Tax Tips & Calculators
- Rental income includes advance rental payments, late payments, and current payments.
- If your rental income is greater than your expenses, report the income on your return. However, if your rental income is less than your expenses, consult special rules to see if you can take the loss against other income.
Rental IncomeIncome you receive for allowing another person to use your property is rental income.
Rental income includes:
- Advance rental payments
- Late payments
- Current payments
Payments received for lease cancellation and forfeited security deposits are rental income in the year:
- The lease is canceled
- The security deposit is forfeited
Rental income is considered passive income for purposes of the passiveloss rules limitation – except for qualified real estate professionals. If your rental income is greater than your expenses, report the income on your return. However, if your rental income is less than your expenses, you must consult special rules to see if you can take the loss against other income.
At-Risk RulesAt-risk refers to what you´ve invested in a particular activity. For rental activities, you´re usually at risk for the:
- Adjusted basis of real properties
- Certain amounts you´ve borrowed
- Cash you´ve invested in the activity
Under the at-risk rules, your losses are limited to amounts you have at risk.
Passive-Loss RulesRental real estate often generates a loss since it has large depreciation deductions and cash expenses, like:
- Mortgage interest
You can usually deduct passiveactivity losses only up to the amount of income you receive from rent and other passive activities. The passive-loss rules determine if you can take the loss against other income. If you can´t, then you have to carry forward the loss into another year, offsetting that year´s passive income.
Also, you usually can´t deduct passive losses from nonpassive income, like wages. If you have several sources of passive income, like multiple rental houses, you can deduct the loss from 1 of them if the income from the others covers it.
Special Loss AllowanceYou can claim a special loss allowance for rental real estate activities that fall outside the general rule. This allowance allows you to take up to $25,000 in losses against nonpassive income. You must be an active participant in the activity to qualify.
There´s an exception to this rule.The amount allowed if you´re married filing separately is either:
- $12,500 if live together
- Zero if live together during the year
- Approving new tenants
- Handling leases
- Making decisions about property maintenance
Your involvement must be significant and bona fide. The ability to take the special loss allowance begins to phase out as if adjusted gross income (AGI) is more than:
- $50,000 if you´re married filing separately and lived apart from your spouse all year.
Vacation-Home RentalsIf you own a home that you live in part of the year and rent out part of the year,prorate the expenses you incur between personal and rental use.
If you're Married Filing Separately, you can't deduct losses if you lived with your spouse at any time during the year. If you didn't live with your spouse at any time during the year, the losses can't exceed $12,500 and may be reduced if your MAGI exceeds $75,000.
To figure the ratio of personal and rental use, divide the number of days the home was rented by the total days of use – both personal days and rental days. Since vacation homes usually get this kind of treatment, the rules are known as the vacation–home rules.
Rental of a Former Main HomeIf you convert your main home to rental property, you don´t need to apply the vacation-home rules if you intend to keep the property exclusively for rental use. Once converted, don´t count days of personal use before the conversion date if either of these apply:
- You rented or tried to rent the property for at least 12 consecutive months
- You rented or tried to rent the property for a period of fewer than 12 consecutive months if the period ended because you sold or exchanged the home.
Ex: You used your home as your main home from Jan 1 – June 30. On July 1, you began renting the home to an unrelated individual for 2 consecutive years. In determining if you used the home as a residence under the vacation-home rules, don´t consider the period before July 1.
Depreciation of converted rental property follows special rules. When you convert property from personal to business use, the basis for depreciation is the lesser of:
- Adjusted basis most common
- Fair market value on date of conversion usually applies when property values are dropping
To figure how much depreciation you can claim, figure the basis of the property. The basis is usually how much you paid for the property. However, a part of that price applies to the land. You can only depreciate the rental home itself, not the land.
To figure how much the land is worth, get an appraisal of the property. The appraisal should separately state the fair market value of the land and the building. If necessary, you can estimate the value of the land based on the tax assessment statement for the year of conversion. Or a local real estate firm might provide guidance on land values at the time you bought the land and on the conversion date.
Rental ExpensesDeduct your expenses in the year you pay them.
You can deduct these expenses related to your rental property:
- Auto and travel
- Cleaning and maintenance
- Legal and other professional fees
- Mortgage interest paid to banks and other financial institutions if secured by the rental property
- Real property taxes
- Depreciation expense
- Other expenses specific to your rental, like certain condominium fees or landscaping expenses
If you don´t use the rental property personally, you don´t need to prorate your expenses between personal and rental use.
Reporting Rental IncomeReport rental income on Form 1040, Schedule E, page 1. Deduct rental expenses in the expenses section of Schedule E. Report rental income of property other than real estate in the Other Income section of Form 1040 or, in some instances, on Schedule C.
To learn more ,see IRS Publication 527: Residential Rental Property (Including Rental of Vacation Homes).
RoyaltiesReport royalties from:
- Oil, gas, or mineral properties, not including operating interests
If you received $10 or more in royalties in 2010, the payer should send you a Form 1099MISC or similar statement. Contact the payer if you haven´t received this document by early February.
If you´re in business as a selfemployed writer, inventor, or artist, report your royalty income and expenses on Schedule C.
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Related IRS Forms & Publications
- Schedule E (Form 1040) - Supplemental Income and Loss
- Schedule E (Form 1040) Instructions
- Schedule C (Form 1040) - Profit or Loss from Business
- Schedule C-EZ (Form 1040) - Net Profit from Business
- Schedule C (Form 1040) Instructions
- Form 4562 - Depreciation and Amortization
- Form 4562 Instructions
- Form 8582 - Passive Activity Loss Limitations
- Form 8582 Instructions
- Publication 946 - How To Depreciate Property
- Publication 527 - Residential Rental Property (Including Rental of Vacation Homes)