General Instructions

Table of Contents

Other Schedules and Forms You May Have To File

  • Schedule A (Form 1040) to deduct interest, taxes, and casualty losses not related to your business.

  • Form 3520 to report certain transactions with foreign trusts and receipt of certain large gifts or bequests from certain foreign persons.

  • Form 4562 to claim depreciation (including the special allowance) on assets placed in service in 2012, to claim amortization that began in 2012, to make an election under section 179 to expense certain property, or to report information on listed property.

  • Form 4684 to report a casualty or theft gain or loss involving property used in your trade or business or income-producing property.

  • Form 4797 to report sales, exchanges, and involuntary conversions (not from a casualty or theft) of trade or business property.

  • Form 6198 to figure your allowable loss from an at-risk activity.

  • Form 8082 to notify the IRS of any inconsistent tax treatment for an item on your return.

  • Form 8582 to figure allowable passive activity loss.

  • Form 8824 to report like-kind exchanges.

  • Form 8826 to claim a credit for expenditures to improve access to your business for individuals with disabilities.

  • Form 8873 to figure your extraterritorial income exclusion.

  • Form 8910 to claim a credit for placing a new alternative motor vehicle in service for business use.

Single-member limited liability company (LLC).   In most cases, a single-member domestic LLC is not treated as a separate entity for federal income tax purposes. If you are the sole member of a domestic LLC, file Schedule E (or Schedule C, C-EZ, or F, if applicable). However, you can elect to treat a domestic LLC as a corporation. See Form 8832 for details on the election and the tax treatment of a foreign LLC.

Information returns.   You may have to file information returns for wages paid to employees, certain payments of fees and other nonemployee compensation, interest, rents, royalties, real estate transactions, annuities, and pensions. You generally use Form 1099-MISC, Miscellaneous Income, to report rents and payments of fees and other nonemployee compensation. For details, see Line A, later, and the 2012 General Instructions for Certain Information Returns.

  If you received cash of more than $10,000 in one or more related transactions in your trade or business, you may have to file Form 8300. For details, see Pub. 1544.

Husband-Wife Qualified Joint Venture

If you and your spouse each materially participate (see Material participation in the Instructions for Schedule C) as the only members of a jointly owned and operated rental real estate business and you file a joint return for the tax year, you can elect to be treated as a qualified joint venture instead of a partnership. This election, in most cases, will not increase the total tax owed on the joint return. By making the election, you will not be required to file Form 1065 for any year the election is in effect and will instead report the income and deductions directly on your joint return. If you and your spouse filed 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.

Note.

Mere joint ownership of property that is not a trade or business does not qualify for the election.

Making the election.    To make this election for your rental real estate business, check the “QJV” box on line 2 for each property that is part of the qualified joint venture. You must divide all items of income, gain, loss, deduction, and credit attributable to the rental real estate business between you and your spouse in accordance with your respective interests in the venture. Although you and your spouse will not each file your own Schedule E as part of the qualified joint venture, each of you must report your interest as separate properties on line 1 of Schedule E. On lines 3 through 22 for each separate property interest, you must enter your share of the applicable income, deduction, or loss.

  If you have more than three rental real estate or royalty properties, complete and attach as many Schedules E as you need to list them. But fill in lines 23a through 26 on only one Schedule E. The figures on lines 23a through 26 on that Schedule E should be the combined totals for all properties reported on your Schedules E.

  Once made, the election can be revoked only with the permission of the IRS. However, the election technically remains in effect only for as long as the spouses filing as a qualified joint venture continue to meet the requirements to be treated as a qualified joint venture. If the spouses fail to meet the qualified joint venture requirements for a year, a new election will be necessary for any future year in which the spouses meet the requirements to be treated as a qualified joint venture.

  Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to passive loss limitation rules. Electing qualified joint venture status does not alter the application of the self-employment tax or the passive loss limitation rules.

  For more information on qualified joint ventures, go to IRS.gov. Enter “qualified joint venture” in the search box and select “Election for Husband and Wife Unincorporated Businesses.”

Reportable Transaction Disclosure Statement

Use Form 8886 to disclose information for each reportable transaction in which you participated. Form 8886 must be filed for each tax year that your federal income tax liability is affected by your participation in the transaction. You may have to pay a penalty if you are required to file Form 8886 but do not do so. You may also have to pay interest and penalties on any reportable transaction understatements. The following are reportable transactions.

  • Any listed transaction that is the same as or substantially similar to tax avoidance transactions identified by the IRS.

  • Any transaction offered to you or a related party under conditions of confidentiality for which you paid an advisor a fee of at least $50,000.

  • Certain transactions for which you or a related party have contractual protection against disallowance of the tax benefits.

  • Certain transactions resulting in a loss of at least $2 million in any single tax year or $4 million in any combination of tax years. (At least $50,000 for a single tax year if the loss arose from a foreign currency transaction defined in section 988(c)(1), whether or not the loss flows through from an S corporation or partnership.)

  • Certain transactions of interest entered into after November 1, 2006, that are the same or substantially similar to transactions that the IRS has identified by notice, regulation, or other form of published guidance as transactions of interest.

See the Instructions for Form 8886 for more details.

At-Risk Rules

In most cases, you must complete Form 6198 to figure your allowable loss if you have:

  • A loss from an activity carried on as a trade or business or for the production of income, and

  • Amounts in the activity for which you are not at risk.

The at-risk rules in most cases limit the amount of loss (including loss on the disposition of assets) you can claim to the amount you could actually lose in the activity. However, the at-risk rules do not apply to losses from an activity of holding real property placed in service before 1987. They also do not apply to losses from your interest acquired before 1987 in a pass-through entity engaged in such activity. The activity of holding mineral property does not qualify for this exception.

In most cases, you are not at risk for amounts such as the following.

  • Nonrecourse loans used to finance the activity, to acquire property used in the activity, or to acquire your interest in the activity that are not secured by your own property (other than property used in the activity). However, there is an exception for certain nonrecourse financing borrowed by you in connection with the activity of holding real property (other than mineral property). See Qualified nonrecourse financing, later.

  • Cash, property, or borrowed amounts used in the activity (or contributed to the activity, or used to acquire your interest in the activity) that are protected against loss by a guarantee, stop-loss agreement, or other similar arrangement (excluding casualty insurance and insurance against tort liability).

  • Amounts borrowed for use in the activity from a person who has an interest in the activity (other than as a creditor) or who is related under section 465(b)(3)(C) to a person (other than you) having such an interest.

Qualified nonrecourse financing.   Qualified nonrecourse financing is treated as an amount at risk if it is secured by real property used in an activity of holding real property subject to the at-risk rules. Qualified nonrecourse financing is financing for which no one is personally liable for repayment and is:

  • Borrowed by you in connection with the activity of holding real property (other than mineral property),

  • Not convertible from a debt obligation to an ownership interest, and

  • Loaned or guaranteed by any federal, state, or local government, or borrowed by you from a qualified person.

Qualified person.   A qualified person is a person who actively and regularly engages in the business of lending money, such as a bank or savings and loan association. A qualified person cannot be:

  • Related to you (unless the nonrecourse financing obtained is commercially reasonable and on substantially the same terms as loans involving unrelated persons),

  • The seller of the property (or a person related to the seller), or

  • A person who receives a fee due to your investment in real property (or a person related to that person).

  For more details about the at-risk rules, see the Instructions for Form 6198 and Pub. 925.

Passive Activity Loss Rules

The passive activity loss rules may limit the amount of losses you can deduct. These rules apply to losses in Parts I, II, and III, and line 40 of Schedule E.

Losses from passive activities may be subject first to the at-risk rules. Losses deductible under the at-risk rules are then subject to the passive activity loss rules.

You can deduct losses from passive activities in most cases only to the extent of income from passive activities. An exception for certain rental real estate activities (explained later) may apply.

Passive Activity

A passive activity is any business activity in which you did not materially participate and any rental activity, except as explained later. If you are a limited partner, in most cases, you are not treated as having materially participated in the partnership's activities for the year.

The rental of real or personal property is a rental activity under the passive activity loss rules in most cases, but exceptions apply. If your rental of property is not treated as a rental activity, you must determine whether it is a trade or business activity, and if so, whether you materially participated in the activity for the tax year.

See the Instructions for Form 8582 to determine whether you materially participated in the activity and for the definition of “rental activity.”

See Pub. 925 for special rules that apply to rentals of:

  • Substantially nondepreciable property,

  • Property incidental to development activities, and

  • Property related to activities in which you materially participate.

Activities That Are Not Passive Activities

Activities of real estate professionals.   If you were a real estate professional for 2012, any rental real estate activity in which you materially participated is not a passive activity. You were a real estate professional for the year only if you met both of the following conditions.

  • More than half of the personal services you performed in trades or businesses during the year were performed in real property trades or businesses in which you materially participated.

  • You performed more than 750 hours of services during the year in real property trades or businesses in which you materially participated.

  If you are married filing jointly, either you or your spouse must meet both of the above conditions without taking into account services performed by the other spouse.

  A real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Services you performed as an employee are not treated as performed in a real property trade or business unless you owned more than 5% of the stock (or more than 5% of the capital or profits interest) in the employer.

  If you qualify as a real estate professional, rental real estate activities in which you materially participated are not passive activities. 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. To make this election, attach a statement to your original tax return that declares you are a qualifying taxpayer for the year and you are making the election under section 469(c)(7)(A). The election applies for the year made and all later years in which you are a real estate professional. You can revoke the election only if your facts and circumstances materially change.

If you did not make this election on your timely filed return, you may be eligible to make a late election to treat all your interest in rental real estate as one activity. See Rev. Proc. 2011-34, 2011-24 I.R.B. 874, available at www.irs.gov/irb/2011-24_IRB/ar07.html.

If you were a real estate professional for 2012, complete Schedule E, line 43.

Other activities.   The rental of a dwelling unit that you used as a home is not subject to the passive loss limitation rules. See Line 2, later, to see if you used the dwelling unit as a home.

  A working interest in an oil or gas well you held directly or through an entity that did not limit your liability is not a passive activity even if you did not materially participate.

  Royalty income not derived in the ordinary course of a trade or business reported on Schedule E in most cases is not considered income from a passive activity.

  For more details on passive activities, see the Instructions for Form 8582 and Pub. 925.

Exception for Certain Rental Real Estate Activities

If you meet all of the following conditions, your rental real estate losses are not limited by the passive activity loss rules. If you do not meet all of these conditions, see the Instructions for Form 8582 to find out if you must complete and attach Form 8582 to figure any losses allowed.

  1. Rental real estate activities are your only passive activities.

  2. You do not have any prior year unallowed losses from any passive activities.

  3. All of the following apply if you have an overall net loss from these activities:

    1. You actively participated (defined later) in all of the rental real estate activities;

    2. If married filing separately, you lived apart from your spouse all year;

    3. Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately);

    4. You have no current or prior year unallowed credits from passive activities; and

    5. Your modified adjusted gross income (defined later) is $100,000 or less ($50,000 or less if married filing separately).

Active participation.   You can meet the active participation requirement without regular, continuous, and substantial involvement in real estate activities. But you must have participated in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense. Such management decisions include:

  • Approving new tenants,

  • Deciding on rental terms,

  • Approving capital or repair expenditures, and

  • Other similar decisions.

  You are not considered to actively participate if, at any time during the tax year, your interest (including your spouse's interest) in the activity was less than 10% by value of all interests in the activity. If you are a limited partner, you are also not treated as actively participating in a partnership's rental real estate activities.

Modified adjusted gross income.   This is your adjusted gross income from Form 1040, line 38, or Form 1040NR, line 37, without taking into account:

  • Any allowable passive activity loss,

  • Rental real estate losses allowed for real estate professionals (see Activities of real estate professionals, earlier),

  • Taxable social security or tier 1 railroad retirement benefits,

  • Deductible contributions to a traditional IRA or certain other qualified retirement plans under section 219,

  • The student loan interest deduction,

  • The tuition and fees deduction,

  • The domestic production activities deduction,

  • The deduction for a portion of self-employment tax,

  • The exclusion from income of interest from series EE and I U.S. savings bonds used to pay higher education expenses, and

  • Any excluded amounts under an employer's adoption assistance program.

Recordkeeping

You must keep records to support items reported on Schedule E in case the IRS has questions about them. If the IRS examines your tax return, you may be asked to explain the items reported. Good records will help you explain any item and arrive at the correct tax with a minimum of effort. If you do not have records, you may have to spend time getting statements and receipts from various sources. If you cannot produce the correct documents, you may have to pay additional tax and be subject to penalties.

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