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2010 Tax Form 1040

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2010 Tax Form 1040

2010 tax form 1040 Publication 560 - Introductory Material Table of Contents Future Developments What's New Reminders IntroductionSEP plans. 2010 tax form 1040 SIMPLE plans. 2010 tax form 1040 Qualified plans. 2010 tax form 1040 Ordering forms and publications. 2010 tax form 1040 Tax questions. 2010 tax form 1040 Future Developments For the latest information about developments related to Publication 560, such as legislation enacted after we release it, go to www. 2010 tax form 1040 irs. 2010 tax form 1040 gov/pub560. 2010 tax form 1040 What's New Compensation limit increased for 2013 and 2014. 2010 tax form 1040  For 2013 the maximum compensation used for figuring contributions and benefits increases to $255,000. 2010 tax form 1040 This limit increases to $260,000 for 2014. 2010 tax form 1040 Elective deferral limit for 2013 and 2014. 2010 tax form 1040  The limit on elective deferrals, other than catch-up contributions, increases to $17,500 for 2013 and remains at $17,500 for 2014. 2010 tax form 1040 These limits apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), section 403(b) plans and section 457(b) plans. 2010 tax form 1040 Defined contribution limit increased for 2013 and 2014. 2010 tax form 1040  The limit on contributions, other than catch-up contributions, for a participant in a defined contribution plan increases to $51,000 for 2013. 2010 tax form 1040 This limit increases to $52,000 for 2014. 2010 tax form 1040 SIMPLE plan salary reduction contribution limit for 2013 and 2014. 2010 tax form 1040  The limit on salary reduction contributions, other than catch-up contributions, increases to $12,000 for 2013 and remains at $12,000 for 2014. 2010 tax form 1040 Catch-up contribution limit remains unchanged for 2013 and 2014. 2010 tax form 1040  A plan can permit participants who are age 50 or over at the end of the calendar year to make catch-up contributions in addition to elective deferrals and SIMPLE plan salary reduction contributions. 2010 tax form 1040 The catch-up contribution limitation for defined contribution plans other than SIMPLE plans remains unchanged at $5,500 for 2013 and 2014. 2010 tax form 1040 The catch-up contribution limitation for SIMPLE plans remains unchanged at $2,500 for 2013 and 2014. 2010 tax form 1040 The catch-up contributions a participant can make for a year cannot exceed the lesser of the following amounts. 2010 tax form 1040 The catch-up contribution limit. 2010 tax form 1040 The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. 2010 tax form 1040 See “Catch-up contributions” under Contribution Limits and Limit on Elective Deferrals in chapters 3 and 4, respectively, for more information. 2010 tax form 1040 All section references are to the Internal Revenue Code, unless otherwise stated. 2010 tax form 1040 Reminders In-plan Roth rollovers. 2010 tax form 1040  Section 402A(c)(4) provides for a distribution from an individual's account in a 401(k) plan, other than from a designated Roth account, that is rolled over to the individual's designated Roth account in the same plan. 2010 tax form 1040 An in-plan Roth rollover is not treated as a distribution for most purposes. 2010 tax form 1040 Section 402A(c)(4) was added by the Small Business Jobs Act of 2010 and applies to distributions made after September 27, 2010. 2010 tax form 1040 For additional guidance on in-plan Roth rollovers, see Notice 2010-84, 2010-51 I. 2010 tax form 1040 R. 2010 tax form 1040 B. 2010 tax form 1040 872, available at  www. 2010 tax form 1040 irs. 2010 tax form 1040 gov/irb/2010-51_IRB/ar11. 2010 tax form 1040 html. 2010 tax form 1040 In-plan Roth rollovers expanded. 2010 tax form 1040  Beginning in 2013, a plan with designated Roth accounts can permit a participant to roll over amounts into a designated Roth account from his or her other accounts in the same plan, regardless of whether the participant is eligible for a distribution from the other accounts. 2010 tax form 1040 Section 402A(c)(4) was amended by the American Taxpayer Relief Act of 2012. 2010 tax form 1040 For more information, see Notice 2013-74, 2013-52 I. 2010 tax form 1040 R. 2010 tax form 1040 B. 2010 tax form 1040 819, available at www. 2010 tax form 1040 irs. 2010 tax form 1040 gov/irb/2013-52_IRB/ar11. 2010 tax form 1040 html. 2010 tax form 1040 Credit for startup costs. 2010 tax form 1040  You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or qualified plan. 2010 tax form 1040 The credit equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. 2010 tax form 1040 You can choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective. 2010 tax form 1040 You must have had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year. 2010 tax form 1040 At least one participant must be a non-highly compensated employee. 2010 tax form 1040 The employees generally cannot be substantially the same employees for whom contributions were made or benefits accrued under a plan of any of the following employers in the 3-tax-year period immediately before the first year to which the credit applies. 2010 tax form 1040 You. 2010 tax form 1040 A member of a controlled group that includes you. 2010 tax form 1040 A predecessor of (1) or (2). 2010 tax form 1040 The credit is part of the general business credit, which can be carried back or forward to other tax years if it cannot be used in the current year. 2010 tax form 1040 However, the part of the general business credit attributable to the small employer pension plan startup cost credit cannot be carried back to a tax year beginning before January 1, 2002. 2010 tax form 1040 You cannot deduct the part of the startup costs equal to the credit claimed for a tax year, but you can choose not to claim the allowable credit for a tax year. 2010 tax form 1040 To take the credit, use Form 8881, Credit for Small Employer Pension Plan Startup Costs. 2010 tax form 1040 Retirement savings contributions credit. 2010 tax form 1040  Retirement plan participants (including self-employed individuals) who make contributions to their plan may qualify for the retirement savings contribution credit. 2010 tax form 1040 The maximum contribution eligible for the credit is $2,000. 2010 tax form 1040 To take the credit, use Form 8880, Credit for Qualified Retirement Savings Contributions. 2010 tax form 1040 For more information on who is eligible for the credit, retirement plan contributions eligible for the credit and how to figure the credit, see Form 8880 and its instructions or go to the IRS website and search Retirement Topics-Retirement Savings Contributions Credit (Saver's Credit). 2010 tax form 1040 Photographs of missing children. 2010 tax form 1040  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 2010 tax form 1040 Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 2010 tax form 1040 You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. 2010 tax form 1040 Introduction This publication discusses retirement plans you can set up and maintain for yourself and your employees. 2010 tax form 1040 In this publication, “you” refers to the employer. 2010 tax form 1040 See chapter 1 for the definition of the term employer and the definitions of other terms used in this publication. 2010 tax form 1040 This publication covers the following types of retirement plans. 2010 tax form 1040 SEP (simplified employee pension) plans. 2010 tax form 1040 SIMPLE (savings incentive match plan for employees) plans. 2010 tax form 1040 Qualified plans (also called H. 2010 tax form 1040 R. 2010 tax form 1040 10 plans or Keogh plans when covering self-employed individuals), including 401(k) plans. 2010 tax form 1040 SEP, SIMPLE, and qualified plans offer you and your employees a tax-favored way to save for retirement. 2010 tax form 1040 You can deduct contributions you make to the plan for your employees. 2010 tax form 1040 If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. 2010 tax form 1040 You can also deduct trustees' fees if contributions to the plan do not cover them. 2010 tax form 1040 Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. 2010 tax form 1040 Under a 401(k) plan, employees can have you contribute limited amounts of their before-tax (after-tax, in the case of a qualified Roth contribution program) pay to the plan. 2010 tax form 1040 These amounts (and the earnings on them) are generally tax free until your employees receive distributions from the plan or, in the case of a qualified distribution from a designated Roth account, completely tax free. 2010 tax form 1040 What this publication covers. 2010 tax form 1040   This publication contains the information you need to understand the following topics. 2010 tax form 1040 What type of plan to set up. 2010 tax form 1040 How to set up a plan. 2010 tax form 1040 How much you can contribute to a plan. 2010 tax form 1040 How much of your contribution is deductible. 2010 tax form 1040 How to treat certain distributions. 2010 tax form 1040 How to report information about the plan to the IRS and your employees. 2010 tax form 1040 Basic features of SEP, SIMPLE, and qualified plans. 2010 tax form 1040 The key rules for SEP, SIMPLE, and qualified plans are outlined in Table 1. 2010 tax form 1040 SEP plans. 2010 tax form 1040   SEPs provide a simplified method for you to make contributions to a retirement plan for yourself and your employees. 2010 tax form 1040 Instead of setting up a profit-sharing or money purchase plan with a trust, you can adopt a SEP agreement and make contributions directly to a traditional individual retirement account or a traditional individual retirement annuity (SEP-IRA) set up for yourself and each eligible employee. 2010 tax form 1040 SIMPLE plans. 2010 tax form 1040   Generally, if you had 100 or fewer employees who received at least $5,000 in compensation last year, you can set up a SIMPLE plan. 2010 tax form 1040 Under a SIMPLE plan, employees can choose to make salary reduction contributions rather than receiving these amounts as part of their regular pay. 2010 tax form 1040 In addition, you will contribute matching or nonelective contributions. 2010 tax form 1040 The two types of SIMPLE plans are the SIMPLE IRA plan and the SIMPLE 401(k) plan. 2010 tax form 1040 Qualified plans. 2010 tax form 1040   The qualified plan rules are more complex than the SEP plan and SIMPLE plan rules. 2010 tax form 1040 However, there are advantages to qualified plans, such as increased flexibility in designing plans and increased contribution and deduction limits in some cases. 2010 tax form 1040 Table 1. 2010 tax form 1040 Key Retirement Plan Rules for 2013 Type  of  Plan Last Date for Contribution Maximum Contribution Maximum Deduction When To Set Up Plan SEP Due date of employer's return (including extensions). 2010 tax form 1040 Smaller of $51,000 or 25%1 of participant's compensation. 2010 tax form 1040 2 25%1 of all participants' compensation. 2010 tax form 1040 2 Any time up to the due date of employer's return (including extensions). 2010 tax form 1040 SIMPLE IRA and SIMPLE 401(k) Salary reduction contributions: 30 days after the end of the month for which the contributions are to be made. 2010 tax form 1040 4  Matching or nonelective contributions: Due date of employer's return (including extensions). 2010 tax form 1040 Employee contribution: Salary reduction contribution up to $12,000, $14,500 if age 50 or over. 2010 tax form 1040   Employer contribution:  Either dollar-for-dollar matching contributions, up to 3% of employee's compensation,3 or fixed nonelective contributions of 2% of compensation. 2010 tax form 1040 2 Same as maximum contribution. 2010 tax form 1040 Any time between 1/1 and 10/1 of the calendar year. 2010 tax form 1040   For a new employer coming into existence after 10/1, as soon as administratively feasible. 2010 tax form 1040 Qualified Plan: Defined Contribution Plan  Elective deferral: Due date of employer's return (including extensions). 2010 tax form 1040 4   Employer contribution: Money Purchase or Profit-Sharing: Due date of employer's return (including extensions). 2010 tax form 1040  Employee contribution: Elective deferral up to $17,500, $23,000 if age 50 or over. 2010 tax form 1040   Employer contribution: Money Purchase: Smaller of $51,000 or 100%1 of participant's compensation. 2010 tax form 1040 2  Profit-Sharing: Smaller of $51,000 or 100%1 of participant's compensation. 2010 tax form 1040 2  25%1 of all participants' compensation2, plus amount of elective deferrals made. 2010 tax form 1040   By the end of the tax year. 2010 tax form 1040 Qualified Plan: Defined Benefit Plan Contributions generally must be paid in quarterly installments, due 15 days after the end of each quarter. 2010 tax form 1040 See Minimum Funding Requirement in chapter 4. 2010 tax form 1040 Amount needed to provide an annual benefit no larger than the smaller of $205,000 or 100% of the participant's average compensation for his or her highest 3 consecutive calendar years. 2010 tax form 1040 Based on actuarial assumptions and computations. 2010 tax form 1040 By the end of the tax year. 2010 tax form 1040 1Net earnings from self-employment must take the contribution into account. 2010 tax form 1040 See Deduction Limit for Self-Employed Individuals in chapters 2 and 4 . 2010 tax form 1040  2Compensation is generally limited to $255,000 in 2013. 2010 tax form 1040  3Under a SIMPLE 401(k) plan, compensation is generally limited to $255,000 in 2013. 2010 tax form 1040  4Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions and elective deferrals. 2010 tax form 1040 What this publication does not cover. 2010 tax form 1040   Although the purpose of this publication is to provide general information about retirement plans you can set up for your employees, it does not contain all the rules and exceptions that apply to these plans. 2010 tax form 1040 You may also need professional help and guidance. 2010 tax form 1040   Also, this publication does not cover all the rules that may be of interest to employees. 2010 tax form 1040 For example, it does not cover the following topics. 2010 tax form 1040 The comprehensive IRA rules an employee needs to know. 2010 tax form 1040 These rules are covered in Publication 590, Individual Retirement Arrangements (IRAs). 2010 tax form 1040 The comprehensive rules that apply to distributions from retirement plans. 2010 tax form 1040 These rules are covered in Publication 575, Pension and Annuity Income. 2010 tax form 1040 The comprehensive rules that apply to section 403(b) plans. 2010 tax form 1040 These rules are covered in Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans). 2010 tax form 1040 Comments and suggestions. 2010 tax form 1040   We welcome your comments about this publication and your suggestions for future editions. 2010 tax form 1040   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. 2010 tax form 1040 NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. 2010 tax form 1040 Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 2010 tax form 1040   You can send your comments from www. 2010 tax form 1040 irs. 2010 tax form 1040 gov/formspubs. 2010 tax form 1040 Click on “More Information” and then on “Give us feedback. 2010 tax form 1040 ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. 2010 tax form 1040 Ordering forms and publications. 2010 tax form 1040   Visit www. 2010 tax form 1040 irs. 2010 tax form 1040 gov/formspubs to download forms  and publications, call 1-800-TAX-FORM  (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. 2010 tax form 1040 Internal Revenue Service 1201 N. 2010 tax form 1040 Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. 2010 tax form 1040   If you have a tax question, check the information available on IRS. 2010 tax form 1040 gov or call 1-800-829-1040. 2010 tax form 1040 We cannot answer tax questions sent to either of the above addresses. 2010 tax form 1040 Note. 2010 tax form 1040 Forms filed electronically with the Department of Labor are not available on the IRS website. 2010 tax form 1040 Instead, see www. 2010 tax form 1040 efast. 2010 tax form 1040 dol. 2010 tax form 1040 gov. 2010 tax form 1040 Prev  Up  Next   Home   More Online Publications
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The 2010 Tax Form 1040

2010 tax form 1040 4. 2010 tax form 1040   Special Situations Table of Contents Condominiums CooperativesDepreciation Property Changed to Rental UseBasis of Property Changed to Rental Use Figuring the Depreciation Deduction Renting Part of Property Not Rented for ProfitPostponing decision. 2010 tax form 1040 Example—Property Changed to Rental Use This chapter discusses some rental real estate activities that are subject to additional rules. 2010 tax form 1040 Condominiums A condominium is most often a dwelling unit in a multi-unit building, but can also take other forms, such as a townhouse or garden apartment. 2010 tax form 1040 If you own a condominium, you also own a share of the common elements, such as land, lobbies, elevators, and service areas. 2010 tax form 1040 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. 2010 tax form 1040 Special rules apply if you rent your condominium to others. 2010 tax form 1040 You can deduct as rental expenses all the expenses discussed in chapters 1 and 2. 2010 tax form 1040 In addition, you can deduct any dues or assessments paid for maintenance of the common elements. 2010 tax form 1040 You cannot deduct special assessments you pay to a condominium management corporation for improvements. 2010 tax form 1040 However, you may be able to recover your share of the cost of any improvement by taking depreciation. 2010 tax form 1040 Cooperatives If you live in a cooperative, you do not own your apartment. 2010 tax form 1040 Instead, a corporation owns the apartments and you are a tenant-stockholder in the cooperative housing corporation. 2010 tax form 1040 If you rent your apartment to others, you usually can deduct, as a rental expense, all the maintenance fees you pay to the cooperative housing corporation. 2010 tax form 1040 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. 2010 tax form 1040 Depreciation You will be depreciating your stock in the corporation rather than the apartment itself. 2010 tax form 1040 Figure your depreciation deduction as follows. 2010 tax form 1040 Figure the depreciation for all the depreciable real property owned by the corporation. 2010 tax form 1040 (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. 2010 tax form 1040 ) If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. 2010 tax form 1040 Multiply your cost per share by the total number of outstanding shares. 2010 tax form 1040 Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. 2010 tax form 1040 Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. 2010 tax form 1040 Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. 2010 tax form 1040 Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. 2010 tax form 1040 Multiply the result of (2) by the percentage you figured in (3). 2010 tax form 1040 This is your depreciation on the stock. 2010 tax form 1040 Your depreciation deduction for the year cannot be more than the part of your adjusted basis (defined in chapter 2) in the stock of the corporation that is allocable to your rental property. 2010 tax form 1040 Payments added to capital account. 2010 tax form 1040   Payments earmarked for a capital asset or improvement, or otherwise charged to the corporation's capital account are added to the basis of your stock in the corporation. 2010 tax form 1040 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. 2010 tax form 1040   Treat as a capital cost the amount you were assessed for capital items. 2010 tax form 1040 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. 2010 tax form 1040   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. 2010 tax form 1040 Otherwise, figure your share in the following manner. 2010 tax form 1040 Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. 2010 tax form 1040 Multiply the corporation's deductible interest by the number you figured in (1). 2010 tax form 1040 This is your share of the interest. 2010 tax form 1040 Multiply the corporation's deductible taxes by the number you figured in (1). 2010 tax form 1040 This is your share of the taxes. 2010 tax form 1040 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. 2010 tax form 1040 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. 2010 tax form 1040 You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. 2010 tax form 1040 However, you can include the home mortgage interest, qualified mortgage insurance premiums, 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). 2010 tax form 1040 Example. 2010 tax form 1040 Your tax year is the calendar year. 2010 tax form 1040 You moved from your home in May and started renting it out on June 1. 2010 tax form 1040 You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. 2010 tax form 1040 Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. 2010 tax form 1040 When figuring depreciation, treat the property as placed in service on June 1. 2010 tax form 1040 Basis of Property Changed to Rental Use When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion. 2010 tax form 1040 Fair market value. 2010 tax form 1040   This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. 2010 tax form 1040 Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property. 2010 tax form 1040 Figuring the basis. 2010 tax form 1040   The basis for depreciation is the lesser of: The fair market value of the property on the date you changed it to rental use, or Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. 2010 tax form 1040 For other increases and decreases to basis, see Adjusted Basis in chapter 2. 2010 tax form 1040 Example. 2010 tax form 1040 Several years ago you built your home for $140,000 on a lot that cost you $14,000. 2010 tax form 1040 Before changing the property to rental use this year, you added $28,000 of permanent improvements to the house and claimed a $3,500 casualty loss deduction for damage to the house. 2010 tax form 1040 Part of the improvements qualified for a $500 residential energy credit, which you claimed on your 2010 tax return. 2010 tax form 1040 Because land is not depreciable, you can only include the cost of the house when figuring the basis for depreciation. 2010 tax form 1040 The adjusted basis of the house at the time of the change in its use was $164,000 ($140,000 + $28,000 − $3,500 − $500). 2010 tax form 1040 On the date of the change in use, your property had a fair market value of $168,000, of which $21,000 was for the land and $147,000 was for the house. 2010 tax form 1040 The basis for depreciation on the house is the fair market value on the date of the change ($147,000), because it is less than your adjusted basis ($164,000). 2010 tax form 1040 Cooperatives If you change your cooperative apartment to rental use, figure your allowable depreciation as explained earlier. 2010 tax form 1040 (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. 2010 tax form 1040 ) The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. 2010 tax form 1040 The fair market value of the property on the date you change your apartment to rental use. 2010 tax form 1040 This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. 2010 tax form 1040 The corporation's adjusted basis in the property on that date. 2010 tax form 1040 Do not subtract depreciation when figuring the corporation's adjusted basis. 2010 tax form 1040 If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1) under Depreciation (under Cooperatives, near the beginning of this chapter). 2010 tax form 1040 The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. 2010 tax form 1040 Figuring the Depreciation Deduction To figure the deduction, use the depreciation system in effect when you convert your residence to rental use. 2010 tax form 1040 Generally, that will be MACRS for any conversion after 1986. 2010 tax form 1040 Treat the property as placed in service on the conversion date. 2010 tax form 1040 Example. 2010 tax form 1040 Your converted residence (see previous example under Figuring the basis) was available for rent on August 1. 2010 tax form 1040 Using Table 2-2d (see chapter 2), the percentage for Year 1 beginning in August is 1. 2010 tax form 1040 364% and the depreciation deduction for Year 1 is $2,005 ($147,000 × . 2010 tax form 1040 01364). 2010 tax form 1040 Renting Part of Property 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. 2010 tax form 1040 You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). 2010 tax 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 the house. 2010 tax form 1040 There is no change in the types of expenses deductible for the personal-use part of your property. 2010 tax form 1040 Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). 2010 tax form 1040 You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. 2010 tax form 1040 You do not have to divide the expenses that belong only to the rental part of your property. 2010 tax form 1040 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. 2010 tax form 1040 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. 2010 tax form 1040 You can deduct depreciation on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. 2010 tax form 1040 How to divide expenses. 2010 tax form 1040   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. 2010 tax form 1040 You can use any reasonable method for dividing the expense. 2010 tax form 1040 It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. 2010 tax form 1040 The two most common methods for dividing an expense are (1) the number of rooms in your home, and (2) the square footage of your home. 2010 tax form 1040 Example. 2010 tax form 1040 You rent a room in your house. 2010 tax form 1040 The room is 12 × 15 feet, or 180 square feet. 2010 tax form 1040 Your entire house has 1,800 square feet of floor space. 2010 tax form 1040 You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. 2010 tax form 1040 If your heating bill for the year for the entire house was $600, $60 ($600 × . 2010 tax form 1040 10) is a rental expense. 2010 tax form 1040 The balance, $540, is a personal expense that you cannot deduct. 2010 tax form 1040 Duplex. 2010 tax form 1040   A common situation is the duplex where you live in one unit and rent out the other. 2010 tax form 1040 Certain expenses apply to the entire property, such as mortgage interest and real estate taxes, and must be split to determine rental and personal expenses. 2010 tax form 1040 Example. 2010 tax form 1040 You own a duplex and live in one half, renting the other half. 2010 tax form 1040 Both units are approximately the same size. 2010 tax form 1040 Last year, you paid a total of $10,000 mortgage interest and $2,000 real estate taxes for the entire property. 2010 tax form 1040 You can deduct $5,000 mortgage interest and $1,000 real estate taxes on Schedule E (Form 1040), and if you itemize your deductions, you can deduct the other $5,000 mortgage interest and $1,000 real estate taxes on Schedule A (Form 1040). 2010 tax form 1040 Not Rented for Profit 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. 2010 tax form 1040 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. 2010 tax form 1040 Where to report. 2010 tax form 1040   Report your not-for-profit rental income on Form 1040 or 1040NR, line 21. 2010 tax form 1040 For example, if you are filing Form 1040, you can include your mortgage interest and any qualified mortgage insurance premiums (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. 2010 tax 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 Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. 2010 tax 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. 2010 tax form 1040 Presumption of profit. 2010 tax form 1040   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. 2010 tax form 1040 Postponing decision. 2010 tax form 1040   If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. 2010 tax form 1040 You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. 2010 tax form 1040 You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. 2010 tax form 1040 More information. 2010 tax form 1040   For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. 2010 tax form 1040 Example—Property Changed to Rental Use In January, Eileen Johnson bought a condominium apartment to live in. 2010 tax form 1040 Instead of selling the house she had been living in, she decided to change it to rental property. 2010 tax form 1040 Eileen selected a tenant and started renting the house on February 1. 2010 tax form 1040 Eileen charges $750 a month for rent and collects it herself. 2010 tax form 1040 Eileen also received a $750 security deposit from her tenant. 2010 tax form 1040 Because she plans to return it to her tenant at the end of the lease, she does not include it in her income. 2010 tax form 1040 Her rental expenses for the year are as follows. 2010 tax form 1040   Mortgage interest $1,800     Fire insurance (1-year policy) 100     Miscellaneous repairs (after renting) 297     Real estate taxes imposed and paid 1,200   Eileen must divide the real estate taxes, mortgage interest, and fire insurance between the personal use of the property and the rental use of the property. 2010 tax form 1040 She can deduct eleven-twelfths of these expenses as rental expenses. 2010 tax form 1040 She can include the balance of the allowable taxes and mortgage interest on Schedule A (Form 1040) if she itemizes. 2010 tax form 1040 She cannot deduct the balance of the fire insurance because it is a personal expense. 2010 tax form 1040 Eileen bought this house in 1984 for $35,000. 2010 tax form 1040 Her property tax was based on assessed values of $10,000 for the land and $25,000 for the house. 2010 tax form 1040 Before changing it to rental property, Eileen added several improvements to the house. 2010 tax form 1040 She figures her adjusted basis as follows:   Improvements Cost     House $25,000     Remodeled kitchen 4,200     Recreation room 5,800     New roof 1,600     Patio and deck 2,400     Adjusted basis $39,000   On February 1, when Eileen changed her house to rental property, the property had a fair market value of $152,000. 2010 tax form 1040 Of this amount, $35,000 was for the land and $117,000 was for the house. 2010 tax form 1040 Because Eileen's adjusted basis is less than the fair market value on the date of the change, Eileen uses $39,000 as her basis for depreciation. 2010 tax form 1040 As specified for residential rental property, Eileen must use the straight line method of depreciation over the GDS or ADS recovery period. 2010 tax form 1040 She chooses the GDS recovery period of 27. 2010 tax form 1040 5 years. 2010 tax form 1040 She uses Table 2-2d to find her depreciation percentage. 2010 tax form 1040 Since she placed the property in service in February, the percentage is 3. 2010 tax form 1040 182%. 2010 tax form 1040 On April 1, Eileen bought a new dishwasher for the rental property at a cost of $425. 2010 tax form 1040 The dishwasher is personal property used in a rental real estate activity, which has a 5-year recovery period. 2010 tax form 1040 She uses Table 2-2a to find the percentage for Year 1 under “Half-year convention” (20%) to figure her depreciation deduction. 2010 tax form 1040 On May 1, Eileen paid $4,000 to have a furnace installed in the house. 2010 tax form 1040 The furnace is residential rental property. 2010 tax form 1040 Because she placed the property in service in May, the percentage from Table 2-2d is 2. 2010 tax form 1040 273%. 2010 tax form 1040 Eileen figures her net rental income or loss for the house as follows: Total rental income received  ($750 × 11) $8,250 Minus: Expenses     Mortgage interest ($1,800 × 11/12) $1,650   Fire insurance ($100 × 11/12) 92   Miscellaneous repairs 297   Real estate taxes ($1,200 × 11/12) 1,100   Total expenses 3,139 Balance $5,111 Minus: Depreciation     House ($39,000 × . 2010 tax form 1040 03182) $1,241   Dishwasher ($425 × . 2010 tax form 1040 20) 85   Furnace ($4,000 × . 2010 tax form 1040 02273) 91   Total depreciation 1,417 Net rental income for house   $3,694       Eileen uses Schedule E, Part I, to report her rental income and expenses. 2010 tax form 1040 She enters her income, expenses, and depreciation for the house in the column for Property A. 2010 tax form 1040 Since all property was placed in service this year, Eileen must use Form 4562 to figure the depreciation. 2010 tax form 1040 See the Instructions for Form 4562 for more information on preparing the form. 2010 tax form 1040 Prev  Up  Next   Home   More Online Publications