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Easy tax forms Publication 597 - Main Content Table of Contents Application of Treaty Personal Services Pensions, Annuities, Social Security, and AlimonyRoth IRAs. Easy tax forms Tax-deferred plans. Easy tax forms Investment Income From Canadian Sources Other Income Charitable ContributionsQualified charities. Easy tax forms Income Tax Credits Competent Authority Assistance How To Get Tax HelpText of Treaty U. Easy tax forms S. Easy tax forms Taxation Canadian Taxation Application of Treaty The benefits of the income tax treaty are generally provided on the basis of residence for income tax purposes. Easy tax forms That is, a person who is recognized as a resident of the United States who has income from Canada, will often pay less income tax to Canada on that income than if no treaty was in effect. Easy tax forms Article IV provides definitions of residents of Canada and the United States, and provides specific criteria for applying the treaty in cases where a taxpayer is considered by both countries to be a resident. Easy tax forms Saving clause. Easy tax forms   In most instances, a treaty does not affect the right of a country to tax its own residents (including those who are U. Easy tax forms S. Easy tax forms citizens) or of the United States to tax its residents or citizens (including U. Easy tax forms S. Easy tax forms citizens who are residents of the foreign country). Easy tax forms This provision is known as the “saving clause. Easy tax forms ”   For example, an individual who is a U. Easy tax forms S. Easy tax forms citizen and a resident of Canada may have dividend income from a U. Easy tax forms S. Easy tax forms corporation. Easy tax forms The treaty provides a maximum rate of 15% on dividends received by a resident of Canada from sources in the United States. Easy tax forms Even though a resident of Canada, the individual is a U. Easy tax forms S. Easy tax forms citizen and the saving clause overrides the treaty article that limits the U. Easy tax forms S. Easy tax forms tax to 15%. Easy tax forms    Exceptions to the saving clause can be found in Article XXIX, paragraph 3. Easy tax forms Treaty-based position. Easy tax forms   If you take the position that any U. Easy tax forms S. Easy tax forms tax is overruled or otherwise reduced by a U. Easy tax forms S. Easy tax forms treaty (a treaty-based position), you generally must disclose that position on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and attach it to your return. Easy tax forms Personal Services A U. Easy tax forms S. Easy tax forms citizen or resident who is temporarily present in Canada during the tax year is exempt from Canadian income taxes on pay for services performed, or remittances received from the United States, if the citizen or resident qualifies under one of the treaty exemption provisions set out below. Easy tax forms Income from employment (Article XV). Easy tax forms   Income U. Easy tax forms S. Easy tax forms residents receive for the performance of dependent personal services in Canada (except as public entertainers) is exempt from Canadian tax if it is not more than $10,000 in Canadian currency for the year. Easy tax forms If it is more than $10,000 for the year, it is exempt only if: The residents are present in Canada for no more than 183 days in any 12-month period beginning or ending in the year concerned, and The income is not paid by, or on behalf of, a Canadian resident and is not borne by a permanent establishment in Canada. Easy tax forms    Whether there is a permanent establishment in Canada is determined by the rules set forth in Article V. Easy tax forms Example. Easy tax forms You are a U. Easy tax forms S. Easy tax forms resident employed under an 8-month contract with a Canadian firm to install equipment in their Montreal plant. Easy tax forms During the calendar year you were physically present in Canada for 179 days and were paid $16,500 (Canadian) for your services. Easy tax forms Although you were in Canada for not more than 183 days during the year, your income is not exempt from Canadian income tax because it was paid by a Canadian resident and was more than $10,000 (Canadian) for the year. Easy tax forms Pay received by a U. Easy tax forms S. Easy tax forms resident for work regularly done in more than one country as an employee on a ship, aircraft, motor vehicle, or train operated by a U. Easy tax forms S. Easy tax forms resident is exempt from Canadian tax. Easy tax forms Income from self-employment (Article VII). Easy tax forms   Income from services performed (other than those performed as an employee) are taxed in Canada if they are attributable to a permanent establishment in Canada. Easy tax forms This income is treated as business profits, and deductions similar to those allowed under U. Easy tax forms S. Easy tax forms law are allowable. Easy tax forms   If you carry on (or have carried on) business in both Canada and the United States, the business profits are attributable to each country based on the profits that the permanent establishment might be expected to make if it were a distinct and separate person engaged in the same or similar activities. Easy tax forms The business profits attributable to the permanent establishment include only those profits derived from assets used, risks assumed, and activities performed by the permanent establishment. Easy tax forms   You may be considered to have a permanent establishment if you meet certain conditions. Easy tax forms For more information, see Article V (Permanent Establishment) and Article VII (Business Profits). Easy tax forms Public entertainers (Article XVI). Easy tax forms   The provisions under income from employment or income from self-employment do not apply to public entertainers (such as theater, motion picture, radio, or television artistes, musicians, or athletes) from the United States who receive more than $15,000 in gross receipts in Canadian currency, including reimbursed expenses, from their entertainment activities in Canada during the calendar year. Easy tax forms However, this provision for public entertainers does not apply (and the other provisions will apply) to athletes participating in team sports in leagues with regularly scheduled games in both the United States and Canada. Easy tax forms Compensation paid by the U. Easy tax forms S. Easy tax forms Government (Article XIX). Easy tax forms   Wages, salaries, and similar income (other than pensions) paid to a U. Easy tax forms S. Easy tax forms citizen by the United States or any of its agencies, instrumentalities, or political subdivisions for discharging governmental functions are exempt from Canadian income tax. Easy tax forms   The exemption does not apply to pay for services performed in connection with any trade or business carried on for profit by the United States, or any of its agencies, instrumentalities, or political subdivisions. Easy tax forms Students and apprentices (Article XX). Easy tax forms   A full-time student, apprentice, or business trainee who is in Canada to study or acquire business experience is exempt from Canadian income tax on remittances received from any source outside Canada for maintenance, education, or training. Easy tax forms The recipient must be or must have been a U. Easy tax forms S. Easy tax forms resident immediately before visiting Canada. Easy tax forms   An apprentice or business trainee can claim this exemption only for a period of one year from the date the individual first arrived in Canada for the purpose of training. Easy tax forms Pensions, Annuities, Social Security, and Alimony Under Article XVIII, pensions and annuities from Canadian sources paid to U. Easy tax forms S. Easy tax forms residents are subject to tax by Canada, but the tax is limited to 15% of the gross amount (if a periodic pension payment) or of the taxable amount (if an annuity). Easy tax forms Canadian pensions and annuities paid to U. Easy tax forms S. Easy tax forms residents may be taxed by the United States, but the amount of any pension included in income for U. Easy tax forms S. Easy tax forms tax purposes may not be more than the amount that would be included in income in Canada if the recipient were a Canadian resident. Easy tax forms Pensions. Easy tax forms   A pension includes any payment under a pension or other retirement arrangement, Armed Forces retirement pay, war veterans pensions and allowances, and payments under a sickness, accident, or disability plan. Easy tax forms It includes pensions paid by private employers and the government for services rendered. Easy tax forms   Pensions also include payments from individual retirement arrangements (IRAs) in the United States, registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) in Canada. Easy tax forms   Pensions do not include social security benefits. Easy tax forms Roth IRAs. Easy tax forms   A distribution from a Roth IRA is exempt from Canadian tax to the extent it would be exempt from U. Easy tax forms S. Easy tax forms tax if paid to a U. Easy tax forms S. Easy tax forms resident. Easy tax forms In addition, you may elect to defer any tax in Canada on income accrued within the Roth IRA but not distributed by the Roth IRA. Easy tax forms However, you cannot defer tax on any accruals due to contributions made after you become a Canadian resident. Easy tax forms Tax-deferred plans. Easy tax forms   Generally, income that accrues in a Canadian RRSP or RRIF is subject to U. Easy tax forms S. Easy tax forms tax, even if it is not distributed. Easy tax forms However, a U. Easy tax forms S. Easy tax forms citizen or resident can elect to defer U. Easy tax forms S. Easy tax forms tax on income from the plan until the income is distributed. Easy tax forms Form 8891 is used to make the election. Easy tax forms Annuities. Easy tax forms    An annuity is a stated sum payable periodically at stated times, during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). Easy tax forms Annuities do not include: Non-periodic payments, or An annuity the cost of which was deductible for tax purposes. Easy tax forms Special rules. Easy tax forms    Special rules apply to pensions and annuities with respect to: Short-term assignments, Cross-border commuters, and Individuals who participate in a Canadian qualifying plan. Easy tax forms Generally, distributions in such cases are deemed to be earned in the country in which the plan is established, without regard to where the services were rendered. Easy tax forms Social security benefits. Easy tax forms   U. Easy tax forms S. Easy tax forms social security benefits paid to a resident of Canada are taxed in Canada as if they were benefits under the Canada Pension Plan, except that 15% of the amount of the benefit is exempt from Canadian tax. Easy tax forms Alimony. Easy tax forms   Alimony and similar amounts (including child support payments) from Canadian sources paid to U. Easy tax forms S. Easy tax forms residents are exempt from Canadian tax. Easy tax forms For purposes of U. Easy tax forms S. Easy tax forms tax, these amounts are excluded from income to the same extent they would be excluded from income in Canada if the recipient was a Canadian resident. Easy tax forms Investment Income From Canadian Sources The treaty provides beneficial treatment for certain items of Canadian source income that result from an investment of capital. Easy tax forms Dividends (Article X). Easy tax forms   For Canadian source dividends received by U. Easy tax forms S. Easy tax forms residents, the Canadian income tax generally may not be more than 15%. Easy tax forms   A 5% rate applies to intercorporate dividends paid from a subsidiary to a parent corporation owning at least 10% of the subsidiary's voting stock. Easy tax forms However, a 10% rate applies if the payer of the dividend is a nonresident-owned Canadian investment corporation. Easy tax forms   These rates do not apply if the owner of the dividends carries on, or has carried on, a business in Canada through a permanent establishment and the holding on which the income is paid is effectively connected with that permanent establishment. Easy tax forms Interest (Article XI). Easy tax forms   Generally, Canadian source interest received by U. Easy tax forms S. Easy tax forms residents is exempt from Canadian income tax. Easy tax forms   The exemption does not apply if the owner of the interest carries on, or has carried on, a business in Canada through a permanent establishment and the debt on which the income is paid is effectively connected with that permanent establishment. Easy tax forms Gains from the sale of property (Article XIII). Easy tax forms   Generally, gains from the sale of personal property by a U. Easy tax forms S. Easy tax forms resident having no permanent establishment in Canada are exempt from Canadian income tax. Easy tax forms However, the exemption from Canadian tax does not apply to gains realized by U. Easy tax forms S. Easy tax forms residents on Canadian real property, and on personal property belonging to a permanent establishment in Canada. Easy tax forms   If the property subject to Canadian tax is a capital asset and was owned by the U. Easy tax forms S. Easy tax forms resident on September 26, 1980, not as part of the business property of a permanent establishment in Canada, generally the taxable gain is limited to the appreciation after 1984. Easy tax forms Royalties (Article XII). Easy tax forms   The following are exempt from Canadian tax: Copyright royalties and other like payments for the production or reproduction of any literary, dramatic, musical, or artistic work (other than payments for motion pictures and works on film, videotape, or other means of reproduction for use in connection with television, which may be taxed at 10%), Payments for the use of, or the right to use, computer software, Payments for the use of, or the right to use, any patent or any information concerning industrial, commercial, or scientific experience (but not within a rental or franchise agreement), and Payments for broadcasting as agreed to in an exchange of notes between the countries. Easy tax forms   This rate or exemption does not apply if the owner of the royalties carries on, or has carried on, a business in Canada through a permanent establishment and the right or property on which the income is paid is effectively connected with that permanent establishment. Easy tax forms   This exemption (or lower rate) does not apply to royalties to explore for or to exploit mineral deposits, timber, and other natural resources. Easy tax forms Other Income Generally, Canadian source income that is not specifically mentioned in the treaty, may be taxed by Canada. Easy tax forms Gambling losses. Easy tax forms   Canadian residents may deduct gambling losses in the U. Easy tax forms S. Easy tax forms against gambling winnings in the U. Easy tax forms S. Easy tax forms in the same manner as a U. Easy tax forms S. Easy tax forms resident. Easy tax forms Charitable Contributions United States income tax return. Easy tax forms   Under Article XXI, you may deduct contributions to certain qualified Canadian charitable organizations on your United States income tax return. Easy tax forms Besides being subject to the overall limits applicable to all your charitable contributions under U. Easy tax forms S. Easy tax forms tax law, your charitable contributions to Canadian organizations (other than contributions to a college or university at which you or a member of your family is or was enrolled) are subject to the U. Easy tax forms S. Easy tax forms percentage limits on charitable contributions, applied to your Canadian source income. Easy tax forms If your return does not include gross income from Canadian sources, charitable contributions to Canadian organizations are generally not deductible. Easy tax forms Example. Easy tax forms You are a U. Easy tax forms S. Easy tax forms citizen living in Canada. Easy tax forms You have both U. Easy tax forms S. Easy tax forms and Canadian source income. Easy tax forms During your tax year, you contribute to Canadian organizations that would qualify as charitable organizations under U. Easy tax forms S. Easy tax forms tax law if they were U. Easy tax forms S. Easy tax forms organizations. Easy tax forms To figure the maximum amount of the contribution to Canadian organizations that you can deduct on your U. Easy tax forms S. Easy tax forms income tax return, multiply your adjusted gross income from Canadian sources by the percentage limit that applies to contributions under U. Easy tax forms S. Easy tax forms income tax law. Easy tax forms Then include this amount on your return along with all your domestic charitable contributions, subject to the appropriate percentage limit required for contributions under U. Easy tax forms S. Easy tax forms income tax law. Easy tax forms The appropriate percentage limit for U. Easy tax forms S. Easy tax forms tax purposes is applied to your total adjusted gross income from all sources. Easy tax forms Qualified charities. Easy tax forms   These Canadian organizations must meet the qualifications that a U. Easy tax forms S. Easy tax forms charitable organization must meet under U. Easy tax forms S. Easy tax forms tax law. Easy tax forms Usually an organization will notify you if it qualifies. Easy tax forms For further information on charitable contributions and the U. Easy tax forms S. Easy tax forms percentage limits, see Publication 526, Charitable Contributions. Easy tax forms Canadian income tax return. Easy tax forms   Under certain conditions, contributions to qualified U. Easy tax forms S. Easy tax forms charitable organizations may also be claimed on your Canadian income tax return if you are a Canadian resident. Easy tax forms Income Tax Credits The treaty contains a credit provision (Article XXIV) for the elimination of double taxation. Easy tax forms In general, the United States and Canada both allow a credit against their income tax for the income tax paid to the other country on income from sources in that other country. Easy tax forms For detailed discussions of the U. Easy tax forms S. Easy tax forms income tax treatment of tax paid to foreign countries, see Publication 514, Foreign Tax Credit for Individuals. Easy tax forms See paragraphs (4) and (5) of Article XXIV for certain provisions that affect the computation of the credit allowed by the United States for Canadian income taxes paid by U. Easy tax forms S. Easy tax forms citizens residing in Canada. Easy tax forms Competent Authority Assistance Under Article XXVI, a U. Easy tax forms S. Easy tax forms citizen or resident may request assistance from the U. Easy tax forms S. Easy tax forms competent authority when the actions of Canada, the United States, or both, potentially result in double taxation or taxation contrary to the treaty. Easy tax forms The U. Easy tax forms S. Easy tax forms competent authority may then consult with the Canadian competent authority to determine if the double taxation or denial of treaty benefits in question can be avoided. Easy tax forms If the competent authorities are not able to reach agreement in a case, binding arbitration proceedings may apply. Easy tax forms It is important that your request for competent authority assistance be made as soon as you have been notified by either Canada or the United States of proposed adjustments that would result in denial of treaty benefits or in double taxation. Easy tax forms This is so that implementation of any agreement reached by the competent authorities is not barred by administrative, legal, or procedural barriers. Easy tax forms For information that you should include with your request for competent authority assistance, see Revenue Procedure 2006-54, 2006-49 IRB 1035, available at www. Easy tax forms irs. Easy tax forms gov/irb/2006-49_IRB/ar13. Easy tax forms html. Easy tax forms The request should be addressed to:  Deputy Commissioner (International) Large Business and International Division Attn: Office of Tax Treaty  Internal Revenue Service 1111 Constitution Ave. Easy tax forms , NW Routing: MA3-322A Washington, D. Easy tax forms C. Easy tax forms 20024 In addition to a timely request for assistance, you should take the following measures: File a timely protective claim for credit or refund of U. Easy tax forms S. Easy tax forms taxes on Form 1040X, Form 1120X, or amended Form 1041, whichever is appropriate. Easy tax forms This will, among other things, give you the benefit of a foreign tax credit in case you do not qualify for the treaty benefit in question. Easy tax forms For figuring this credit, attach either Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), or Form 1118, Foreign Tax Credit — Corporations, as appropriate. Easy tax forms Attach your protective claim to your request for competent authority assistance. Easy tax forms Take appropriate action under Canadian procedures to avoid the lapse or termination of your right of appeal under Canadian income tax law. Easy tax forms How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS and the Canada Revenue Agency in several ways. Easy tax forms Text of Treaty You can get the text of the U. Easy tax forms S. Easy tax forms —Canada income tax treaty from: Superintendent of Documents U. Easy tax forms S. Easy tax forms Government Printing Office P. Easy tax forms O. Easy tax forms Box 371954 Pittsburgh, PA 15250-7954 The treaty can also be found on the Internet at IRS. Easy tax forms gov. Easy tax forms U. Easy tax forms S. Easy tax forms Taxation During the filing season, the IRS conducts a taxpayer assistance program in Canada. Easy tax forms To find out if IRS personnel will be in your area, you should contact the consular office at the nearest U. Easy tax forms S. Easy tax forms Embassy or consulate. Easy tax forms Mail. Easy tax forms For answers to technical or account questions, you can write to:   Internal Revenue Service International Section Philadelphia, PA 19255-0525 Phone. Easy tax forms You can call the IRS for help at (267) 941-1000 (not a toll-free call). Easy tax forms Canadian Taxation You can get information on Canadian taxation from the Canada Revenue Agency. Easy tax forms The International Tax Services Office can be contacted on 1-800-267-5177 (from anywhere in Canada and the U. Easy tax forms S. Easy tax forms ) or on the Internet at www. Easy tax forms cra-arc. Easy tax forms gc. Easy tax forms ca. Easy tax forms Prev  Up  Next   Home   More Online Publications
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The Easy Tax Forms

Easy tax forms 1. Easy tax forms   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Easy tax forms Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Easy tax forms The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. Easy tax forms If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Easy tax forms Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Easy tax forms Rental income is any payment you receive for the use or occupation of property. Easy tax forms In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Easy tax forms When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Easy tax forms Most individual taxpayers use the cash method. Easy tax forms Cash method. Easy tax forms   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. Easy tax forms You constructively receive income when it is made available to you, for example, by being credited to your bank account. Easy tax forms Accrual method. Easy tax forms    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Easy tax forms You generally deduct your expenses when you incur them, rather than when you pay them. Easy tax forms More information. Easy tax forms   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Easy tax forms Types of Income The following are common types of rental income. Easy tax forms Advance rent. Easy tax forms   Advance rent is any amount you receive before the period that it covers. Easy tax forms 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. Easy tax forms Example. Easy tax forms On March 18, 2013, you signed a 10-year lease to rent your property. Easy tax forms During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Easy tax forms You must include $19,200 in your rental income in the first year. Easy tax forms Canceling a lease. Easy tax forms   If your tenant pays you to cancel a lease, the amount you receive is rent. Easy tax forms Include the payment in your income in the year you receive it regardless of your method of accounting. Easy tax forms Expenses paid by tenant. Easy tax forms   If your tenant pays any of your expenses, those payments are rental income. Easy tax forms Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Easy tax forms For more information, see Rental Expenses , later. Easy tax forms Example 1. Easy tax forms Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Easy tax forms Under the terms of the lease, your tenant does not have to pay this bill. Easy tax forms Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Easy tax forms You can deduct the utility payment made by your tenant as a rental expense. Easy tax forms Example 2. Easy tax forms While you are out of town, the furnace in your rental property stops working. Easy tax forms Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Easy tax forms Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Easy tax forms You can deduct the repair payment made by your tenant as a rental expense. Easy tax forms Property or services. Easy tax forms   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. Easy tax forms   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. Easy tax forms Example. Easy tax forms Your tenant is a house painter. Easy tax forms He offers to paint your rental property instead of paying 2 months rent. Easy tax forms You accept his offer. Easy tax forms Include in your rental income the amount the tenant would have paid for 2 months rent. Easy tax forms You can deduct that same amount as a rental expense for painting your property. Easy tax forms Security deposits. Easy tax forms   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. Easy tax forms 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. Easy tax forms    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Easy tax forms Include it in your income when you receive it. Easy tax forms Other Sources of Rental Income Lease with option to buy. Easy tax forms   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. Easy tax forms If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Easy tax forms Part interest. Easy tax forms   If you own a part interest in rental property, you must report your part of the rental income from the property. Easy tax forms Rental of property also used as your home. Easy tax forms   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. Easy tax forms However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Easy tax forms See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Easy tax forms Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Easy tax forms Personal use of rental property. Easy tax forms   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Easy tax forms Also, your rental expense deductions may be limited. Easy tax forms See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Easy tax forms Part interest. Easy tax forms   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Easy tax forms Example. Easy tax forms Roger owns a one-half undivided interest in a rental house. Easy tax forms Last year he paid $968 for necessary repairs on the property. Easy tax forms Roger can deduct $484 (50% × $968) as a rental expense. Easy tax forms He is entitled to reimbursement for the remaining half from the co-owner. Easy tax forms When To Deduct You generally deduct your rental expenses in the year you pay them. Easy tax forms If you use the accrual method, see Publication 538 for more information. Easy tax forms Types of Expenses Listed below are the most common rental expenses. Easy tax forms Advertising. Easy tax forms Auto and travel expenses. Easy tax forms Cleaning and maintenance. Easy tax forms Commissions. Easy tax forms Depreciation. Easy tax forms Insurance. Easy tax forms Interest (other). Easy tax forms Legal and other professional fees. Easy tax forms Local transportation expenses. Easy tax forms Management fees. Easy tax forms Mortgage interest paid to banks, etc. Easy tax forms Points. Easy tax forms Rental payments. Easy tax forms Repairs. Easy tax forms Taxes. Easy tax forms Utilities. Easy tax forms Some of these expenses, as well as other less common ones, are discussed below. Easy tax forms Depreciation. Easy tax forms   Depreciation is a capital expense. Easy tax forms It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Easy tax forms   You can begin to depreciate rental property when it is ready and available for rent. Easy tax forms See Placed in Service under When Does Depreciation Begin and End in chapter 2. Easy tax forms Insurance premiums paid in advance. Easy tax forms   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. Easy tax forms You cannot deduct the total premium in the year you pay it. Easy tax forms See chapter 6 of Publication 535 for information on deductible premiums. Easy tax forms Interest expense. Easy tax forms   You can deduct mortgage interest you pay on your rental property. Easy tax forms When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Easy tax forms Chapter 4 of Publication 535 explains mortgage interest in detail. Easy tax forms Expenses paid to obtain a mortgage. Easy tax forms   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Easy tax forms These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Easy tax forms Form 1098, Mortgage Interest Statement. Easy tax forms   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. Easy tax forms 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. Easy tax forms Attach a statement to your return showing the name and address of the other person. Easy tax forms On the dotted line next to line 13, enter “See attached. Easy tax forms ” Legal and other professional fees. Easy tax forms   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. Easy tax forms For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Easy tax forms 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. Easy tax forms Local benefit taxes. Easy tax forms   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. Easy tax forms These charges are nondepreciable capital expenditures and must be added to the basis of your property. Easy tax forms However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Easy tax forms Local transportation expenses. Easy tax forms   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. Easy tax forms 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. Easy tax forms See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Easy tax forms   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. Easy tax forms For 2013, the standard mileage rate for business use is 56. Easy tax forms 5 cents per mile. Easy tax forms For more information, see chapter 4 of Publication 463. Easy tax forms    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Easy tax forms In addition, you must complete Form 4562, Part V, and attach it to your tax return. Easy tax forms Pre-rental expenses. Easy tax forms   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Easy tax forms Rental of equipment. Easy tax forms   You can deduct the rent you pay for equipment that you use for rental purposes. Easy tax forms However, in some cases, lease contracts are actually purchase contracts. Easy tax forms If so, you cannot deduct these payments. Easy tax forms You can recover the cost of purchased equipment through depreciation. Easy tax forms Rental of property. Easy tax forms   You can deduct the rent you pay for property that you use for rental purposes. Easy tax forms 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. Easy tax forms Travel expenses. Easy tax forms   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. Easy tax forms You must properly allocate your expenses between rental and nonrental activities. Easy tax forms You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Easy tax forms The cost of improvements is recovered by taking depreciation. Easy tax forms For information on travel expenses, see chapter 1 of Publication 463. Easy tax forms    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Easy tax forms Uncollected rent. Easy tax forms   If you are a cash basis taxpayer, do not deduct uncollected rent. Easy tax forms Because you have not included it in your income, it is not deductible. Easy tax forms   If you use an accrual method, report income when you earn it. Easy tax forms If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Easy tax forms See chapter 10 of Publication 535 for more information about business bad debts. Easy tax forms Vacant rental property. Easy tax forms   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. Easy tax forms However, you cannot deduct any loss of rental income for the period the property is vacant. Easy tax forms Vacant while listed for sale. Easy tax forms   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. Easy tax forms If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Easy tax forms Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. Easy tax forms These charges are also called loan origination fees, maximum loan charges, or premium charges. Easy tax forms Any of these charges (points) that are solely for the use of money are interest. Easy tax forms Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. Easy tax forms The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Easy tax forms In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). Easy tax forms The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. Easy tax forms If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Easy tax forms De minimis OID. Easy tax forms   The OID is de minimis if it is less than one-fourth of 1% (. Easy tax forms 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). Easy tax forms   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. Easy tax forms On a constant-yield basis over the term of the loan. Easy tax forms On a straight line basis over the term of the loan. Easy tax forms In proportion to stated interest payments. Easy tax forms In its entirety at maturity of the loan. Easy tax forms You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Easy tax forms Example. Easy tax forms Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. Easy tax forms The loan is to be repaid over 30 years. Easy tax forms During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Easy tax forms When the loan was made, she paid $1,500 in points to the lender. Easy tax forms The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Easy tax forms Carol determines that the points (OID) she paid are de minimis based on the following computation. Easy tax forms Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Easy tax forms 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Easy tax forms Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Easy tax forms Under the straight line method, she can deduct $50 each year for 30 years. Easy tax forms Constant-yield method. Easy tax forms   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Easy tax forms   You figure your deduction for the first year in the following manner. Easy tax forms Determine the issue price of the loan. Easy tax forms If you paid points on the loan, the issue price generally is the difference between the principal and the points. Easy tax forms Multiply the result in (1) by the yield to maturity (defined later). Easy tax forms Subtract any qualified stated interest payments (defined later) from the result in (2). Easy tax forms This is the OID you can deduct in the first year. Easy tax forms Yield to maturity (YTM). Easy tax forms   This rate is generally shown in the literature you receive from your lender. Easy tax forms If you do not have this information, consult your lender or tax advisor. Easy tax forms In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Easy tax forms Qualified stated interest (QSI). Easy tax forms   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. Easy tax forms Example—Year 1. Easy tax forms The facts are the same as in the previous example. Easy tax forms The yield to maturity on Carol's loan is 10. Easy tax forms 2467%, compounded annually. Easy tax forms She figured the amount of points (OID) she could deduct in 2013 as follows. Easy tax forms Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Easy tax forms 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. Easy tax forms To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Easy tax forms Then follow steps (2) and (3), earlier. Easy tax forms Example—Year 2. Easy tax forms Carol figured the deduction for 2014 as follows. Easy tax forms Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Easy tax forms 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Easy tax forms    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. Easy tax forms A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Easy tax forms However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. Easy tax forms Points when loan refinance is more than the previous outstanding balance. Easy tax forms   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Easy tax forms For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. Easy tax forms 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. Easy tax forms Improvements. Easy tax forms   You must capitalize any expense you pay to improve your rental property. Easy tax forms 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. Easy tax forms Betterments. Easy tax forms   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. Easy tax forms Restoration. Easy tax forms   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. Easy tax forms Adaptation. Easy tax forms   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. Easy tax forms Separate the costs of repairs and improvements, and keep accurate records. Easy tax forms You will need to know the cost of improvements when you sell or depreciate your property. Easy tax forms The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Easy tax forms Table 1-1. Easy tax forms Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications