1040nr If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Form 1040nr Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. Form 1040nr These charges are also called loan origination fees, maximum loan charges, or premium charges. Form 1040nr Any of these charges (points) that are solely for the use of money are interest. Form 1040nr Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. Form 1040nr The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Form 1040nr In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). Form 1040nr The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. Form 1040nr If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Form 1040nr De minimis OID. Form 1040nr   The OID is de minimis if it is less than one-fourth of 1% (. Form 1040nr 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). Form 1040nr   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. Form 1040nr On a constant-yield basis over the term of the loan. Form 1040nr On a straight line basis over the term of the loan. Form 1040nr In proportion to stated interest payments. Form 1040nr In its entirety at maturity of the loan. Form 1040nr You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Form 1040nr Example. Form 1040nr Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. Form 1040nr The loan is to be repaid over 30 years. Form 1040nr During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Form 1040nr When the loan was made, she paid $1,500 in points to the lender. Form 1040nr The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Form 1040nr Carol determines that the points (OID) she paid are de minimis based on the following computation. Form 1040nr Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Form 1040nr 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Form 1040nr Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Form 1040nr Under the straight line method, she can deduct $50 each year for 30 years. Form 1040nr Constant-yield method. Form 1040nr   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Form 1040nr   You figure your deduction for the first year in the following manner. Form 1040nr Determine the issue price of the loan. Form 1040nr If you paid points on the loan, the issue price generally is the difference between the principal and the points. Form 1040nr Multiply the result in (1) by the yield to maturity (defined later). Form 1040nr Subtract any qualified stated interest payments (defined later) from the result in (2). Form 1040nr This is the OID you can deduct in the first year. Form 1040nr Yield to maturity (YTM). Form 1040nr   This rate is generally shown in the literature you receive from your lender. Form 1040nr If you do not have this information, consult your lender or tax advisor. Form 1040nr In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Form 1040nr Qualified stated interest (QSI). Form 1040nr   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. Form 1040nr Example—Year 1. Form 1040nr The facts are the same as in the previous example. Form 1040nr The yield to maturity on Carol's loan is 10. Form 1040nr 2467%, compounded annually. Form 1040nr She figured the amount of points (OID) she could deduct in 2013 as follows. Form 1040nr Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Form 1040nr 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. Form 1040nr To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Form 1040nr Then follow steps (2) and (3), earlier. Form 1040nr Example—Year 2. Form 1040nr Carol figured the deduction for 2014 as follows. Form 1040nr Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Form 1040nr 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Form 1040nr    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. Form 1040nr A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Form 1040nr However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. Form 1040nr Points when loan refinance is more than the previous outstanding balance. Form 1040nr   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Form 1040nr For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. Form 1040nr Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Form 1040nr Improvements. Form 1040nr   You must capitalize any expense you pay to improve your rental property. Form 1040nr An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Form 1040nr Betterments. Form 1040nr   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Form 1040nr Restoration. Form 1040nr   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Form 1040nr Adaptation. Form 1040nr   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Form 1040nr Separate the costs of repairs and improvements, and keep accurate records. Form 1040nr You will need to know the cost of improvements when you sell or depreciate your property. Form 1040nr The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Form 1040nr Table 1-1. Form 1040nr Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications