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Vita free tax help 6. Vita free tax help   Tax Treaty Benefits Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Purpose of Tax Treaties Common Benefits Competent Authority AssistanceAdditional filing. Vita free tax help Obtaining Copies of Tax Treaties Topics - This chapter discusses: Some common tax treaty benefits, How to get help in certain situations, and How to get copies of tax treaties. Vita free tax help Useful Items - You may want to see: Publication 597 Information on the United States—Canada Income Tax Treaty 901 U. Vita free tax help S. Vita free tax help Tax Treaties See chapter 7 for information about getting these publications. Vita free tax help Purpose of Tax Treaties The United States has tax treaties or conventions with many countries. Vita free tax help See Table 6-1 at the end of this chapter for a list of these countries. Vita free tax help Under these treaties and conventions, citizens and residents of the United States who are subject to taxes imposed by the foreign countries are entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries. Vita free tax help If a foreign country with which the United States has a treaty imposes a tax on you, you may be entitled to benefits under the treaty. Vita free tax help Treaty benefits generally are available to residents of the United States. Vita free tax help They generally are not available to U. Vita free tax help S. Vita free tax help citizens who do not reside in the United States. Vita free tax help However, certain treaty benefits and safeguards, such as the nondiscrimination provisions, are available to U. Vita free tax help S. Vita free tax help citizens residing in the treaty countries. Vita free tax help U. Vita free tax help S. Vita free tax help citizens residing in a foreign country also may be entitled to benefits under that country's tax treaties with third countries. Vita free tax help Certification of U. Vita free tax help S. Vita free tax help residency. Vita free tax help   Use Form 8802, Application for United States Residency Certification, to request certification of U. Vita free tax help S. Vita free tax help residency for purposes of claiming benefits under a tax treaty. Vita free tax help Certification can be requested for the current and any prior calendar years. Vita free tax help You should examine the specific treaty articles to find if you are entitled to a tax credit, tax exemption, reduced rate of tax, or other treaty benefit or safeguard. Vita free tax help Common Benefits Some common tax treaty benefits are explained below. Vita free tax help The credits, deductions, exemptions, reductions in rate, and other benefits provided by tax treaties are subject to conditions and various restrictions. Vita free tax help Benefits provided by certain treaties are not provided by others. Vita free tax help Personal service income. Vita free tax help If you are a U. Vita free tax help S. Vita free tax help resident who is in a treaty country for a limited number of days in the tax year and you meet certain other requirements, the payment you receive for personal services performed in that country may be exempt from that country's income tax. Vita free tax help Professors and teachers. Vita free tax help If you are a U. Vita free tax help S. Vita free tax help resident, the payment you receive for the first 2 or 3 years that you are teaching or doing research in a treaty country may be exempt from that country's income tax. Vita free tax help Students, trainees, and apprentices. Vita free tax help If you are a U. Vita free tax help S. Vita free tax help resident, amounts you receive from the United States for study, research, or business, professional and technical training may be exempt from a treaty country's income tax. Vita free tax help Some treaties exempt grants, allowances, and awards received from governmental and certain nonprofit organizations. Vita free tax help Also, under certain circumstances, a limited amount of pay received by students, trainees, and apprentices may be exempt from the income tax of many treaty countries. Vita free tax help Pensions and annuities. Vita free tax help If you are a U. Vita free tax help S. Vita free tax help resident, nongovernment pensions and annuities you receive may be exempt from the income tax of treaty countries. Vita free tax help Most treaties contain separate provisions for exempting government pensions and annuities from treaty country income tax, and some treaties provide exemption from the treaty country's income tax for social security payments. Vita free tax help Investment income. Vita free tax help If you are a U. Vita free tax help S. Vita free tax help resident, investment income, such as interest and dividends, that you receive from sources in a treaty country may be exempt from that country's income tax or taxed at a reduced rate. Vita free tax help Several treaties provide exemption for capital gains (other than from sales of real property in most cases) if specified requirements are met. Vita free tax help Tax credit provisions. Vita free tax help If you are a U. Vita free tax help S. Vita free tax help resident who receives income from or owns capital in a foreign country, you may be taxed on that income or capital by both the United States and the treaty country. Vita free tax help Most treaties allow you to take a credit against or deduction from the treaty country's taxes based on the U. Vita free tax help S. Vita free tax help tax on the income. Vita free tax help Nondiscrimination provisions. Vita free tax help Most U. Vita free tax help S. Vita free tax help tax treaties provide that the treaty country cannot discriminate by imposing more burdensome taxes on U. Vita free tax help S. Vita free tax help citizens who are residents of the treaty country than it imposes on its own citizens in the same circumstances. Vita free tax help Saving clauses. Vita free tax help U. Vita free tax help S. Vita free tax help treaties contain saving clauses that provide that the treaties do not affect the U. Vita free tax help S. Vita free tax help taxation of its own citizens and residents. Vita free tax help As a result, U. Vita free tax help S. Vita free tax help citizens and residents generally cannot use the treaty to reduce their U. Vita free tax help S. Vita free tax help tax liability. Vita free tax help However, most treaties provide exceptions to saving clauses that allow certain provisions of the treaty to be claimed by U. Vita free tax help S. Vita free tax help citizens or residents. Vita free tax help It is important that you examine the applicable saving clause to determine if an exception applies. Vita free tax help More information on treaties. Vita free tax help   Publication 901 contains an explanation of treaty provisions that apply to amounts received by teachers, students, workers, and government employees and pensioners who are alien nonresidents or residents of the United States. Vita free tax help Since treaty provisions generally are reciprocal, you usually can substitute “United States” for the name of the treaty country whenever it appears, and vice versa when “U. Vita free tax help S. Vita free tax help ” appears in the treaty exemption discussions in Publication 901. Vita free tax help   Publication 597 contains an explanation of a number of frequently-used provisions of the United States–Canada income tax treaty. Vita free tax help Competent Authority Assistance If you are a U. Vita free tax help S. Vita free tax help citizen or resident alien, you can request assistance from the U. Vita free tax help S. Vita free tax help competent authority if you think that the actions of the United States, a treaty country, or both, cause or will cause a tax situation not intended by the treaty between the two countries. Vita free tax help You should read any treaty articles, including the mutual agreement procedure article, that apply in your situation. Vita free tax help The U. Vita free tax help S. Vita free tax help competent authority cannot consider requests involving countries with which the United States does not have a tax treaty. Vita free tax help Effect of request for assistance. Vita free tax help   If your request provides a basis for competent authority assistance, the U. Vita free tax help S. Vita free tax help competent authority generally will consult with the treaty country competent authority on how to resolve the situation. Vita free tax help How to make your request. Vita free tax help   It is important that you make your request for competent authority consideration as soon as either of the following occurs. Vita free tax help You are denied treaty benefits. Vita free tax help Actions taken by both the United States and the foreign country result in double taxation or will result in taxation not intended by the treaty. Vita free tax help   In addition to making a request for assistance, you should take steps so that any agreement reached by the competent authorities is not barred by administrative, legal, or procedural barriers. Vita free tax help Some of the steps you should consider taking include the following. Vita free tax help Filing a protective claim for credit or refund of U. Vita free tax help S. Vita free tax help taxes. Vita free tax help Delaying the expiration of any period of limitations on the making of a refund or other tax adjustment. Vita free tax help Avoiding the lapse or termination of your right to appeal any tax determination. Vita free tax help Complying with all applicable procedures for invoking competent authority consideration. Vita free tax help Contesting an adjustment or seeking an appropriate correlative adjustment with respect to the U. Vita free tax help S. Vita free tax help or treaty country tax. Vita free tax help Taxpayers can consult with the U. Vita free tax help S. Vita free tax help competent authority to determine whether they need to take protective steps and when any required steps need to be taken. Vita free tax help   The request should contain all essential items of information, including the following items. Vita free tax help A reference to the treaty and the treaty provisions on which the request is based. Vita free tax help The years and amounts involved in both U. Vita free tax help S. Vita free tax help dollars and foreign currency. Vita free tax help A brief description of the issues for which competent authority assistance is requested. Vita free tax help   A complete listing of the information that must be included with the request can be found in Revenue Procedure 2006-54, or its successor. Vita free tax help Revenue Procedure 2006-54 is available at www. Vita free tax help irs. Vita free tax help gov/irb/2006-49_IRB/ar13. Vita free tax help html. Vita free tax help   Also, see Notice 2013-78, which provides proposed updates to the procedures for requesting U. Vita free tax help S. Vita free tax help competent authority assistance under tax treaties. Vita free tax help As noted, Revenue Procedure 2006-54 will be superseded by a revenue procedure to be published in the future. Vita free tax help    Your request for competent authority consideration should be addressed to:   Deputy Commissioner (International) Large Business and International Division Internal Revenue Service 1111 Constitution Avenue, NW Routing M4-365 Washington, DC 20224 Attn: TAIT Additional filing. Vita free tax help   In the case of U. Vita free tax help S. Vita free tax help - initiated adjustments, you also must file a copy of the request with the IRS office where your case is pending. Vita free tax help If the request is filed after the matter has been designated for litigation or while a suit contesting your relevant tax liability is pending in a United States court, a copy of the request, with a separate statement attached identifying the court where the suit is pending and the docket number of the action, also must be filed with the: Office of Associate Chief Counsel (International) Internal Revenue Service 1111 Constitution Avenue, NW Washington, DC 20224 Additional details on the procedures for requesting competent authority assistance are included in Revenue Procedure 2006-54, or its successor. Vita free tax help Obtaining Copies of Tax Treaties Table 6-1 lists those countries with which the United States has income tax treaties. Vita free tax help This table is updated through October 31, 2013. Vita free tax help You can get complete information about treaty provisions from the taxing authority in the country from which you receive income or from the treaty itself. Vita free tax help You can obtain the text of most U. Vita free tax help S. Vita free tax help treaties at IRS. Vita free tax help gov. Vita free tax help You also can request the text of treaties from the Department of Treasury at the following address. Vita free tax help Department of Treasury Office of Business and Public Liaison Rm. Vita free tax help 3411 1500 Pennsylvania Avenue, NW  Washington, DC 20220 If you have questions about a treaty and you are in the United States, Puerto Rico, or the U. Vita free tax help S. Vita free tax help Virgin Islands, you can call the IRS at 1-800-829-1040. Vita free tax help Table 6–1. Vita free tax help List of Tax Treaties (Updated through October 31, 2013) Country Official Text  Symbol1 General  Effective Date Citation Applicable Treasury Explanations  or Treasury Decision (T. Vita free tax help D. Vita free tax help ) Australia TIAS 10773 Dec. Vita free tax help 1, 1983 1986-2 C. Vita free tax help B. Vita free tax help 220 1986-2 C. Vita free tax help B. Vita free tax help 246 Protocol TIAS Jan. Vita free tax help 1, 2004     Austria TIAS Jan. Vita free tax help 1, 1999     Bangladesh TIAS Jan. Vita free tax help 1, 2007     Barbados TIAS 11090 Jan. Vita free tax help 1, 1984 1991-2 C. Vita free tax help B. Vita free tax help 436 1991-2 C. Vita free tax help B. Vita free tax help 466 Protocol TIAS Jan. Vita free tax help 1, 2005     Belgium TIAS Jan. Vita free tax help 1, 2008     Bulgaria TIAS Jan. Vita free tax help 1, 2009     Canada2 TIAS 11087 Jan. Vita free tax help 1, 1985 1986-2 C. Vita free tax help B. Vita free tax help 258 1987-2 C. Vita free tax help B. Vita free tax help 298 Protocol TIAS Jan. Vita free tax help 1, 2009     China, People's Republic of TIAS 12065 Jan. Vita free tax help 1, 1987 1988-1 C. Vita free tax help B. Vita free tax help 414 1988-1 C. Vita free tax help B. Vita free tax help 447 Commonwealth of Independent States3 TIAS 8225 Jan. Vita free tax help 1, 1976 1976-2 C. Vita free tax help B. Vita free tax help 463 1976-2 C. Vita free tax help B. Vita free tax help 475 Cyprus TIAS 10965 Jan. Vita free tax help 1, 1986 1989-2 C. Vita free tax help B. Vita free tax help 280 1989-2 C. Vita free tax help B. Vita free tax help 314 Czech Republic TIAS Jan. Vita free tax help 1, 1993     Denmark TIAS Jan. Vita free tax help 1, 2001     Protocol TIAS Jan. Vita free tax help 1, 2008     Egypt TIAS 10149 Jan. Vita free tax help 1, 1982 1982-1 C. Vita free tax help B. Vita free tax help 219 1982-1 C. Vita free tax help B. Vita free tax help 243 Estonia TIAS Jan. Vita free tax help 1, 2000     Finland TIAS 12101 Jan. Vita free tax help 1, 1991     Protocol TIAS Jan. Vita free tax help 1, 2008     France TIAS Jan. Vita free tax help 1, 1996     Protocol TIAS Jan. Vita free tax help 1, 2009     Germany TIAS Jan. Vita free tax help 1, 1990     Protocol TIAS Jan. Vita free tax help 1, 2008     Greece TIAS 2902 Jan. Vita free tax help 1, 1953 1958-2 C. Vita free tax help B. Vita free tax help 1054 T. Vita free tax help D. Vita free tax help 6109, 1954-2 C. Vita free tax help B. Vita free tax help 638 Hungary TIAS 9560 Jan. Vita free tax help 1, 1980 1980-1 C. Vita free tax help B. Vita free tax help 333 1980-1 C. Vita free tax help B. Vita free tax help 354 Iceland TIAS 8151 Jan. Vita free tax help 1, 2009     India TIAS Jan. Vita free tax help 1, 1991     Indonesia TIAS 11593 Jan. Vita free tax help 1, 1990     Ireland TIAS Jan. Vita free tax help 1, 1998     Israel TIAS Jan. Vita free tax help 1, 1995     Italy TIAS Jan. Vita free tax help 1, 2010     Jamaica TIAS 10207 Jan. Vita free tax help 1, 1982 1982-1 C. Vita free tax help B. Vita free tax help 257 1982-1 C. Vita free tax help B. Vita free tax help 291 Japan TIAS Jan. Vita free tax help 1, 2005     Kazakhstan TIAS Jan. Vita free tax help 1, 1996     Korea, South TIAS 9506 Jan. Vita free tax help 1, 1980 1979-2 C. Vita free tax help B. Vita free tax help 435 1979-2 C. Vita free tax help B. Vita free tax help 458 Latvia TIAS Jan. Vita free tax help 1, 2000     Lithuania TIAS Jan. Vita free tax help 1, 2000     Luxembourg TIAS Jan. Vita free tax help 1, 2001     Malta TIAS Jan. Vita free tax help 1, 2011     Mexico TIAS Jan. Vita free tax help 1,1994     Protocol TIAS Jan. Vita free tax help 1, 2004               Table 6–1 (continued). Vita free tax help Country Official Text  Symbol1 General  Effective Date Citation Applicable Treasury Explanations  or Treasury Decision (T. Vita free tax help D. Vita free tax help ) Morocco TIAS 10195 Jan. Vita free tax help 1, 1981 1982-2 C. Vita free tax help B. Vita free tax help 405 1982-2 C. Vita free tax help B. Vita free tax help 427 Netherlands TIAS Jan. Vita free tax help 1, 1994     Protocol TIAS Jan. Vita free tax help 1, 2005     New Zealand TIAS 10772 Nov. Vita free tax help 2, 1983 1990-2 C. Vita free tax help B. Vita free tax help 274 1990-2 C. Vita free tax help B. Vita free tax help 303 Protocol TIAS Jan. Vita free tax help 1, 2011     Norway TIAS 7474 Jan. Vita free tax help 1, 1971 1973-1 C. Vita free tax help B. Vita free tax help 669 1973-1 C. Vita free tax help B. Vita free tax help 693 Protocol TIAS 10205 Jan. Vita free tax help 1, 1982 1982-2 C. Vita free tax help B. Vita free tax help 440 1982-2 C. Vita free tax help B. Vita free tax help 454 Pakistan TIAS 4232 Jan. Vita free tax help 1, 1959 1960-2 C. Vita free tax help B. Vita free tax help 646 T. Vita free tax help D. Vita free tax help 6431, 1960-1 C. Vita free tax help B. Vita free tax help 755 Philippines TIAS 10417 Jan. Vita free tax help 1, 1983 1984-2 C. Vita free tax help B. Vita free tax help 384 1984-2 C. Vita free tax help B. Vita free tax help 412 Poland TIAS 8486 Jan. Vita free tax help 1, 1974 1977-1 C. Vita free tax help B. Vita free tax help 416 1977-1 C. Vita free tax help B. Vita free tax help 427 Portugal TIAS Jan. Vita free tax help 1, 1996     Romania TIAS 8228 Jan. Vita free tax help 1, 1974 1976-2 C. Vita free tax help B. Vita free tax help 492 1976-2 C. Vita free tax help B. Vita free tax help 504 Russia TIAS Jan. Vita free tax help 1, 1994     Slovak Republic TIAS Jan. Vita free tax help 1, 1993     Slovenia TIAS Jan. Vita free tax help 1, 2002     South Africa TIAS Jan. Vita free tax help 1, 1998     Spain TIAS Jan. Vita free tax help 1, 1991     Sri Lanka TIAS Jan. Vita free tax help 1, 2004     Sweden TIAS Jan. Vita free tax help 1, 1996     Protocol TIAS Jan. Vita free tax help 1, 2007     Switzerland TIAS Jan. Vita free tax help 1, 1998     Thailand TIAS Jan. Vita free tax help 1, 1998     Trinidad and Tobago TIAS 7047 Jan. Vita free tax help 1, 1970 1971-2 C. Vita free tax help B. Vita free tax help 479   Tunisia TIAS Jan. Vita free tax help 1, 1990     Turkey TIAS Jan. Vita free tax help 1, 1998     Ukraine TIAS Jan. Vita free tax help 1, 2001     United Kingdom TIAS Jan. Vita free tax help 1, 2004     Venezuela TIAS Jan. Vita free tax help 1, 2000      1(TIAS) — Treaties and Other International Act Series. Vita free tax help  2Information on the treaty can be found in Publication 597, Information on the United States—Canada Income Tax Treaty. Vita free tax help 3The U. Vita free tax help S. Vita free tax help -U. Vita free tax help S. Vita free tax help S. Vita free tax help R. Vita free tax help income tax treaty applies to the countries of Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan. 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Vita free tax help 1. Vita free tax help   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. Vita free tax help Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Vita free tax help 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. Vita free tax help 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). Vita free tax help Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Vita free tax help Rental income is any payment you receive for the use or occupation of property. Vita free tax help In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Vita free tax help 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. Vita free tax help Most individual taxpayers use the cash method. Vita free tax help Cash method. Vita free tax help   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. Vita free tax help You constructively receive income when it is made available to you, for example, by being credited to your bank account. Vita free tax help Accrual method. Vita free tax help    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Vita free tax help You generally deduct your expenses when you incur them, rather than when you pay them. Vita free tax help More information. Vita free tax help   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Vita free tax help Types of Income The following are common types of rental income. Vita free tax help Advance rent. Vita free tax help   Advance rent is any amount you receive before the period that it covers. Vita free tax help 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. Vita free tax help Example. Vita free tax help On March 18, 2013, you signed a 10-year lease to rent your property. Vita free tax help During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Vita free tax help You must include $19,200 in your rental income in the first year. Vita free tax help Canceling a lease. Vita free tax help   If your tenant pays you to cancel a lease, the amount you receive is rent. Vita free tax help Include the payment in your income in the year you receive it regardless of your method of accounting. Vita free tax help Expenses paid by tenant. Vita free tax help   If your tenant pays any of your expenses, those payments are rental income. Vita free tax help Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Vita free tax help For more information, see Rental Expenses , later. Vita free tax help Example 1. Vita free tax help Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Vita free tax help Under the terms of the lease, your tenant does not have to pay this bill. Vita free tax help Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Vita free tax help You can deduct the utility payment made by your tenant as a rental expense. Vita free tax help Example 2. Vita free tax help While you are out of town, the furnace in your rental property stops working. Vita free tax help Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Vita free tax help Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Vita free tax help You can deduct the repair payment made by your tenant as a rental expense. Vita free tax help Property or services. Vita free tax help   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. Vita free tax help   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. Vita free tax help Example. Vita free tax help Your tenant is a house painter. Vita free tax help He offers to paint your rental property instead of paying 2 months rent. Vita free tax help You accept his offer. Vita free tax help Include in your rental income the amount the tenant would have paid for 2 months rent. Vita free tax help You can deduct that same amount as a rental expense for painting your property. Vita free tax help Security deposits. Vita free tax help   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. Vita free tax help 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. Vita free tax help    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Vita free tax help Include it in your income when you receive it. Vita free tax help Other Sources of Rental Income Lease with option to buy. Vita free tax help   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. Vita free tax help 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. Vita free tax help Part interest. Vita free tax help   If you own a part interest in rental property, you must report your part of the rental income from the property. Vita free tax help Rental of property also used as your home. Vita free tax help   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. Vita free tax help 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. Vita free tax help See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Vita free tax help 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. Vita free tax help Personal use of rental property. Vita free tax help   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Vita free tax help Also, your rental expense deductions may be limited. Vita free tax help See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Vita free tax help Part interest. Vita free tax help   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Vita free tax help Example. Vita free tax help Roger owns a one-half undivided interest in a rental house. Vita free tax help Last year he paid $968 for necessary repairs on the property. Vita free tax help Roger can deduct $484 (50% × $968) as a rental expense. Vita free tax help He is entitled to reimbursement for the remaining half from the co-owner. Vita free tax help When To Deduct You generally deduct your rental expenses in the year you pay them. Vita free tax help If you use the accrual method, see Publication 538 for more information. Vita free tax help Types of Expenses Listed below are the most common rental expenses. Vita free tax help Advertising. Vita free tax help Auto and travel expenses. Vita free tax help Cleaning and maintenance. Vita free tax help Commissions. Vita free tax help Depreciation. Vita free tax help Insurance. Vita free tax help Interest (other). Vita free tax help Legal and other professional fees. Vita free tax help Local transportation expenses. Vita free tax help Management fees. Vita free tax help Mortgage interest paid to banks, etc. Vita free tax help Points. Vita free tax help Rental payments. Vita free tax help Repairs. Vita free tax help Taxes. Vita free tax help Utilities. Vita free tax help Some of these expenses, as well as other less common ones, are discussed below. Vita free tax help Depreciation. Vita free tax help   Depreciation is a capital expense. Vita free tax help It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Vita free tax help   You can begin to depreciate rental property when it is ready and available for rent. Vita free tax help See Placed in Service under When Does Depreciation Begin and End in chapter 2. Vita free tax help Insurance premiums paid in advance. Vita free tax help   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. Vita free tax help You cannot deduct the total premium in the year you pay it. Vita free tax help See chapter 6 of Publication 535 for information on deductible premiums. Vita free tax help Interest expense. Vita free tax help   You can deduct mortgage interest you pay on your rental property. Vita free tax help 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. Vita free tax help Chapter 4 of Publication 535 explains mortgage interest in detail. Vita free tax help Expenses paid to obtain a mortgage. Vita free tax help   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Vita free tax help These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Vita free tax help Form 1098, Mortgage Interest Statement. Vita free tax help   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. Vita free tax help 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. Vita free tax help Attach a statement to your return showing the name and address of the other person. Vita free tax help On the dotted line next to line 13, enter “See attached. Vita free tax help ” Legal and other professional fees. Vita free tax help   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. Vita free tax help For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Vita free tax help 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. Vita free tax help Local benefit taxes. Vita free tax help   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. Vita free tax help These charges are nondepreciable capital expenditures and must be added to the basis of your property. Vita free tax help However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Vita free tax help Local transportation expenses. Vita free tax help   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. Vita free tax help 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. Vita free tax help See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Vita free tax help   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. Vita free tax help For 2013, the standard mileage rate for business use is 56. Vita free tax help 5 cents per mile. Vita free tax help For more information, see chapter 4 of Publication 463. Vita free tax help    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Vita free tax help In addition, you must complete Form 4562, Part V, and attach it to your tax return. Vita free tax help Pre-rental expenses. Vita free tax help   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Vita free tax help Rental of equipment. Vita free tax help   You can deduct the rent you pay for equipment that you use for rental purposes. Vita free tax help However, in some cases, lease contracts are actually purchase contracts. Vita free tax help If so, you cannot deduct these payments. Vita free tax help You can recover the cost of purchased equipment through depreciation. Vita free tax help Rental of property. Vita free tax help   You can deduct the rent you pay for property that you use for rental purposes. Vita free tax help 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. Vita free tax help Travel expenses. Vita free tax help   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. Vita free tax help You must properly allocate your expenses between rental and nonrental activities. Vita free tax help You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Vita free tax help The cost of improvements is recovered by taking depreciation. Vita free tax help For information on travel expenses, see chapter 1 of Publication 463. Vita free tax help    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Vita free tax help Uncollected rent. Vita free tax help   If you are a cash basis taxpayer, do not deduct uncollected rent. Vita free tax help Because you have not included it in your income, it is not deductible. Vita free tax help   If you use an accrual method, report income when you earn it. Vita free tax help If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Vita free tax help See chapter 10 of Publication 535 for more information about business bad debts. Vita free tax help Vacant rental property. Vita free tax help   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. Vita free tax help However, you cannot deduct any loss of rental income for the period the property is vacant. Vita free tax help Vacant while listed for sale. Vita free tax help   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. Vita free tax help If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Vita free tax help 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. Vita free tax help These charges are also called loan origination fees, maximum loan charges, or premium charges. Vita free tax help Any of these charges (points) that are solely for the use of money are interest. Vita free tax help 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. Vita free tax help The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Vita free tax help 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). Vita free tax help 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. Vita free tax help If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Vita free tax help De minimis OID. Vita free tax help   The OID is de minimis if it is less than one-fourth of 1% (. Vita free tax help 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). Vita free tax help   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. Vita free tax help On a constant-yield basis over the term of the loan. Vita free tax help On a straight line basis over the term of the loan. Vita free tax help In proportion to stated interest payments. Vita free tax help In its entirety at maturity of the loan. Vita free tax help 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. Vita free tax help Example. Vita free tax help 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. Vita free tax help The loan is to be repaid over 30 years. Vita free tax help During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Vita free tax help When the loan was made, she paid $1,500 in points to the lender. Vita free tax help The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Vita free tax help Carol determines that the points (OID) she paid are de minimis based on the following computation. Vita free tax help Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Vita free tax help 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Vita free tax help 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. Vita free tax help Under the straight line method, she can deduct $50 each year for 30 years. Vita free tax help Constant-yield method. Vita free tax help   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Vita free tax help   You figure your deduction for the first year in the following manner. Vita free tax help Determine the issue price of the loan. Vita free tax help If you paid points on the loan, the issue price generally is the difference between the principal and the points. Vita free tax help Multiply the result in (1) by the yield to maturity (defined later). Vita free tax help Subtract any qualified stated interest payments (defined later) from the result in (2). Vita free tax help This is the OID you can deduct in the first year. Vita free tax help Yield to maturity (YTM). Vita free tax help   This rate is generally shown in the literature you receive from your lender. Vita free tax help If you do not have this information, consult your lender or tax advisor. Vita free tax help 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. Vita free tax help Qualified stated interest (QSI). Vita free tax help   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. Vita free tax help Example—Year 1. Vita free tax help The facts are the same as in the previous example. Vita free tax help The yield to maturity on Carol's loan is 10. Vita free tax help 2467%, compounded annually. Vita free tax help She figured the amount of points (OID) she could deduct in 2013 as follows. Vita free tax help Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Vita free tax help 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. Vita free tax help To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Vita free tax help Then follow steps (2) and (3), earlier. Vita free tax help Example—Year 2. Vita free tax help Carol figured the deduction for 2014 as follows. Vita free tax help Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Vita free tax help 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Vita free tax help    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. Vita free tax help A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Vita free tax help 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. Vita free tax help Points when loan refinance is more than the previous outstanding balance. Vita free tax help   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. Vita free tax help 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. Vita free tax help 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. Vita free tax help Improvements. Vita free tax help   You must capitalize any expense you pay to improve your rental property. Vita free tax help 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. Vita free tax help Betterments. Vita free tax help   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. Vita free tax help Restoration. Vita free tax help   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. Vita free tax help Adaptation. Vita free tax help   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. Vita free tax help Separate the costs of repairs and improvements, and keep accurate records. Vita free tax help You will need to know the cost of improvements when you sell or depreciate your property. Vita free tax help The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Vita free tax help Table 1-1. Vita free tax help 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