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Amend My Federal Tax Return

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Amend My Federal Tax Return

Amend my federal tax return 9. Amend my federal tax return   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. Amend my federal tax return Repairs and Improvements Other Expenses Property Changed to Rental Use Renting Part of Property Not Rented for Profit Personal Use of Dwelling Unit (Including Vacation Home)Example. Amend my federal tax return Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. Amend my federal tax return Limits on Rental LossesAt-Risk Rules Passive Activity Limits How To Report Rental Income and ExpensesSchedule E (Form 1040) Introduction This chapter discusses rental income and expenses. Amend my federal tax return It also covers the following topics. Amend my federal tax return Personal use of dwelling unit (including vacation home). Amend my federal tax return Depreciation. Amend my federal tax return Limits on rental losses. Amend my federal tax return How to report your rental income and expenses. Amend my federal tax return If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. Amend my federal tax return If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. Amend my federal tax return 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. Amend my federal tax return See Publication 527, Residential Rental Property, for more information. Amend my federal tax return Useful Items - You may want to see: Publication 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 Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Amend my federal tax return Rental income is any payment you receive for the use or occupation of property. Amend my federal tax return In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. Amend my federal tax return When to report. Amend my federal tax return   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. Amend my federal tax return You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. Amend my federal tax return You constructively receive income when it is made available to you, for example, by being credited to your bank account. Amend my federal tax return   For more information about when you constructively receive income, see Accounting Methods in chapter 1. Amend my federal tax return Advance rent. Amend my federal tax return   Advance rent is any amount you receive before the period that it covers. Amend my federal tax return 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. Amend my federal tax return Example. Amend my federal tax return You sign a 10-year lease to rent your property. Amend my federal tax return 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. Amend my federal tax return You must include $10,000 in your income in the first year. Amend my federal tax return Canceling a lease. Amend my federal tax return   If your tenant pays you to cancel a lease, the amount you receive is rent. Amend my federal tax return Include the payment in your income in the year you receive it regardless of your method of accounting. Amend my federal tax return Expenses paid by tenant. Amend my federal tax return   If your tenant pays any of your expenses, the payments are rental income. Amend my federal tax return Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. Amend my federal tax return See Rental Expenses , later, for more information. Amend my federal tax return Property or services. Amend my federal tax return   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. Amend my federal tax return   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. Amend my federal tax return Security deposits. Amend my federal tax return   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. Amend my federal tax return 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. Amend my federal tax return   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Amend my federal tax return Include it in your income when you receive it. Amend my federal tax return Part interest. Amend my federal tax return   If you own a part interest in rental property, you must report your part of the rental income from the property. Amend my federal tax return Rental of property also used as your home. Amend my federal tax return   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Amend my federal tax return However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Amend my federal tax return See Personal Use of Dwelling Unit (Including Vacation Home) , later. Amend my federal tax return Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. Amend my federal tax return 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. Amend my federal tax return Depreciation , which you can also deduct from your rental income, is discussed later. Amend my federal tax return Personal use of rental property. Amend my federal tax return   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Amend my federal tax return Also, your rental expense deductions may be limited. Amend my federal tax return See Personal Use of Dwelling Unit (Including Vacation Home) , later. Amend my federal tax return Part interest. Amend my federal tax return   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. Amend my federal tax return When to deduct. Amend my federal tax return   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. Amend my federal tax return Depreciation. Amend my federal tax return   You can begin to depreciate rental property when it is ready and available for rent. Amend my federal tax return See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. Amend my federal tax return Pre-rental expenses. Amend my federal tax return   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Amend my federal tax return Uncollected rent. Amend my federal tax return   If you are a cash-basis taxpayer, do not deduct uncollected rent. Amend my federal tax return Because you have not included it in your income, it is not deductible. Amend my federal tax return Vacant rental property. Amend my federal tax return   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. Amend my federal tax return However, you cannot deduct any loss of rental income for the period the property is vacant. Amend my federal tax return Vacant while listed for sale. Amend my federal tax return   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. Amend my federal tax return If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Amend my federal tax return Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Amend my federal tax return Improvements. Amend my federal tax return   You must capitalize any expense you pay to improve your rental property. Amend my federal tax return An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Amend my federal tax return Betterments. Amend my federal tax return   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Amend my federal tax return Restoration. Amend my federal tax return   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Amend my federal tax return Adaptation. Amend my federal tax return   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Amend my federal tax return Separate the costs of repairs and improvements, and keep accurate records. Amend my federal tax return You will need to know the cost of improvements when you sell or depreciate your property. Amend my federal tax return The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Amend my federal tax return Other Expenses 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. Amend my federal tax return Insurance premiums paid in advance. Amend my federal tax return   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Amend my federal tax return You cannot deduct the total premium in the year you pay it. Amend my federal tax return Legal and other professional fees. Amend my federal tax return   You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. Amend my federal tax return For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. Amend my federal tax return 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. Amend my federal tax return Local benefit taxes. Amend my federal tax return   In most cases, 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. Amend my federal tax return These charges are nondepreciable capital expenditures, and must be added to the basis of your property. Amend my federal tax return However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Amend my federal tax return Local transportation expenses. Amend my federal tax return    You may be able to 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. Amend my federal tax return However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Amend my federal tax return See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Amend my federal tax return   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. Amend my federal tax return For 2013, the standard mileage rate for business use is 56. Amend my federal tax return 5 cents per mile. Amend my federal tax return For more information, see chapter 26. Amend my federal tax return    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. Amend my federal tax return In addition, you must complete Form 4562, Part V, and attach it to your tax return. Amend my federal tax return Rental of equipment. Amend my federal tax return   You can deduct the rent you pay for equipment that you use for rental purposes. Amend my federal tax return However, in some cases, lease contracts are actually purchase contracts. Amend my federal tax return If so, you cannot deduct these payments. Amend my federal tax return You can recover the cost of purchased equipment through depreciation. Amend my federal tax return Rental of property. Amend my federal tax return   You can deduct the rent you pay for property that you use for rental purposes. Amend my federal tax return 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. Amend my federal tax return Travel expenses. Amend my federal tax return   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Amend my federal tax return You must properly allocate your expenses between rental and nonrental activities. Amend my federal tax return You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. Amend my federal tax return You recover the cost of improvements by taking depreciation. Amend my federal tax return For information on travel expenses, see chapter 26. Amend my federal tax return    To deduct travel expenses, you must keep records that follow the rules in chapter 26. Amend my federal tax return   See Rental Expenses in Publication 527 for more information. Amend my federal tax return 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. Amend my federal tax return 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. Amend my federal tax return You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Amend my federal tax return 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). Amend my federal tax return Example. Amend my federal tax return Your tax year is the calendar year. Amend my federal tax return You moved from your home in May and started renting it out on June 1. Amend my federal tax return You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Amend my federal tax return Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Amend my federal tax return 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. Amend my federal tax return 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). Amend my federal tax return 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. Amend my federal tax return There is no change in the types of expenses deductible for the personal-use part of your property. Amend my federal tax return Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Amend my federal tax return You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Amend my federal tax return You do not have to divide the expenses that belong only to the rental part of your property. Amend my federal tax return 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. Amend my federal tax return 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. Amend my federal tax return 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. Amend my federal tax return How to divide expenses. Amend my federal tax return   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 the rental use and the personal use. Amend my federal tax return You can use any reasonable method for dividing the expense. Amend my federal tax return It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Amend my federal tax return The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home. Amend my federal tax return 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. Amend my federal tax return 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. Amend my federal tax return 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. Amend my federal tax return Where to report. Amend my federal tax return   Report your not-for-profit rental income on Form 1040, line 21. Amend my federal tax return For example, 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. Amend my federal tax return   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 Form 1040, Schedule A, line 23. Amend my federal tax return You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Amend my federal tax return Personal Use of Dwelling Unit (Including Vacation Home) 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. Amend my federal tax return 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. Amend my federal tax return Only your rental expenses may be deducted on Schedule E (Form 1040). Amend my federal tax return Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Amend my federal tax return You must also determine if the dwelling unit is considered a home. Amend my federal tax return The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Amend my federal tax return Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Amend my federal tax return 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. Amend my federal tax return Dwelling unit. Amend my federal tax return   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Amend my federal tax return It also includes all structures or other property belonging to the dwelling unit. Amend my federal tax return A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Amend my federal tax return   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. Amend my federal tax return 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. Amend my federal tax return Example. Amend my federal tax return   You rent a room in your home that is always available for short-term occupancy by paying customers. Amend my federal tax return You do not use the room yourself, and you allow only paying customers to use the room. Amend my federal tax return The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Amend my federal tax return Dividing Expenses 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. Amend my federal tax return When dividing your expenses, follow these rules. Amend my federal tax return 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. Amend my federal tax return This rule does not apply when determining whether you used the unit as a home. Amend my federal tax return Any day that the unit is available for rent but not actually rented is not a day of rental use. Amend my federal tax return Example. Amend my federal tax return Your beach cottage was available for rent from June 1 through August 31 (92 days). Amend my federal tax return 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. Amend my federal tax return 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. Amend my federal tax return Your family also used the cottage during the last 2 weeks of May (14 days). Amend my federal tax return The cottage was not used at all before May 17 or after August 31. Amend my federal tax return You figure the part of the cottage expenses to treat as rental expenses as follows. Amend my federal tax return The cottage was used for rental a total of 85 days (92 − 7). Amend my federal tax return The days it was available for rent but not rented (7 days) are not days of rental use. Amend my federal tax return The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Amend my federal tax return You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Amend my federal tax return The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Amend my federal tax return Your rental expenses are 85/99 (86%) of the cottage expenses. Amend my federal tax return Note. Amend my federal tax return 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. Amend my federal tax return Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Amend my federal tax return 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. Amend my federal tax return If you have a net loss, you may not be able to deduct all of the rental expenses. Amend my federal tax return See Dwelling Unit Used as a Home, next. Amend my federal tax return Dwelling Unit Used as a Home 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. Amend my federal tax return 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. Amend my federal tax return See What is a day of personal use , later. Amend my federal tax return Fair rental price. Amend my federal tax return   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. Amend my federal tax return 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 in your area. Amend my federal tax return   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. Amend my federal tax return Instead, count it as a day of personal use in applying both (1) and (2) above. Amend my federal tax return What is a day 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. Amend my federal tax return 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). Amend my federal tax return However, see Days used as a main home before or after renting , later. Amend my federal tax return 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. Amend my federal tax return Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Amend my federal tax return ), and lineal descendants (children, grandchildren, etc. Amend my federal tax return ). Amend my federal tax return Anyone under an arrangement that lets you use some other dwelling unit. Amend my federal tax return Anyone at less than a fair rental price. Amend my federal tax return Main home. Amend my federal tax return   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. Amend my federal tax return Shared equity financing agreement. Amend my federal tax return   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. Amend my federal tax return Donation of use of property. Amend my federal tax return   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. Amend my federal tax return Examples. Amend my federal tax return   The following examples show how to determine days of personal use. Amend my federal tax return Example 1. Amend my federal tax return You and your neighbor are co-owners of a condominium at the beach. Amend my federal tax return Last year, you rented the unit to vacationers whenever possible. Amend my federal tax return The unit was not used as a main home by anyone. Amend my federal tax return Your neighbor used the unit for 2 weeks last year; you did not use it at all. Amend my federal tax return 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. Amend my federal tax return Example 2. Amend my federal tax return You and your neighbors are co-owners of a house under a shared equity financing agreement. Amend my federal tax return Your neighbors live in the house and pay you a fair rental price. Amend my federal tax return 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. Amend my federal tax return This is because your neighbors rent the house as their main home under a shared equity financing agreement. Amend my federal tax return Example 3. Amend my federal tax return You own a rental property that you rent to your son. Amend my federal tax return Your son does not own any interest in this property. Amend my federal tax return He uses it as his main home and pays you a fair rental price. Amend my federal tax return 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. Amend my federal tax return Example 4. Amend my federal tax return You rent your beach house to Joshua. Amend my federal tax return Joshua rents his cabin in the mountains to you. Amend my federal tax return You each pay a fair rental price. Amend my federal tax return 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. Amend my federal tax return Days used for repairs and maintenance. Amend my federal tax return   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. Amend my federal tax return 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. Amend my federal tax return Days used as a main home before or after renting. Amend my federal tax return   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. Amend my federal tax return Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Amend my federal tax return 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. Amend my federal tax return However, this special rule does not apply when dividing expenses between rental and personal use. Amend my federal tax return Examples. Amend my federal tax return   The following examples show how to determine whether you used your rental property as a home. Amend my federal tax return Example 1. Amend my federal tax return You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Amend my federal tax return You rented the basement apartment at a fair rental price to college students during the regular school year. Amend my federal tax return You rented to them on a 9-month lease (273 days). Amend my federal tax return You figured 10% of the total days rented to others at a fair rental price is 27 days. Amend my federal tax return During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Amend my federal tax return Your basement apartment was used as a home because you used it for personal purposes for 30 days. Amend my federal tax return Rent-free use by your brothers is considered personal use. Amend my federal tax return Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Amend my federal tax return Example 2. Amend my federal tax return 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). Amend my federal tax return Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Amend my federal tax return You figured 10% of the total days rented to others at a fair rental price is 3 days. Amend my federal tax return The room was used as a home because you used it for personal purposes for 21 days. Amend my federal tax return That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Amend my federal tax return Example 3. Amend my federal tax return You own a condominium apartment in a resort area. Amend my federal tax return You rented it at a fair rental price for a total of 170 days during the year. Amend my federal tax return 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. Amend my federal tax return Your family actually used the apartment for 10 of those days. Amend my federal tax return Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. Amend my federal tax return You figured 10% of the total days rented to others at a fair rental price is 16 days. Amend my federal tax return Your family also used the apartment for 7 other days during the year. Amend my federal tax return You used the apartment as a home because you used it for personal purposes for 17 days. Amend my federal tax return That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Amend my federal tax return Minimal rental use. Amend my federal tax return   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. Amend my federal tax return See Used as a home but rented less than 15 days , later, for more information. Amend my federal tax return Limit on deductions. Amend my federal tax return   Renting a dwelling unit that is considered a home is not a passive activity. Amend my federal tax return Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. Amend my federal tax return The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Amend my federal tax return Any expenses carried forward to the next year will be subject to any limits that apply for that year. Amend my federal tax return This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. Amend my federal tax return   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. Amend my federal tax return Reporting Income and Deductions Property not used for personal purposes. Amend my federal tax return   If you do not use a dwelling unit for personal purposes, see How To Report Rental Income and Expenses , later, for how to report your rental income and expenses. Amend my federal tax return Property used for personal purposes. Amend my federal tax return   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. Amend my federal tax return Not used as a home. Amend my federal tax return   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Amend my federal tax return Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Amend my federal tax return The expenses for personal use are not deductible as rental expenses. Amend my federal tax return   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. Amend my federal tax return Used as a home but rented less than 15 days. Amend my federal tax return   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). Amend my federal tax return You are not required to report the rental income and rental expenses from this activity. Amend my federal tax return The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Amend my federal tax return See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Amend my federal tax return Used as a home and rented 15 days or more. Amend my federal tax return   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Amend my federal tax return Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Amend my federal tax return The expenses for personal use are not deductible as rental expenses. Amend my federal tax return   If you had a net profit from renting the dwelling unit 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. Amend my federal tax return You do not need to use Worksheet 9-1. Amend my federal tax return   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Amend my federal tax return To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. Amend my federal tax return Depreciation You recover the cost of income-producing property through yearly tax deductions. Amend my federal tax return You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Amend my federal 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. Amend my federal tax return You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. Amend my federal tax return You can deduct depreciation only on the part of your property used for rental purposes. Amend my federal tax return Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Amend my federal tax return You may have to use Form 4562 to figure and report your depreciation. Amend my federal tax return See How To Report Rental Income and Expenses , later. Amend my federal tax return Alternative minimum tax (AMT). Amend my federal tax return    If you use accelerated depreciation, you may be subject to the AMT. Amend my federal tax return Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Amend my federal tax return Claiming the correct amount of depreciation. Amend my federal tax return   You should claim the correct amount of depreciation each tax year. Amend my federal tax return If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Amend my federal tax return   If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Amend my federal tax return S Individual Income Tax Return. Amend my federal tax return If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Amend my federal tax return See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. Amend my federal tax return Changing your accounting method to deduct unclaimed depreciation. Amend my federal tax return   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Amend my federal tax return In some instances, that consent is automatic. Amend my federal tax return For more information, see chapter 1 of Publication 946. Amend my federal tax return Land. Amend my federal tax return   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Amend my federal tax return The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Amend my federal tax return More information. Amend my federal tax return   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. Amend my federal tax return Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. Amend my federal tax return You must consider these rules in the order shown below. Amend my federal tax return At-risk rules. Amend my federal tax return These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Amend my federal tax return This applies only if the real property was placed in service after 1986. Amend my federal tax return Passive activity limits. Amend my federal tax return 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. Amend my federal tax return However, there are exceptions. Amend my federal tax return At-Risk Rules 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. Amend my federal tax return Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Amend my federal tax return 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. Amend my federal tax return 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. Amend my federal tax return See Publication 925 for more information. Amend my federal tax return Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Amend my federal tax return 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. Amend my federal tax return Limits on passive activity deductions and credits. Amend my federal tax return    Deductions or losses from passive activities are limited. Amend my federal tax return You generally cannot offset income, other than passive income, with losses from passive activities. Amend my federal tax return Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Amend my federal tax return Any excess loss or credit is carried forward to the next tax year. Amend my federal tax return   For a detailed discussion of these rules, see Publication 925. Amend my federal tax return    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. Amend my federal tax return Real estate professionals. Amend my federal tax return   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. Amend my federal tax return For a detailed discussion of the requirements, see Publication 527. Amend my federal tax return For a detailed discussion of material participation, see Publication 925. Amend my federal tax return Exception for Personal Use of Dwelling Unit 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. Amend my federal tax return Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. Amend my federal tax return Exception for Rental Real Estate Activities With Active Participation 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. Amend my federal tax return This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Amend my federal tax return 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. Amend my federal tax return Active participation. Amend my federal tax return   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Amend my federal tax return Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Amend my federal tax return Maximum special allowance. Amend my federal tax return   The maximum special allowance is: $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. Amend my federal tax return   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. Amend my federal tax return If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. Amend my federal tax return   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Amend my federal tax return More information. Amend my federal tax return   See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity. Amend my federal tax return How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Amend my federal tax return However, do not use that schedule to report a not-for-profit activity. Amend my federal tax return See Not Rented for Profit, earlier. Amend my federal tax return Providing substantial services. Amend my federal tax return   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship). Amend my federal tax return Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Amend my federal tax return For information, see Publication 334, Tax Guide for Small Business. Amend my federal tax return You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Amend my federal tax return   Use Form 1065, U. Amend my federal tax return S. Amend my federal tax return Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Amend my federal tax return Qualified joint venture. Amend my federal tax return   If you and your spouse each materially participate as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. Amend my federal tax return This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. Amend my federal tax return For more information, see Publication 527. Amend my federal tax return Form 1098, Mortgage Interest Statement. Amend my federal tax return    If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, or similar statement showing the interest you paid for the year. Amend my federal tax return 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. Amend my federal tax return Attach a statement to your return showing the name and address of the other person. Amend my federal tax return In the left margin of Schedule E, next to line 13, enter “See attached. Amend my federal tax return ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Amend my federal tax return , you normally report your rental income and expenses on Schedule E, Part I. Amend my federal tax return List your total income, expenses, and depreciation for each rental property. Amend my federal tax return Be sure to enter the number of fair rental and personal use days on line 2. Amend my federal tax return If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Amend my federal tax return Complete lines 1 and 2 for each property. Amend my federal tax return However, fill in lines 23a through 26 on only one Schedule E. Amend my federal tax return On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Amend my federal tax return To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. Amend my federal tax return If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Amend my federal tax return Form 6198, At-Risk Limitations. Amend my federal tax return See At-Risk Rules , earlier. Amend my federal tax return Also see Publication 925. Amend my federal tax return Form 8582, Passive Activity Loss Limitations. Amend my federal tax return See Passive Activity Limits , earlier. Amend my federal tax return Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Amend my federal tax return 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. Amend my federal tax return Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Amend my federal tax return Worksheet 9-1. Amend my federal tax return Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. Amend my federal tax return Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Amend my federal tax return ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. Amend my federal tax return Rental Use Percentage A. Amend my federal tax return Total days available for rent at fair rental price A. Amend my federal tax return       B. Amend my federal tax return Total days available for rent (line A) but not rented B. Amend my federal tax return       C. Amend my federal tax return Total days of rental use. Amend my federal tax return Subtract line B from line A C. Amend my federal tax return       D. Amend my federal tax return Total days of personal use (including days rented at less than fair rental price) D. Amend my federal tax return       E. Amend my federal tax return Total days of rental and personal use. Amend my federal tax return Add lines C and D E. Amend my federal tax return       F. Amend my federal tax return Percentage of expenses allowed for rental. Amend my federal tax return Divide line C by line E     F. Amend my federal tax return   PART II. Amend my federal tax return Allowable Rental Expenses 1. Amend my federal tax return Enter rents received 1. Amend my federal tax return   2a. Amend my federal tax return Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Amend my federal tax return       b. Amend my federal tax return Enter the rental portion of real estate taxes b. Amend my federal tax return       c. Amend my federal tax return Enter the rental portion of deductible casualty and theft losses (see instructions) c. Amend my federal tax return       d. Amend my federal tax return Enter direct rental expenses (see instructions) d. Amend my federal tax return       e. Amend my federal tax return Fully deductible rental expenses. Amend my federal tax return Add lines 2a–2d. Amend my federal tax return Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Amend my federal tax return   3. Amend my federal tax return Subtract line 2e from line 1. Amend my federal tax return If zero or less, enter -0- 3. Amend my federal tax return   4a. Amend my federal tax return Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Amend my federal tax return       b. Amend my federal tax return Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Amend my federal tax return       c. Amend my federal tax return Carryover of operating expenses from 2012 worksheet c. Amend my federal tax return       d. Amend my federal tax return Add lines 4a–4c d. Amend my federal tax return       e. Amend my federal tax return Allowable expenses. Amend my federal tax return Enter the smaller of line 3 or line 4d (see instructions) 4e. Amend my federal tax return   5. Amend my federal tax return Subtract line 4e from line 3. Amend my federal tax return If zero or less, enter -0- 5. Amend my federal tax return   6a. Amend my federal tax return Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Amend my federal tax return       b. Amend my federal tax return Enter the rental portion of depreciation of the dwelling unit b. Amend my federal tax return       c. Amend my federal tax return Carryover of excess casualty losses and depreciation from 2012 worksheet c. Amend my federal tax return       d. Amend my federal tax return Add lines 6a–6c d. Amend my federal tax return       e. Amend my federal tax return Allowable excess casualty and theft losses and depreciation. Amend my federal tax return Enter the smaller of  line 5 or line 6d (see instructions) 6e. Amend my federal tax return   PART III. Amend my federal tax return Carryover of Unallowed Expenses to Next Year 7a. Amend my federal tax return Operating expenses to be carried over to next year. Amend my federal tax return Subtract line 4e from line 4d 7a. Amend my federal tax return   b. Amend my federal tax return Excess casualty and theft losses and depreciation to be carried over to next year. Amend my federal tax return  Subtract line 6e from line 6d b. Amend my federal tax return   Worksheet 9-1 Instructions. Amend my federal tax return Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Amend my federal tax return 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 of  Part II. Amend my federal tax return Line 2a. Amend my federal tax return Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Amend my federal tax return Do not include interest on a loan that did not benefit the dwelling unit. Amend my federal tax return 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. Amend my federal tax return Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Amend my federal tax return Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Amend my federal tax return   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. Amend my federal tax return See the Schedule A instructions. Amend my federal tax return However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Amend my federal tax return See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Amend my federal tax return Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Amend my federal tax return   Note. Amend my federal tax return Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Amend my federal tax return Instead, figure the personal portion on a separate Schedule A. Amend my federal tax return If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. Amend my federal tax return           Line 2c. Amend my federal tax return 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. Amend my federal tax return To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Amend my federal tax return If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Amend my federal tax return On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Amend my federal tax return Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Amend my federal tax return   Note. Amend my federal tax return Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Amend my federal tax return Instead, figure the personal portion on a separate Form 4684. Amend my federal tax return           Line 2d. Amend my federal tax return Enter the total of your rental expenses that are directly related only to the rental activity. Amend my federal tax return These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Amend my federal tax return Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Amend my federal tax return           Line 2e. Amend my federal tax return 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. Amend my federal tax return Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Amend my federal tax return           Line 4b. Amend my federal tax return On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. Amend my federal tax return If you had additional mortgage interest and qualified mortgage insurance premiums 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. Amend my federal tax return Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). Amend my federal tax return           Line 4e. Amend my federal tax return 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. Amend my federal tax return *           Line 6a. Amend my federal tax return To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Amend my federal tax return   A. Amend my federal tax return Enter the amount from Form 4684, line 10       B. Amend my federal tax return Enter the rental portion of line A       C. Amend my federal tax return Enter the amount from line 2c of this worksheet       D. Amend my federal tax return Subtract line C from line B. Amend my federal tax return Enter the result here and on line 6a of this worksheet               Line 6e. Amend my federal tax return 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. Amend my federal tax return * *Allocating the limited deduction. Amend my federal tax return 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. Amend my federal tax return Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Amend my federal tax return Prev  Up  Next   Home   More Online Publications
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Amend my federal tax return 9. Amend my federal tax return   Depletion Table of Contents Introduction Topics - This chapter discusses: Who Can Claim Depletion? Mineral PropertyCost Depletion Percentage Depletion Oil and Gas Wells Mines and Geothermal Deposits Lessor's Gross Income TimberTimber units. Amend my federal tax return Depletion unit. Amend my federal tax return Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. Amend my federal tax return The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. Amend my federal tax return There are two ways of figuring depletion: cost depletion and percentage depletion. Amend my federal tax return For mineral property, you generally must use the method that gives you the larger deduction. Amend my federal tax return For standing timber, you must use cost depletion. Amend my federal tax return Topics - This chapter discusses: Who can claim depletion Mineral property Timber Who Can Claim Depletion? If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. Amend my federal tax return More than one person can have an economic interest in the same mineral deposit or timber. Amend my federal tax return In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Amend my federal tax return You have an economic interest if both the following apply. Amend my federal tax return You have acquired by investment any interest in mineral deposits or standing timber. Amend my federal tax return You have a legal right to income from the extraction of the mineral or cutting of the timber to which you must look for a return of your capital investment. Amend my federal tax return A contractual relationship that allows you an economic or monetary advantage from products of the mineral deposit or standing timber is not, in itself, an economic interest. Amend my federal tax return A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. Amend my federal tax return Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax. Amend my federal tax return Basis adjustment for depletion. Amend my federal tax return   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater. Amend my federal tax return Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). Amend my federal tax return For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. Amend my federal tax return You can treat two or more separate interests as one property or as separate properties. Amend my federal tax return See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral interests. Amend my federal tax return There are two ways of figuring depletion on mineral property. Amend my federal tax return Cost depletion. Amend my federal tax return Percentage depletion. Amend my federal tax return Generally, you must use the method that gives you the larger deduction. Amend my federal tax return However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. Amend my federal tax return See Oil and Gas Wells , later. Amend my federal tax return Cost Depletion To figure cost depletion you must first determine the following. Amend my federal tax return The property's basis for depletion. Amend my federal tax return The total recoverable units of mineral in the property's natural deposit. Amend my federal tax return The number of units of mineral sold during the tax year. Amend my federal tax return Basis for depletion. Amend my federal tax return   To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. Amend my federal tax return Amounts recoverable through: Depreciation deductions, Deferred expenses (including deferred exploration and development costs), and Deductions other than depletion. Amend my federal tax return The residual value of land and improvements at the end of operations. Amend my federal tax return The cost or value of land acquired for purposes other than mineral production. Amend my federal tax return Adjusted basis. Amend my federal tax return   The adjusted basis of your property is your original cost or other basis, plus certain additions and improvements, and minus certain deductions such as depletion allowed or allowable and casualty losses. Amend my federal tax return Your adjusted basis can never be less than zero. Amend my federal tax return See Publication 551, Basis of Assets, for more information on adjusted basis. Amend my federal tax return Total recoverable units. Amend my federal tax return   The total recoverable units is the sum of the following. Amend my federal tax return The number of units of mineral remaining at the end of the year (including units recovered but not sold). Amend my federal tax return The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). Amend my federal tax return   You must estimate or determine recoverable units (tons, pounds, ounces, barrels, thousands of cubic feet, or other measure) of mineral products using the current industry method and the most accurate and reliable information you can obtain. Amend my federal tax return You must include ores and minerals that are developed, in sight, blocked out, or assured. Amend my federal tax return You must also include probable or prospective ores or minerals that are believed to exist based on good evidence. Amend my federal tax return But see Elective safe harbor for owners of oil and gas property , later. Amend my federal tax return Number of units sold. Amend my federal tax return   You determine the number of units sold during the tax year based on your method of accounting. Amend my federal tax return Use the following table to make this determination. Amend my federal tax return    IF you  use . Amend my federal tax return . Amend my federal tax return . Amend my federal tax return THEN the units sold during the year are . Amend my federal tax return . Amend my federal tax return . Amend my federal tax return The cash method of accounting The units sold for which you receive payment during the tax year (regardless of the year of sale). Amend my federal tax return An accrual method of accounting The units sold based on your inventories and method of accounting for inventory. Amend my federal tax return   The number of units sold during the tax year does not include any for which depletion deductions were allowed or allowable in earlier years. Amend my federal tax return Figuring the cost depletion deduction. Amend my federal tax return   Once you have figured your property's basis for depletion, the total recoverable units, and the number of units sold during the tax year, you can figure your cost depletion deduction by taking the following steps. Amend my federal tax return Step Action Result 1 Divide your property's basis for depletion by total recoverable units. Amend my federal tax return Rate per unit. Amend my federal tax return 2 Multiply the rate per unit by units sold during the tax year. Amend my federal tax return Cost depletion deduction. Amend my federal tax return You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. Amend my federal tax return Elective safe harbor for owners of oil and gas property. Amend my federal tax return   Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. Amend my federal tax return If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undeveloped). Amend my federal tax return For details, see Revenue Procedure 2004-19 on page 563 of Internal Revenue Bulletin 2004-10, available at www. Amend my federal tax return irs. Amend my federal tax return gov/pub/irs-irbs/irb04-10. Amend my federal tax return pdf. Amend my federal tax return   To make the election, attach a statement to your timely filed (including extensions) original return for the first tax year for which the safe harbor is elected. Amend my federal tax return The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. Amend my federal tax return The election, if made, is effective for the tax year in which it is made and all later years. Amend my federal tax return It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. Amend my federal tax return Once revoked, it cannot be re-elected for the next 5 years. Amend my federal tax return Percentage Depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. Amend my federal tax return The rates to be used and other rules for oil and gas wells are discussed later under Independent Producers and Royalty Owners and under Natural Gas Wells . Amend my federal tax return Rates and other rules for percentage depletion of other specific minerals are found later in Mines and Geothermal Deposits . Amend my federal tax return Gross income. Amend my federal tax return   When figuring percentage depletion, subtract from your gross income from the property the following amounts. Amend my federal tax return Any rents or royalties you paid or incurred for the property. Amend my federal tax return The part of any bonus you paid for a lease on the property allocable to the product sold (or that otherwise gives rise to gross income) for the tax year. Amend my federal tax return A bonus payment includes amounts you paid as a lessee to satisfy a production payment retained by the lessor. Amend my federal tax return   Use the following fraction to figure the part of the bonus you must subtract. Amend my federal tax return No. Amend my federal tax return of units sold in the tax year Recoverable units from the property × Bonus Payments For oil and gas wells and geothermal deposits, more information about the definition of gross income from the property is under Oil and Gas Wells , later. Amend my federal tax return For other property, more information about the definition of gross income from the property is under Mines and Geothermal Deposits , later. Amend my federal tax return Taxable income limit. Amend my federal tax return   The percentage depletion deduction generally cannot be more than 50% (100% for oil and gas property) of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction. Amend my federal tax return   Taxable income from the property means gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to mining processes, including mining transportation. Amend my federal tax return These deductible items include, but are not limited to, the following. Amend my federal tax return Operating expenses. Amend my federal tax return Certain selling expenses. Amend my federal tax return Administrative and financial overhead. Amend my federal tax return Depreciation. Amend my federal tax return Intangible drilling and development costs. Amend my federal tax return Exploration and development expenditures. Amend my federal tax return Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. Amend my federal tax return Losses sustained. Amend my federal tax return   The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. Amend my federal tax return Do not deduct any net operating loss deduction from the gross income from the property. Amend my federal tax return Corporations do not deduct charitable contributions from the gross income from the property. Amend my federal tax return If, during the year, you dispose of an item of section 1245 property that was used in connection with mineral property, reduce any allowable deduction for mining expenses by the part of any gain you must report as ordinary income that is allocable to the mineral property. Amend my federal tax return See section 1. Amend my federal tax return 613-5(b)(1) of the regulations for information on how to figure the ordinary gain allocable to the property. Amend my federal tax return Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies. Amend my federal tax return You are either an independent producer or a royalty owner. Amend my federal tax return The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. Amend my federal tax return If you are an independent producer or royalty owner, see Independent Producers and Royalty Owners , next. Amend my federal tax return For information on the depletion deduction for wells that produce natural gas that is either sold under a fixed contract or produced from geopressured brine, see Natural Gas Wells , later. Amend my federal tax return Independent Producers and Royalty Owners If you are an independent producer or royalty owner, you figure percentage depletion using a rate of 15% of the gross income from the property based on your average daily production of domestic crude oil or domestic natural gas up to your depletable oil or natural gas quantity. Amend my federal tax return However, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. Amend my federal tax return For information on figuring the deduction, see Figuring percentage depletion , later. Amend my federal tax return Refiners who cannot claim percentage depletion. Amend my federal tax return   You cannot claim percentage depletion if you or a related person refine crude oil and you and the related person refined more than 75,000 barrels on any day during the tax year based on average (rather than actual) daily refinery runs for the tax year. Amend my federal tax return The average daily refinery run is computed by dividing total refinery runs for the tax year by the total number of days in the tax year. Amend my federal tax return Related person. Amend my federal tax return   You and another person are related persons if either of you holds a significant ownership interest in the other person or if a third person holds a significant ownership interest in both of you. Amend my federal tax return For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. Amend my federal tax return A partnership and a trust are related persons if one person holds a significant ownership interest in each of them. Amend my federal tax return For purposes of the related person rules, significant ownership interest means direct or indirect ownership of 5% or more in any one of the following. Amend my federal tax return The value of the outstanding stock of a corporation. Amend my federal tax return The interest in the profits or capital of a partnership. Amend my federal tax return The beneficial interests in an estate or trust. Amend my federal tax return Any interest owned by or for a corporation, partnership, trust, or estate is considered to be owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries. Amend my federal tax return Retailers who cannot claim percentage depletion. Amend my federal tax return   You cannot claim percentage depletion if both the following apply. Amend my federal tax return You sell oil or natural gas or their by-products directly or through a related person in any of the following situations. Amend my federal tax return Through a retail outlet operated by you or a related person. Amend my federal tax return To any person who is required under an agreement with you or a related person to use a trademark, trade name, or service mark or name owned by you or a related person in marketing or distributing oil, natural gas, or their by-products. Amend my federal tax return To any person given authority under an agreement with you or a related person to occupy any retail outlet owned, leased, or controlled by you or a related person. Amend my federal tax return The combined gross receipts from sales (not counting resales) of oil, natural gas, or their by-products by all retail outlets taken into account in (1) are more than $5 million for the tax year. Amend my federal tax return   For the purpose of determining if this rule applies, do not count the following. Amend my federal tax return Bulk sales (sales in very large quantities) of oil or natural gas to commercial or industrial users. Amend my federal tax return Bulk sales of aviation fuels to the Department of Defense. Amend my federal tax return Sales of oil or natural gas or their by-products outside the United States if none of your domestic production or that of a related person is exported during the tax year or the prior tax year. Amend my federal tax return Related person. Amend my federal tax return   To determine if you and another person are related persons, see Related person under Refiners who cannot claim percentage depletion, earlier. Amend my federal tax return Sales through a related person. Amend my federal tax return   You are considered to be selling through a related person if any sale by the related person produces gross income from which you may benefit because of your direct or indirect ownership interest in the person. Amend my federal tax return   You are not considered to be selling through a related person who is a retailer if all the following apply. Amend my federal tax return You do not have a significant ownership interest in the retailer. Amend my federal tax return You sell your production to persons who are not related to either you or the retailer. Amend my federal tax return The retailer does not buy oil or natural gas from your customers or persons related to your customers. Amend my federal tax return There are no arrangements for the retailer to acquire oil or natural gas you produced for resale or made available for purchase by the retailer. Amend my federal tax return Neither you nor the retailer knows of or controls the final disposition of the oil or natural gas you sold or the original source of the petroleum products the retailer acquired for resale. Amend my federal tax return Transferees who cannot claim percentage depletion. Amend my federal tax return   You cannot claim percentage depletion if you received your interest in a proven oil or gas property by transfer after 1974 and before October 12, 1990. Amend my federal tax return For a definition of the term “transfer,” see section 1. Amend my federal tax return 613A-7(n) of the regulations. Amend my federal tax return For a definition of the term “interest in proven oil or gas property,” see section 1. Amend my federal tax return 613A-7(p) of the regulations. Amend my federal tax return Figuring percentage depletion. Amend my federal tax return   Generally, as an independent producer or royalty owner, you figure your percentage depletion by computing your average daily production of domestic oil or gas and comparing it to your depletable oil or gas quantity. Amend my federal tax return If your average daily production does not exceed your depletable oil or gas quantity, you figure your percentage depletion by multiplying the gross income from the oil or gas property (defined later) by 15%. Amend my federal tax return If your average daily production of domestic oil or gas exceeds your depletable oil or gas quantity, you must make an allocation as explained later under Average daily production. Amend my federal tax return   In addition, there is a limit on the percentage depletion deduction. Amend my federal tax return See Taxable income limit , later. Amend my federal tax return Average daily production. Amend my federal tax return   Figure your average daily production by dividing your total domestic production of oil or gas for the tax year by the number of days in your tax year. Amend my federal tax return Partial interest. Amend my federal tax return   If you have a partial interest in the production from a property, figure your share of the production by multiplying total production from the property by your percentage of interest in the revenues from the property. Amend my federal tax return   You have a partial interest in the production from a property if you have a net profits interest in the property. Amend my federal tax return To figure the share of production for your net profits interest, you must first determine your percentage participation (as measured by the net profits) in the gross revenue from the property. Amend my federal tax return To figure this percentage, you divide the income you receive for your net profits interest by the gross revenue from the property. Amend my federal tax return Then multiply the total production from the property by your percentage participation to figure your share of the production. Amend my federal tax return Example. Amend my federal tax return Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. Amend my federal tax return During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. Amend my federal tax return Javier had expenses of $90,000 attributable to the property. Amend my federal tax return The property generated a net profit of $110,000 ($200,000 − $90,000). Amend my federal tax return Pablo received income of $22,000 ($110,000 × . Amend my federal tax return 20) for his net profits interest. Amend my federal tax return Pablo determined his percentage participation to be 11% by dividing $22,000 (the income he received) by $200,000 (the gross revenue from the property). Amend my federal tax return Pablo determined his share of the oil production to be 1,100 barrels (10,000 barrels × 11%). Amend my federal tax return Depletable oil or natural gas quantity. Amend my federal tax return   Generally, your depletable oil quantity is 1,000 barrels. Amend my federal tax return Your depletable natural gas quantity is 6,000 cubic feet multiplied by the number of barrels of your depletable oil quantity that you choose to apply. Amend my federal tax return If you claim depletion on both oil and natural gas, you must reduce your depletable oil quantity (1,000 barrels) by the number of barrels you use to figure your depletable natural gas quantity. Amend my federal tax return Example. Amend my federal tax return You have both oil and natural gas production. Amend my federal tax return To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1000-barrel depletable oil quantity. Amend my federal tax return Your depletable natural gas quantity is 2. Amend my federal tax return 16 million cubic feet of gas (360 × 6000). Amend my federal tax return You must reduce your depletable oil quantity to 640 barrels (1000 − 360). Amend my federal tax return If you have production from marginal wells, see section 613A(c)(6) of the Internal Revenue Code to figure your depletable oil or natural gas quantity. Amend my federal tax return Also, see Notice 2012-50, available at www. Amend my federal tax return irs. Amend my federal tax return gov/irb/2012–31_IRB/index. Amend my federal tax return html. Amend my federal tax return Business entities and family members. Amend my federal tax return   You must allocate the depletable oil or gas quantity among the following related persons in proportion to each entity's or family member's production of domestic oil or gas for the year. Amend my federal tax return Corporations, trusts, and estates if 50% or more of the beneficial interest is owned by the same or related persons (considering only persons that own at least 5% of the beneficial interest). Amend my federal tax return You and your spouse and minor children. Amend my federal tax return A related person is anyone mentioned in the related persons discussion under Nondeductible loss in chapter 2 of Publication 544, except that for purposes of this allocation, item (1) in that discussion includes only an individual, his or her spouse, and minor children. Amend my federal tax return Controlled group of corporations. Amend my federal tax return   Members of the same controlled group of corporations are treated as one taxpayer when figuring the depletable oil or natural gas quantity. Amend my federal tax return They share the depletable quantity. Amend my federal tax return A controlled group of corporations is defined in section 1563(a) of the Internal Revenue Code, except that, for this purpose, the stock ownership requirement in that definition is “more than 50%” rather than “at least 80%. Amend my federal tax return ” Gross income from the property. Amend my federal tax return   For purposes of percentage depletion, gross income from the property (in the case of oil and gas wells) is the amount you receive from the sale of the oil or gas in the immediate vicinity of the well. Amend my federal tax return If you do not sell the oil or gas on the property, but manufacture or convert it into a refined product before sale or transport it before sale, the gross income from the property is the representative market or field price (RMFP) of the oil or gas, before conversion or transportation. Amend my federal tax return   If you sold gas after you removed it from the premises for a price that is lower than the RMFP, determine gross income from the property for percentage depletion purposes without regard to the RMFP. Amend my federal tax return   Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property. Amend my federal tax return Average daily production exceeds depletable quantities. Amend my federal tax return   If your average daily production for the year is more than your depletable oil or natural gas quantity, figure your allowance for depletion for each domestic oil or natural gas property as follows. Amend my federal tax return Figure your average daily production of oil or natural gas for the year. Amend my federal tax return Figure your depletable oil or natural gas quantity for the year. Amend my federal tax return Figure depletion for all oil or natural gas produced from the property using a percentage depletion rate of 15%. Amend my federal tax return Multiply the result figured in (3) by a fraction, the numerator of which is the result figured in (2) and the denominator of which is the result figured in (1). Amend my federal tax return This is your depletion allowance for that property for the year. Amend my federal tax return Taxable income limit. Amend my federal tax return   If you are an independent producer or royalty owner of oil and gas, your deduction for percentage depletion is limited to the smaller of the following. Amend my federal tax return 100% of your taxable income from the property figured without the deduction for depletion and the deduction for domestic production activities under section 199 of the Internal Revenue Code. Amend my federal tax return For a definition of taxable income from the property, see Taxable income limit , earlier, under Mineral Property. Amend my federal tax return 65% of your taxable income from all sources, figured without the depletion allowance, the deduction for domestic production activities, any net operating loss carryback, and any capital loss carryback. Amend my federal tax return You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. Amend my federal tax return Add it to your depletion allowance (before applying any limits) for the following year. Amend my federal tax return Partnerships and S Corporations Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. Amend my federal tax return (However, see Electing large partnerships must figure depletion allowance , later. Amend my federal tax return ) Each partner or shareholder must decide whether to use cost or percentage depletion. Amend my federal tax return If a partner or shareholder uses percentage depletion, he or she must apply the 65%-of-taxable-income limit using his or her taxable income from all sources. Amend my federal tax return Partner's or shareholder's adjusted basis. Amend my federal tax return   The partnership or S corporation must allocate to each partner or shareholder his or her share of the adjusted basis of each oil or gas property held by the partnership or S corporation. Amend my federal tax return The partnership or S corporation makes the allocation as of the date it acquires the oil or gas property. Amend my federal tax return   Each partner's share of the adjusted basis of the oil or gas property generally is figured according to that partner's interest in partnership capital. Amend my federal tax return However, in some cases, it is figured according to the partner's interest in partnership income. Amend my federal tax return   The partnership or S corporation adjusts the partner's or shareholder's share of the adjusted basis of the oil and gas property for any capital expenditures made for the property and for any change in partnership or S corporation interests. Amend my federal tax return Recordkeeping. Amend my federal tax return Each partner or shareholder must separately keep records of his or her share of the adjusted basis in each oil and gas property of the partnership or S corporation. Amend my federal tax return The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. Amend my federal tax return The partner or shareholder must use that reduced adjusted basis to figure cost depletion or his or her gain or loss if the partnership or S corporation disposes of the property. Amend my federal tax return Reporting the deduction. Amend my federal tax return   Information that you, as a partner or shareholder, use to figure your depletion deduction on oil and gas properties is reported by the partnership or S corporation on Schedule K-1 (Form 1065) or on Schedule K-1 (Form 1120S). Amend my federal tax return Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). Amend my federal tax return The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or royalty properties. Amend my federal tax return The instructions for Schedule E explain where to report this income or loss and whether you need to file either of the following forms. Amend my federal tax return Form 6198, At-Risk Limitations. Amend my federal tax return Form 8582, Passive Activity Loss Limitations. Amend my federal tax return Electing large partnerships must figure depletion allowance. Amend my federal tax return   An electing large partnership, rather than each partner, generally must figure the depletion allowance. Amend my federal tax return The partnership figures the depletion allowance without taking into account the 65-percent-of-taxable-income limit and the depletable oil or natural gas quantity. Amend my federal tax return Also, the adjusted basis of a partner's interest in the partnership is not affected by the depletion allowance. Amend my federal tax return   An electing large partnership is one that meets both the following requirements. Amend my federal tax return The partnership had 100 or more partners in the preceding year. Amend my federal tax return The partnership chooses to be an electing large partnership. Amend my federal tax return Disqualified persons. Amend my federal tax return   An electing large partnership does not figure the depletion allowance of its partners that are disqualified persons. Amend my federal tax return Disqualified persons must figure it themselves, as explained earlier. Amend my federal tax return   All the following are disqualified persons. Amend my federal tax return Refiners who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Amend my federal tax return Retailers who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Amend my federal tax return Any partner whose average daily production of domestic crude oil and natural gas is more than 500 barrels during the tax year in which the partnership tax year ends. Amend my federal tax return Average daily production is discussed earlier. Amend my federal tax return Natural Gas Wells You can use percentage depletion for a well that produces natural gas that is either Sold under a fixed contract, or Produced from geopressured brine. Amend my federal tax return Natural gas sold under a fixed contract. Amend my federal tax return   Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. Amend my federal tax return This is domestic natural gas sold by the producer under a contract that does not provide for a price increase to reflect any increase in the seller's tax liability because of the repeal of percentage depletion for gas. Amend my federal tax return The contract must have been in effect from February 1, 1975, until the date of sale of the gas. Amend my federal tax return Price increases after February 1, 1975, are presumed to take the increase in tax liability into account unless demonstrated otherwise by clear and convincing evidence. Amend my federal tax return Natural gas from geopressured brine. Amend my federal tax return   Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. Amend my federal tax return This is natural gas that is both the following. Amend my federal tax return Produced from a well you began to drill after September 1978 and before 1984. Amend my federal tax return Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. Amend my federal tax return Mines and Geothermal Deposits Certain mines, wells, and other natural deposits, including geothermal deposits, qualify for percentage depletion. Amend my federal tax return Mines and other natural deposits. Amend my federal tax return   For a natural deposit, the percentage of your gross income from the property that you can deduct as depletion depends on the type of deposit. Amend my federal tax return   The following is a list of the percentage depletion rates for the more common minerals. Amend my federal tax return DEPOSITS RATE Sulphur, uranium, and, if from deposits in the United States, asbestos, lead ore, zinc ore, nickel ore, and mica 22% Gold, silver, copper, iron ore, and certain oil shale, if from deposits in the United States 15% Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone, and carbon dioxide produced from a well 14% Coal, lignite, and sodium chloride 10% Clay and shale used or sold for use in making sewer pipe or bricks or used or sold for use as sintered or burned lightweight aggregates 7½% Clay used or sold for use in making drainage and roofing tile, flower pots, and kindred products, and gravel, sand, and stone (other than stone used or sold for use by a mine owner or operator as dimension or ornamental stone) 5%   You can find a complete list of minerals and their percentage depletion rates in section 613(b) of the Internal Revenue Code. Amend my federal tax return Corporate deduction for iron ore and coal. Amend my federal tax return   The percentage depletion deduction of a corporation for iron ore and coal (including lignite) is reduced by 20% of: The percentage depletion deduction for the tax year (figured without this reduction), minus The adjusted basis of the property at the close of the tax year (figured without the depletion deduction for the tax year). Amend my federal tax return Gross income from the property. Amend my federal tax return   For property other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. Amend my federal tax return Mining includes all the following. Amend my federal tax return Extracting ores or minerals from the ground. Amend my federal tax return Applying certain treatment processes described later. Amend my federal tax return Transporting ores or minerals (generally, not more than 50 miles) from the point of extraction to the plants or mills in which the treatment processes are applied. Amend my federal tax return Excise tax. Amend my federal tax return   Gross income from mining includes the separately stated excise tax received by a mine operator from the sale of coal to compensate the operator for the excise tax the mine operator must pay to finance black lung benefits. Amend my federal tax return Extraction. Amend my federal tax return   Extracting ores or minerals from the ground includes extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. Amend my federal tax return This does not apply to extraction from waste or residue of prior mining by the purchaser of the waste or residue or the purchaser of the rights to extract ores or minerals from the waste or residue. Amend my federal tax return Treatment processes. Amend my federal tax return   The processes included as mining depend on the ore or mineral mined. Amend my federal tax return To qualify as mining, the treatment processes must be applied by the mine owner or operator. Amend my federal tax return For a listing of treatment processes considered as mining, see section 613(c)(4) of the Internal Revenue Code and the related regulations. Amend my federal tax return Transportation of more than 50 miles. Amend my federal tax return   If the IRS finds that the ore or mineral must be transported more than 50 miles to plants or mills to be treated because of physical and other requirements, the additional authorized transportation is considered mining and included in the computation of gross income from mining. Amend my federal tax return    If you wish to include transportation of more than 50 miles in the computation of gross income from mining, request an advance ruling from the IRS. Amend my federal tax return Include in the request the facts about the physical and other requirements that prevented the construction and operation of the plant within 50 miles of the point of extraction. Amend my federal tax return For more information about requesting an advance ruling, see Revenue Procedure 2013-1, available at www. Amend my federal tax return irs. Amend my federal tax return gov/irb/2013-01_IRB/ar11. Amend my federal tax return html. Amend my federal tax return Disposal of coal or iron ore. Amend my federal tax return   You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. Amend my federal tax return You disposed of it after holding it for more than 1 year. Amend my federal tax return You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. Amend my federal tax return Treat any gain on the disposition as a capital gain. Amend my federal tax return Disposal to related person. Amend my federal tax return   This rule does not apply if you dispose of the coal or iron ore to one of the following persons. Amend my federal tax return A related person (as listed in chapter 2 of Publication 544). Amend my federal tax return A person owned or controlled by the same interests that own or control you. Amend my federal tax return Geothermal deposits. Amend my federal tax return   Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. Amend my federal tax return A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liquid or vapor. Amend my federal tax return For percentage depletion purposes, a geothermal deposit is not considered a gas well. Amend my federal tax return   Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. Amend my federal tax return See Gross income from the property , earlier, under Oil and Gas Wells. Amend my federal tax return Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income from the property. Amend my federal tax return Lessor's Gross Income In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Amend my federal tax return A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. Amend my federal tax return Bonuses and advanced royalties. Amend my federal tax return   Bonuses and advanced royalties are payments a lessee makes before production to a lessor for the grant of rights in a lease or for minerals, gas, or oil to be extracted from leased property. Amend my federal tax return If you are the lessor, your income from bonuses and advanced royalties received is subject to an allowance for depletion, as explained in the next two paragraphs. Amend my federal tax return Figuring cost depletion. Amend my federal tax return   To figure cost depletion on a bonus, multiply your adjusted basis in the property by a fraction, the numerator of which is the bonus and the denominator of which is the total bonus and royalties expected to be received. Amend my federal tax return To figure cost depletion on advanced royalties, use the computation explained earlier under Cost Depletion , treating the number of units for which the advanced royalty is received as the number of units sold. Amend my federal tax return Figuring percentage depletion. Amend my federal tax return   In the case of mines, wells, and other natural deposits other than gas, oil, or geothermal property, you may use the percentage rates discussed earlier under Mines and Geothermal Deposits . Amend my federal tax return Any bonus or advanced royalty payments are generally part of the gross income from the property to which the rates are applied in making the calculation. Amend my federal tax return However, for oil, gas, or geothermal property, gross income does not include lease bonuses, advanced royalties, or other amounts payable without regard to production from the property. Amend my federal tax return Ending the lease. Amend my federal tax return   If you receive a bonus on a lease that ends or is abandoned before you derive any income from mineral extraction, include in income the depletion deduction you took. Amend my federal tax return Do this for the year the lease ends or is abandoned. Amend my federal tax return Also increase your adjusted basis in the property to restore the depletion deduction you previously subtracted. Amend my federal tax return   For advanced royalties, include in income the depletion claimed on minerals for which the advanced royalties were paid if the minerals were not produced before the lease ended. Amend my federal tax return Include this amount in income for the year the lease ends. Amend my federal tax return Increase your adjusted basis in the property by the amount you include in income. Amend my federal tax return Delay rentals. Amend my federal tax return   These are payments for deferring development of the property. Amend my federal tax return Since delay rentals are ordinary rent, they are ordinary income that is not subject to depletion. Amend my federal tax return These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. Amend my federal tax return Timber You can figure timber depletion only by the cost method. Amend my federal tax return Percentage depletion does not apply to timber. Amend my federal tax return Base your depletion on your cost or other basis in the timber. Amend my federal tax return Your cost does not include the cost of land or any amounts recoverable through depreciation. Amend my federal tax return Depletion takes place when you cut standing timber. Amend my federal tax return You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation. Amend my federal tax return Figuring cost depletion. Amend my federal tax return   To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. Amend my federal tax return Timber units. Amend my federal tax return   When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. Amend my federal tax return You measure the timber using board feet, log scale, cords, or other units. Amend my federal tax return If you later determine that you have more or less units of timber, you must adjust the original estimate. Amend my federal tax return   The term “timber property” means your economic interest in standing timber in each tract or block representing a separate timber account. Amend my federal tax return Depletion unit. Amend my federal tax return   You figure your depletion unit each year by taking the following steps. Amend my federal tax return Determine your cost or adjusted basis of the timber on hand at the beginning of the year. Amend my federal tax return Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property. Amend my federal tax return Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. Amend my federal tax return Figure the number of timber units to take into account by adding the number of timber units acquired during the year to the number of timber units on hand in the account at the beginning of the year and then adding (or subtracting) any correction to the estimate of the number of timber units remaining in the account. Amend my federal tax return Divide the result of (2) by the result of (3). Amend my federal tax return This is your depletion unit. Amend my federal tax return Example. Amend my federal tax return You bought a timber tract for $160,000 and the land was worth as much as the timber. Amend my federal tax return Your basis for the timber is $80,000. Amend my federal tax return Based on an estimated one million board feet (1,000 MBF) of standing timber, you figure your depletion unit to be $80 per MBF ($80,000 ÷ 1,000). Amend my federal tax return If you cut 500 MBF of timber, your depletion allowance would be $40,000 (500 MBF × $80). Amend my federal tax return When to claim depletion. Amend my federal tax return   Claim your depletion allowance as a deduction in the year of sale or other disposition of the products cut from the timber, unless you choose to treat the cutting of timber as a sale or exchange (explained below). Amend my federal tax return Include allowable depletion for timber products not sold during the tax year the timber is cut as a cost item in the closing inventory of timber products for the year. Amend my federal tax return The inventory is your basis for determining gain or loss in the tax year you sell the timber products. Amend my federal tax return Example. Amend my federal tax return The facts are the same as in the previous example except that you sold only half of the timber products in the cutting year. Amend my federal tax return You would deduct $20,000 of the $40,000 depletion that year. Amend my federal tax return You would add the remaining $20,000 depletion to your closing inventory of timber products. Amend my federal tax return Electing to treat the cutting of timber as a sale or exchange. Amend my federal tax return   You can elect, under certain circumstances, to treat the cutting of timber held for more than 1 year as a sale or exchange. Amend my federal tax return You must make the election on your income tax return for the tax year to which it applies. Amend my federal tax return If you make this election, subtract the adjusted basis for depletion from the fair market value of the timber on the first day of the tax year in which you cut it to figure the gain or loss on the cutting. Amend my federal tax return You generally report the gain as long-term capital gain. Amend my federal tax return The fair market value then becomes your basis for figuring your ordinary gain or loss on the sale or other disposition of the products cut from the timber. Amend my federal tax return For more information, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Amend my federal tax return   You may revoke an election to treat the cutting of timber as a sale or exchange without IRS's consent. Amend my federal tax return The prior election (and revocation) is disregarded for purposes of making a subsequent election. Amend my federal tax return See Form T (Timber), Forest Activities Schedule, for more information. Amend my federal tax return Form T. Amend my federal tax return   Complete and attach Form T (Timber) to your income tax return if you claim a deduction for timber depletion, choose to treat the cutting of timber as a sale or exchange, or make an outright sale of timber. Amend my federal tax return Prev  Up  Next   Home   More Online Publications