| Pub. 527, Residential Rental Property |
2006 Tax Year |
Publication 527 - Main Contents
You generally 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, discussed later, that may
be rental income.
When to report.
When you report rental income on your return depends on whether you are a cash basis taxpayer or use an accrual method.
If you are a cash basis taxpayer, you report rental income on your return for the year you
actually or constructively receive it. You are a cash basis taxpayer if you report income in the year you receive it, regardless
of when it was
earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account.
If you use an accrual method, you generally report income when you earn it, rather than when you receive
it. You generally deduct your expenses when you incur them, rather than when you pay them.
For more information about when you constructively receive income and accrual methods of
accounting, see Publication 538, Accounting Periods and Methods.
Advance rent.
Advance rent is any amount you receive before the period that it covers. 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.
Example.
You sign a 10-year lease to rent your property. In the first year, you receive $5,000 for the first year's rent and $5,000
as rent for the last
year of the lease. You must include $10,000 in your income in the first year.
Security deposits.
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. 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.
If an amount called a security deposit is to be used as a final payment of rent, it is advance rent.
Include it in your income when you receive it.
Payment for canceling a lease.
If your tenant pays you to cancel a lease, the amount you receive is rent. Include the payment in your income in the
year you receive it regardless
of your method of accounting.
Expenses paid by tenant.
If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You
can deduct the expenses if they
are deductible rental expenses. See Rental Expenses, later, for more information.
Example 1.
Your tenant pays the water and sewage bill for your rental property and deducts it from the normal rent payment. Under the
terms of the lease, your
tenant does not have to pay this bill. Include the utility bill paid by the tenant and any amount received as a rent payment
in your rental income.
You can deduct the utility payment made by your tenant as a rental expense.
Example 2.
While you are out of town, the furnace in your rental property stops working. Your tenant pays for the necessary repairs and
deducts the repair
bill from the rent payment. Include the repair bill paid by the tenant and any amount received as a rent payment in your rental
income. You can deduct
the repair payment made by your tenant as a rental expense.
Property or services.
If you receive property or services, instead of money, as rent, include the fair market value of the property or services
in your rental income.
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.
Example.
Your tenant is a painter. He offers to paint your rental property instead of paying 2 months' rent. You accept his offer.
Include in your rental income the amount the tenant would have paid for 2 months' rent. You can deduct that same amount as
a rental expense for
painting your property.
Lease with option to buy.
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. 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.
Rental of property also used as a home.
If you rent property that you also use as your home and you rent it fewer than 15 days during the tax year, do not
include the rent you receive in
your income and do not deduct rental expenses. However, you can deduct on Schedule A (Form 1040) the interest, taxes, and
casualty and theft losses
that are allowed for nonrental property. See Personal Use of Dwelling Unit (Including Vacation Home), later.
Part interest.
If you own a part interest in rental property, you must report your part of the rental income from the property.
This section 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 a condominium or cooperative apartment, 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 under Depreciation.
When to deduct.
You generally deduct your rental expenses in the year you pay them.
Vacant rental property.
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. However, you cannot deduct any loss of rental income
for the period the property
is vacant.
Pre-rental expenses.
You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from
the time you make it available
for rent.
Depreciation.
You can begin to depreciate rental property when it is ready and available for rent. See Placed-in-Service Date under Depreciation,
later.
Expenses for rental property sold.
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.
Personal use of rental property.
If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and
personal use. Also, your rental
expense deductions may be limited. See Personal Use of Dwelling Unit (Including Vacation Home), later.
Part interest.
If you own a part interest in rental property, you can deduct your part of the expenses that you paid.
Uncollected rent.
If you are a cash basis taxpayer, you do not report uncollected rent. Because you do not include it in your income,
you cannot deduct it.
If you use an accrual method, you report income when you earn it. If you are unable to collect the rent, you may be
able to deduct it as a business
bad debt. See chapter 10 of Publication 535 for more information about business bad debts.
Table 1. Examples of Improvements
| |
Caution. Work you do (or have done) on your home that does not add much to either the value or the life of the
property, but rather keeps the property in good condition, is considered a repair, not an improvement. |
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
|
You can deduct the cost of repairs to your rental property. You cannot deduct the cost of improvements. You recover the cost
of improvements by
taking depreciation (explained later).
Separate the costs of repairs and improvements, and keep accurate records. You will need to know the cost of improvements
when you sell or
depreciate your property.
Repairs.
A repair keeps your property in good operating condition. It does not materially add to the value of your property
or substantially prolong its
life. Repainting your property inside or out, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows
are examples of
repairs.
If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an
improvement.
Improvements.
An improvement adds to the value of property, prolongs its useful life, or adapts it to new uses. Table 1 shows examples
of many improvements.
If you make an improvement to property, the cost of the improvement must be capitalized. The capitalized cost
can generally be depreciated as if the improvement were separate property.
In addition to depreciation and the cost of repairs, you can deduct the following expenses from your rental income.
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Advertising.
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Cleaning and maintenance.
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Utilities.
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Insurance.
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Taxes.
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Interest.
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Points.
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Commissions.
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Tax return preparation fees.
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Travel expenses.
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Rental payments.
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Local transportation expenses.
Some of these expenses are discussed next.
Rental payments for property.
You can deduct the rent you pay for property that you use for rental purposes. 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.
Rental of equipment.
You can deduct the rent you pay for equipment that you use for rental purposes. However, in some cases, lease contracts
are actually purchase
contracts. If so, you cannot deduct these payments. You can recover the cost of purchased equipment through depreciation.
Insurance premiums paid in advance.
If you pay an insurance premium for more than one year in advance, each year you can deduct the part of the premium
payment that will apply to that
year. You cannot deduct the total premium in the year you pay it.
Local benefit taxes.
Generally, 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. These charges are nondepreciable capital expenditures. You must add them to the basis
of your property. You can
deduct local benefit taxes if they are for maintaining, repairing, or paying interest charges for the benefits.
Interest expense.
You can deduct mortgage interest you pay on your rental property. Chapter 4 of Publication 535 explains mortgage interest
in detail.
Expenses paid to obtain a mortgage.
Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. These expenses,
which include mortgage
commissions, abstract fees, and recording fees, are capital expenses. However, you can amortize them over the life of the
mortgage.
Form 1098.
If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form
1098, Mortgage Interest
Statement, or similar statement showing the interest you paid for the year. 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. Attach a statement to your return showing the name and address of the other person. In the
left margin of Schedule E,
next to line 13, enter “ See attached.”
Points.
The term “ points” is often used to describe some of the charges paid by a borrower to take out a loan
or a mortgage. These charges are also called loan origination fees, maximum loan charges, or premium charges. If any of these
charges (points) are
solely for the use of money, they are interest.
Points paid when you take out a loan or mortgage result in original issue discount
(OID). In general, the points (OID) are deductible as interest unless they must be capitalized. How you figure the amount
of points (OID) you can
deduct each year depends on whether or not your total OID, including the OID resulting from the points, is insignificant or
de minimis. If
the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct.
De minimis OID.
The OID is de minimis if it is less than one-fourth of 1% (.0025) of the stated redemption price at maturity multiplied by the number of
full years from the date of original issue to maturity (the term of the loan).
If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year.
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On a constant-yield basis over the term of the loan.
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On a straight line basis over the term of the loan.
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In proportion to stated interest payments.
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In its entirety at maturity of the loan.
You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for
the tax year in
which the loan is issued.
Example of de minimis amount.
On January 1, 2006, you took out a loan for $100,000. The loan matures on January 1, 2016 (a 10-year term), and the stated
principal amount of the
loan ($100,000) is payable on that date. An interest payment of $10,000 is payable to the bank on January 2 of each year,
beginning on January 2,
2007. When the loan was made, you paid $1,500 in points to the bank. The points reduced the issue price of the loan from $100,000
to $98,500,
resulting in $1,500 of OID. You determine that the points (OID) you paid are de minimis based on the following computation.
The points (OID) you paid ($1,500) are less than the de minimis amount. Therefore, you have de minimis OID and you can
choose one of the four ways discussed earlier to figure the amount you can deduct each year. Under the straight line method,
you can deduct $150 each
year for 10 years.
Constant-yield method.
If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year.
You figure your deduction for the first year in the following manner.
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Determine the issue price of the loan. Generally, this equals the proceeds of the loan. If you paid points on the loan, the
issue price
generally is the difference between the proceeds and the points.
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Multiply the result in (1) by the yield to maturity.
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Subtract any qualified stated interest payments from the result in (2). This is the OID you can deduct in the first year.
To figure your deduction in any subsequent year, you start with the adjusted issue price. To get the adjusted issue
price, add to the issue price
any OID previously deducted. Then follow steps (2) and (3) above.
The yield to maturity (YTM) is generally shown in the literature you receive from your lender. If you do not have
this information, consult your
lender or tax advisor. 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.
Qualified stated interest (QSI) is 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 single fixed rate.
Example of constant yield.
The facts are the same as in the previous example. The yield to maturity on your loan is 10.2467%, compounded annually.
You figure the amount of points (OID) you can deduct in 2006 as follows.
You figure the deduction for 2007 as follows.
Loan or mortgage ends.
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. A loan or mortgage may end due to a refinancing, prepayment, foreclosure,
or similar event. 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.
Travel expenses.
You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip
was to collect rental income or
to manage, conserve, or maintain your rental property. You must properly allocate your expenses between rental and nonrental
activities. You cannot
deduct the cost of traveling away from home if the primary purpose of the trip was the improvement of your property. You recover
the cost of
improvements by taking depreciation. For information on travel expenses, see chapter 1 of Publication 463.
To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463.
Local transportation expenses.
You can 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.
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. For 2006, the standard mileage
rate is 44½
cents a mile for all business miles. For more information, see chapter 4 of Publication 463.
To deduct car expenses under either method, you must keep records that follow the rules
in chapter 5 of Publication 463. In addition, you must complete Form 4562, Part V, and attach it to your tax return.
Tax return preparation.
You can deduct, as a rental expense, the part of tax return preparation fees you paid to prepare Schedule E (Form
1040), Part I. For example, on
your 2006 Schedule E you can deduct fees paid in 2006 to prepare Part I of your 2005 Schedule E. 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.
Condominiums and Cooperatives
If you rent out a condominium or a cooperative apartment, special rules apply. Condominiums are treated differently from cooperatives.
If you own a condominium, you own a dwelling unit in a multi-unit building. You also own a share of the common elements of
the structure, such as
land, lobbies, elevators, and service areas. You and the other condominium owners may pay dues or assessments to a special
corporation that is
organized to take care of the common elements.
If you rent your condominium to others, you can deduct:
You cannot deduct special assessments you pay to a condominium management corporation for improvements. But you may be able
to recover your
share of the cost of any improvement by taking depreciation.
If you have a cooperative apartment that you rent to others, you can usually deduct, as a rental expense, all the maintenance
fees you pay to the
cooperative housing corporation. However, you cannot deduct a payment earmarked for a capital asset or improvement, or otherwise
charged to the
corporation's capital account. For example, you cannot deduct a payment used to pave a community parking lot, install a new
roof, or pay the principal
of the corporation's mortgage. You must add the payment to the basis of your stock in the corporation.
Treat as a capital cost the amount you were assessed for capital items. This cannot be more than the amount by which your
payments to the
corporation exceeded your share of the corporation's mortgage interest and real estate taxes.
Your share of interest and taxes is the amount the corporation elected to allocate to you, if it reasonably reflects those
expenses for your
apartment. Otherwise, figure your share in the following way.
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Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the
corporation.
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Multiply the corporation's deductible interest by the number you figured in (1). This is your share of the interest.
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Multiply the corporation's deductible taxes by the number you figured in (1). This is your share of the taxes.
In addition to the maintenance fees paid to the cooperative housing corporation, you can deduct your direct payments for repairs,
upkeep, and other
rental expenses, including interest paid on a loan used to buy your stock in the corporation. The depreciation deduction allowed
for cooperative
apartments is discussed later.
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
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 chapter 1 of Publication 535.
Where to report.
Report your not-for-profit rental income on Form 1040, line 21. You can include your mortgage interest (if you use
the property as your main home
or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize
your deductions.
Claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous
itemized deductions on line 22
of Schedule A (Form 1040). You can deduct these expenses only if they, together with certain other miscellaneous itemized
deductions, total more than
2% of your adjusted gross income.
Postponing decision.
If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years,
you are presumed to be renting
your property to make a profit. You may choose to postpone the decision of whether the rental is for profit by filing Form
5213.
See Publication 535 for more information.
Property Changed to Rental Use
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.
For depreciation purposes, treat the property as being placed in service on the conversion date.
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).
Example.
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.
When figuring depreciation, treat the property as placed in service on June 1.
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 a rental
expense a part of other
expenses that normally are nondeductible personal expenses, such as expenses for electricity, or painting the outside of your
house.
You can deduct the expenses for the part of the property used for personal purposes, subject to certain limitations, 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 tenant's 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 property used for rental purposes as well as on the furniture and equipment you use for
rental purposes.
How to divide expenses.
If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you
must divide the expense between
rental use and personal use. You can use any reasonable method for dividing the expense. It may be reasonable to divide the
cost of some items (for
example, water) based on the number of people using them. However, the two most common methods for dividing an expense are
one based on the number of
rooms in your home and one based on the square footage of your home.
Example.
You rent a room in your house. The room is 12 × 15 feet, or 180 square feet. Your entire house has 1,800 square feet of floor
space. You can
deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. If your heating bill
for the year for the
entire house was $600, $60 ($600 × 10%) is a rental expense. The balance, $540, is a personal expense that you cannot deduct.
Personal Use of Dwelling Unit (Including Vacation Home)
If you have any personal use of a dwelling unit (defined later) (including a vacation home)
that you rent, you must divide your expenses between rental use and personal use. See Figuring Days of Personal Use and How To Divide
Expenses, later.
If you used a dwelling unit for personal purposes, it may be considered a “dwelling unit used as a home.” If it is, you cannot deduct rental
expenses that are more than your rental income for the unit. See Dwelling Unit Used as Home and How To Figure Rental Income and
Deductions, later. If the dwelling unit is not considered a dwelling unit used as a home, you can deduct rental expenses that are more
than your
rental income for the unit, subject to certain limits. See Limits on Rental Losses, later.
Exception for minimal rental use.
If you use the dwelling unit as a home and you rent it fewer than 15 days during the year, do not include any of the
rent in your income and do not
deduct any of the rental expenses. See Dwelling Unit Used as Home, later.
Dwelling unit.
A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. A
dwelling unit has basic living
accommodations, such as sleeping space, a toilet, and cooking facilities. A dwelling unit does not include property used solely
as a hotel, motel,
inn, or similar establishment.
Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy
by paying customers and is not
used by an owner as a home during the year.
Example.
You rent a room in your home that is always available for short-term occupancy by paying customers. You do not use the room
yourself and you allow
only paying customers to use the room. The room is used solely as a hotel, motel, inn, or similar establishment and is not
a dwelling unit.
Dwelling Unit Used as Home
The tax treatment of rental income and expenses for a dwelling unit that you also use for personal purposes depends on whether
you use it as a
home. (See How To Figure Rental Income and Deductions, later).
You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the
greater of:
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14 days, or
-
10% of the total days it is rented to others at a fair rental price.
See Figuring Days of Personal Use, later.
If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a
day of rental use in
applying (2) above. Instead, count it as a day of personal use in applying both (1) and (2) above. This rule does not apply
when dividing expenses
between rental and personal use.
Fair rental price.
A fair rental price for your property generally is the amount of rent that a person who is not related to you would
be willing to pay. The rent you
charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar
to your property.
Ask yourself the following questions when comparing another property with yours.
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Is it used for the same purpose?
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Is it approximately the same size?
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Is it in approximately the same condition?
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Does it have similar furnishings?
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Is it in a similar location?
If any of the answers are no, the properties probably are not similar.
The following examples show how to determine whether you used your rental property as a home.
Example 1. 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).
Example 2.
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).
Example 3.
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 these
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
figure 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).
Use as Main Home Before or After Renting
For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property
as your main home
before or after renting it or offering it for rent as days of personal use. Do not count them as days of personal use if:
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You rented or tried to rent the property for 12 or more consecutive months.
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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.
This special rule does not apply when dividing expenses between rental and personal use.
Example 1.
On February 28, you moved out of the house you had lived in for 6 years because you accepted a job in another town. You rent
your house at a fair
rental price from March 15 of that year to May 14 of the next year (14 months). On the following June 1, you move back into
your old house.
The days you used the house as your main home from January 1 to February 28 and from June 1 to December 31 of the next year
are not counted as days
of personal use.
Example 2.
On January 31, you moved out of the condominium where you had lived for 3 years. You offered it for rent at a fair rental
price beginning on
February 1. You were unable to rent it until April. On September 15, you sold the condominium.
The days you used the condominium as your main home from January 1 to January 31 are not counted as days of personal use when
determining whether
you used it as a home.
Figuring Days of Personal Use
A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.
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You or any other person who has an interest in it, unless you rent it to another owner as his or her main home under a shared
equity
financing agreement (defined later). However, see Use as Main Home Before or After Renting under Dwelling Unit Used As Home,
earlier.
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A member of your family or a member of the family of any other person who has an interest in it, unless the family member
uses the dwelling
unit as his or her main home and pays a fair rental price. Family includes only brothers and sisters, half-brothers and half-sisters,
spouses,
ancestors (parents, grandparents, etc.) and lineal descendants (children, grandchildren, etc.).
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Anyone under an arrangement that lets you use some other dwelling unit.
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Anyone at less than a fair rental price.
Main home.
If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily
the one he or she lived
in most of the time.
Shared equity financing agreement.
This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire
dwelling unit, including the
land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the
other co-owner or owners.
Donation of use of property.
You use a dwelling unit for personal purposes if:
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You donate the use of the unit to a charitable organization,
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The organization sells the use of the unit at a fund-raising event, and
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The “purchaser” uses the unit.
The following examples show how to determine days of personal use.
Example 1.
You and your neighbor are co-owners of a condominium at the beach. You rent the unit to vacationers whenever possible. The
unit is not used as a
main home by anyone. Your neighbor uses the unit for 2 weeks every year.
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.
Example 2.
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.
Example 3.
You own a rental property that you rent to your son. Your son has no interest in this property. He uses it as his main home.
He pays you a fair
rental price for the property.
Your son's use of the property is not personal use by you because your son is using it as his main home, he has no interest
in the property, and he
is paying you a fair rental price.
Example 4.
You rent your beach house to Rosa. Rosa rents her house in the mountains to you. You each pay a fair rental price.
You are using your house for personal purposes on the days that Rosa uses it because your house is used by Rosa under an arrangement
that allows
you to use her house.
Example 5.
You rent an apartment to your mother at less than a fair rental price. You are using the apartment for personal purposes on
the days that your
mother rents it because you rent it for less than a fair rental price.
Days Used for Repairs and Maintenance
Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted
as a day of personal
use. Do not count such a day as a day of personal use even if family members use the property for recreational purposes on
the same day.
Example.
You own a cabin in the mountains that you rent during the summer. You spend 3 days at the cabin each May, working full time
to repair anything that
was damaged over the winter and get the cabin ready for the summer. You also spend 3 days each September, working full time
to repair any damage done
by renters and getting the cabin ready for the winter.
These 6 days do not count as days of personal use even if your family uses the cabin
while you are repairing it.
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. You can deduct expenses for the rental use of the unit under the rules explained in
How To Figure Rental
Income and Deductions, later.
When dividing your expenses, follow these rules.
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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.
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Any day that the unit is available for rent but not actually rented is not a day of rental use.
Example.
Your beach cottage was available for rent from June 1 through August 31 (92 days). Your family uses the
cottage during the last 2 weeks in May (14 days). You were unable to find a renter for the first week in August (7 days).
The person who rented the
cottage for July allowed you to use it over a weekend (2 days) without any reduction in or refund of rent. 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.
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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.
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You used the cottage for personal purposes for 14 days (the last 2 weeks in May).
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The total use of the cottage was 99 days (14 days personal use + 85 days rental use).
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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 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 Property Used as a Home in the following discussion.
How To Figure Rental Income and Deductions
How you figure your rental income and deductions depends on whether you used the dwelling unit as a home (see Dwelling Unit Used as Home,
earlier) and, if you used it as a home, how many days the property was rented at a fair rental price.
Property Not Used as a Home
If you do not use a dwelling unit as a home, report all the rental income and deduct all the rental expenses. See How To Report Rental Income
and Expenses, later.
Your deductible rental expenses can be more than your gross rental income. However, see Limits on Rental Losses, later.
If you use a dwelling unit as a home during the year, how you figure your rental income and deductions depends on how many
days the unit was rented
at a fair rental price.
Rented fewer than 15 days.
If you use a dwelling unit as a home and you rent it fewer than 15 days during the year, do not include any rental
income in your income. Also, you
cannot deduct any expenses as rental expenses.
Rented 15 days or more.
If you use a dwelling unit as a home and rent it 15 days or more during the year, you include all your rental income
in your income. See How
To Report Rental Income and Expenses, later. If you had a net profit from the rental property for the year (that is, if your rental income is
more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. However, if you
had a net loss, your
deduction for certain rental expenses is limited.
Limit on deductions.
If your rental expenses are more than your rental income, you cannot use the excess expenses to offset income from
other sources. The excess can be
carried forward to the next year and treated as rental expenses for the same property. Any expenses carried forward to next
year will be subject to
any limits that apply next year. You can deduct the expenses carried over to a year only up to the amount of your rental income
for that year, even if
you do not use the property as your home for that year.
To figure your deductible rental expenses and any carryover to next year, use Table 2.
Table 2. Worksheet for Figuring the Limit on Rental Deductions for a Dwelling Unit Used as a Home
Use this worksheet only if you answer “yes” to all the following questions.
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Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as Home.)
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Did you rent the dwelling unit 15 days or more this year?
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Is the total of your rental expenses and depreciation more than your rental income?
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1.
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Enter rents received
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2a.
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Enter the rental portion of deductible home mortgage interest (see instructions)
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b.
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Enter the rental portion of real estate taxes
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c.
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Enter the rental portion of deduction casualty and theft losses (see instructions)
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d.
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Enter direct rental expenses (see instructions)
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