Table of Contents
- Useful Items - You may want to see:
- Rental Income
- Rental Expenses
- Property Changed to Rental Use
- Renting Part of Property
- Not Rented for Profit
- Personal Use of Dwelling Unit (Including Vacation Home)
- Limits on Rental Losses
- How To Report Rental Income and Expenses
This chapter discusses rental income and expenses. It also covers the following topics.
Personal use of dwelling unit (including vacation home).
Limits on rental losses.
How to report your rental income and expenses.
If you sell or otherwise dispose of your rental property, see Pub. 544, Sales and Other Dispositions of Assets.
If you have a loss from damage to, or theft of, rental property, see Pub. 547, Casualties, Disasters, and Thefts.
If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. See Pub. 527, Residential Rental Property, for more information.
527 Residential Rental Property
534 Depreciating Property Placed in Service Before 1987
535 Business Expenses
925 Passive Activity and At-Risk Rules
946 How To Depreciate Property
Form (and Instructions)
4562 Depreciation and Amortization
6251 Alternative Minimum Tax—Individuals
8582 Passive Activity Loss Limitations
Schedule E (Form 1040) Supplemental Income and Loss
In most cases, you must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income.
This part discusses expenses of renting property that you ordinarily can deduct from your rental income. It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. Depreciation , which you can also deduct from your rental income, is discussed later.
Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense.
Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next.
If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use.
You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes.
You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. However, you can include the home mortgage interest and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040).
Your tax year is the calendar year. You moved from your home in May and started renting it out on June 1. You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance.
Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities.
If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property.
You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest and real estate taxes, as rental expenses on Schedule E (Form 1040). You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house.
There is no change in the types of expenses deductible for the personal-use part of your property. Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040).
You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it.
You do not have to divide the expenses that belong only to the rental part of your property. For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes.
If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Pub. 535.
If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Only your rental expenses may be deducted on Schedule E (Form 1040). Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040).
You must also determine if the dwelling unit is considered a home. The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year.
If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose.
When dividing your expenses, follow these rules.
Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. This rule does not apply when determining whether you used the unit as a home.
Any day that the unit is available for rent but not actually rented is not a day of rental use.
Your beach cottage was available for rent from June 1 through August 31 (92 days). During that time, except for the first week in August (7 days) when you were unable to find a renter, you rented the cottage at a fair rental price. The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Your family also used the cottage during the last 2 weeks of May (14 days). The cottage was not used at all before May 17 or after August 31.
You figure the part of the cottage expenses to treat as rental expenses as follows.
The cottage was used for rental a total of 85 days (92 − 7). The days it was available for rent but not rented (7 days) are not days of rental use. The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend.
You used the cottage for personal purposes for 14 days (the last 2 weeks in May).
The total use of the cottage was 99 days (14 days personal use + 85 days rental use).
Your rental expenses are 85/99 (86%) of the cottage expenses.
When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. If you have a net loss, you may not be able to deduct all of the rental expenses. See Dwelling Unit Used as a Home, next.
If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home.
You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of:
14 days, or
10% of the total days it is rented to others at a fair rental price.
See What is a day of personal use , later.
You or any other person who has an interest in the unit, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). However, see Days used as a main home before or after renting , later.
A member of your family or a member of the family of any other person who owns an interest in the unit, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
Anyone under an arrangement that lets you use some other dwelling unit.
Anyone at less than a fair rental price.
You and your neighbor are co-owners of a condominium at the beach. Last year, you rented the unit to vacationers whenever possible. The unit was not used as a main home by anyone. Your neighbor used the unit for 2 weeks last year; you did not use it at all.
Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks.
You and your neighbors are co-owners of a house under a shared equity financing agreement. Your neighbors live in the house and pay you a fair rental price.
Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. This is because your neighbors rent the house as their main home under a shared equity financing agreement.
You own a rental property that you rent to your son. Your son does not own any interest in this property. He uses it as his main home and pays you a fair rental price.
Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price.
You rent your beach house to Joshua. Joshua rents his cabin in the mountains to you. You each pay a fair rental price.
You are using your house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his house.
You rented or tried to rent the property for 12 or more consecutive months.
You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property.
You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. You rented the basement apartment at a fair rental price to college students during the regular school year. You rented to them on a 9-month lease (273 days). You figured 10% of the total days rented to others at a fair rental price is 27 days.
During June (30 days), your brothers stayed with you and lived in the basement apartment rent free.
Your basement apartment was used as a home because you used it for personal purposes for 30 days. Rent-free use by your brothers is considered personal use. Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days).
You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. You figured 10% of the total days rented to others at a fair rental price is 3 days.
The room was used as a home because you used it for personal purposes for 21 days. That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days).
You own a condominium apartment in a resort area. You rented it at a fair rental price for a total of 170 days during the year. For 12 of those days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Your family actually used the apartment for 10 of those days. Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. You figured 10% of the total days rented to others at a fair rental price is 16 days. Your family also used the apartment for 7 other days during the year.
You used the apartment as a home because you used it for personal purposes for 17 days. That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days).
You recover the cost of income-producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return.
Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense.
You may have to use Form 4562 to figure and report your depreciation. See How To Report Rental Income and Expenses , later.
If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. You must consider these rules in the order shown below.
At-risk rules. These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. This applies only if the real property was placed in service after 1986.
Passive activity limits. Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. However, there are exceptions.
You may be subject to the at-risk rules if you have:
A loss from an activity carried on as a trade or business or for the production of income, and
Amounts invested in the activity for which you are not fully at risk.
Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules.
In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. See Pub. 925 for more information.
In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services.
If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier.
If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.
$25,000 for single individuals and married individuals filing a joint return for the tax year,
$12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and
$25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified.
The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). However, do not use that schedule to report a not-for-profit activity. See Not Rented for Profit, earlier.
If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc., you normally report your rental income and expenses on Schedule E (Form 1040), Part I.
Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. See the instructions for Schedule E (Form 1040).
|Use this worksheet only if you answer “yes” to all of the following questions.
|PART I.Rental Use Percentage|
|A.||Total days available for rent at fair rental price||A.|
|B.||Total days available for rent (line A) but not rented||B.|
|C.||Total days of rental use. Subtract line B from line A||C.|
|D.||Total days of personal use (including days rented at less than fair rental price)||D.|
|E.||Total days of rental and personal use. Add lines C and D||E.|
|F.||Percentage of expenses allowed for rental. Divide line C by line E||F.|
|PART II.Allowable Rental Expenses|
|1.||Enter rents received||1.|
|2a.||Enter the rental portion of deductible home mortgage interest (see instructions)||2a.|
|b.||Enter the rental portion of real estate taxes||b.|
|c.||Enter the rental portion of deductible casualty and theft losses (see instructions)||c.|
|d.||Enter direct rental expenses (see instructions)||d.|
|e.||Fully deductible rental expenses. Add lines 2a–2d. Enter here and
on the appropriate lines on Schedule E (see instructions)
|3.||Subtract line 2e from line 1. If zero or less, enter -0-||3.|
|4a.||Enter the rental portion of expenses directly related to operating or maintaining
the dwelling unit (such as repairs, insurance, and utilities)
|b.||Enter the rental portion of excess mortgage interest (see instructions)||b.|
|c.||Carryover of operating expenses from 2014 worksheet||c.|
|d.||Add lines 4a–4c||d.|
|e.||Allowable expenses. Enter the smaller of line 3 or line 4d (see instructions)||4e.|
|5.||Subtract line 4e from line 3. If zero or less, enter -0-||5.|
|6a.||Enter the rental portion of excess casualty and theft losses (see instructions)||6a.|
|b.||Enter the rental portion of depreciation of the dwelling unit||b.|
|c.||Carryover of excess casualty losses and depreciation from 2014 worksheet||c.|
|d.||Add lines 6a–6c||d.|
|e.||Allowable excess casualty and theft losses and depreciation. Enter the smaller of
line 5 or line 6d (see instructions)
|PART III. Carryover of Unallowed Expenses to Next Year|
|7a.||Operating expenses to be carried over to next year. Subtract line 4e from line 4d||7a.|
|b.||Excess casualty and theft losses and depreciation to be carried over to next year.
Subtract line 6e from line 6d
|Caution. Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b
|Line 2a.||Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Do not include interest on a loan that did not benefit the dwelling unit. For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Include the rental portion of this interest in the total you enter on line 2a of the worksheet.|
|Caution At the time this publication was prepared for printing, Congress was considering legislation that would extend the separate deduction for qualified mortgage insurance premiums, which expired at the end of 2014. If extended, your qualified mortgage insurance premiums may be deductible for 2015. To see if the legislation was enacted, go to www.irs.gov/pub17.|
|Note. Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Instead, figure the personal portion on a separate Schedule A. If you have deducted mortgage interest on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount.|
|Line 2c.||Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet.|
|Note. Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Instead, figure the personal portion on a separate Form 4684.|
|Line 2d.||Enter the total of your rental expenses that are directly related only to the rental activity. These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity.|
|Line 2e.||You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E.|
|Line 4b.||On line 2a, you entered the rental portion of the mortgage interest you could deduct on Schedule A if you had not rented the dwelling unit. If you had additional mortgage interest that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions).|
|Line 4e.||You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e.*|
|Line 6a.||To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet.|
|A.||Enter the amount from Form 4684, line 10|
|B.||Enter the rental portion of line A|
|C.||Enter the amount from line 2c of this worksheet|
|D.||Subtract line C from line B. Enter the result here and on line 6a of this worksheet|
|Line 6e.||You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e.*|
|*Allocating the limited deduction. If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I.|
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