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Questions and Answers on the Individual Shared Responsibility Provision


Basic Information

1. What is the individual shared responsibility provision?

Under the Affordable Care Act, the federal government, state governments, insurers, employers and individuals are given shared responsibility to reform and improve the availability, quality and affordability of health insurance coverage in the United States. Starting in 2014, the individual shared responsibility provision calls for each individual to have minimum essential health coverage (known as minimum essential coverage) for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return.

2. Who is subject to the individual shared responsibility provision?

The provision applies to individuals of all ages, including children. The adult or married couple who can claim a child or another individual as a dependent for federal income tax purposes is responsible for making the payment if the dependent does not have coverage or an exemption.

3. When does the individual shared responsibility provision go into effect?

The provision goes into effect on Jan. 1, 2014. It applies to each month in the calendar year. 

4.  Is transition relief available in certain circumstances?

Yes. Notice 2013-42, published on June 26, 2013, provides transition relief from the shared responsibility payment for individuals who are eligible to enroll in eligible employer-sponsored health plans with a plan year other than a calendar year (non-calendar year plans) if the plan year begins in 2013 and ends in 2014 (2013-2014 plan year). The transition relief applies to an employee, or an individual having a relationship to the employee. The transition relief begins in January 2014 and continues through the month in which the 2013-2014 plan year ends.

In addition, Notice 2014-10, published on Jan. 23, 2014, provides transition relief for individuals covered under certain limited-benefit government-sponsored programs. Coverage under these programs is not minimum essential coverage unless it is designated as such by the Department of Health and Human Services. Under Notice 2014-10, individuals who have coverage under these government-sponsored programs will not be held liable for the shared responsibility payment for months in 2014 when they have that coverage. The specific government-sponsored programs are optional family planning coverage of family services under title XIX of the Social Security Act, optional coverage of tuberculosis-related services under title XIX of the Social Security Act, coverage of pregnancy-related services under title XIX of the Social Security Act, coverage limited to treatment of emergency medical conditions (in accordance with section 1611(b)(12)(A) of title 8 of the United States Code) under title XIX of the Social Security Act, coverage for medically needy individuals under title XIX of the Social Security Act, coverage authorized under section 1115(a)(2) of the Social Security Act, limited-benefit TRICARE coverage of space available care provided under chapter 55 of title 10 of the United States Code and limited-benefit TRICARE coverage of line of duty care under chapter 55 of title 10 of the United States Code.  

5. What counts as minimum essential coverage?

Minimum essential coverage includes the following:

  • Employer-sponsored coverage, including self-insured plans, COBRA coverage and retiree coverage
  • Coverage purchased in the individual market, including a qualified health plan offered by the Health Insurance Marketplace 
  • Medicare Part A coverage and Medicare Advantage plans
  • Most Medicaid coverage
  • Children's Health Insurance Program (CHIP) coverage
  • Certain types of veterans health coverage administered by the Veterans Administration
  • Most types of TRICARE coverage under chapter 55 of title 10 of the United States Code
  • Coverage provided to Peace Corps volunteers
  • Coverage under the Nonappropriated Fund Health Benefit Program
  • Refugee Medical Assistance supported by the Administration for Children and Families
  • Self-funded health coverage offered to students by universities for plan or policy years that begin on or before Dec. 31, 2014 (for later plan or policy years, sponsors of these programs may apply to HHS to be recognized as minimum essential coverage)
  • State high risk pools for plan or policy years that begin on or before Dec. 31, 2014 (for later plan or policy years, sponsors of these program may apply to HHS to be recognized as minimum essential coverage)
  • Other coverage recognized by the Secretary of HHS as minimum essential coverage

Minimum essential coverage does not include coverage providing only limited benefits, such as the following:

  • Coverage consisting solely of excepted benefits, such as:
    • Stand-alone vision care or dental care
    • Workers' compensation
    • Accident or disability policies
  • Medicaid providing only family planning services
  • Medicaid providing only tuberculosis-related services
  • Medicaid providing only coverage limited to treatment of emergency medical conditions
  •  Pregnancy-related Medicaid coverage*
  • Medicaid coverage for the medically needy*
  • Section 1115 Medicaid demonstration projects*
  • Space available TRICARE coverage provided under chapter 55 of title 10 of the United States Code for individuals who are not eligible for TRICARE coverage for health care services from private sector providers*
  • Line of duty TRICARE coverage provided under chapter 55 of title 10 of the United States Code*

* These categories of coverage are generally not minimum essential coverage. However, to the extent that certain programs within these categories provide comprehensive coverage, the Secretary of HHS may recognize these programs as minimum essential coverage in the future. The IRS in Notice 2014-10 announced relief from the shared responsibility payment for months in 2014 in which individuals are covered under any of these programs to the extent that they are not minimum essential coverage. Information will be made available later about how the income tax return will take account of coverage under one of these programs. 

6. What are the statutory exemptions from the requirement to obtain minimum essential coverage?

  1. Religious conscience. You are a member of a religious sect that is recognized as conscientiously opposed to accepting any insurance benefits. The Social Security Administration administers the process for recognizing these sects according to the criteria in the law.
  2. Health care sharing ministry. You are a member of a recognized health care sharing ministry.
  3. Indian tribes. You are (1) a member of a federally recognized Indian tribe or (2) an individual eligible for services through an Indian care provider.
  4. Income below the income tax return filing requirement. Your income is below the minimum threshold for filing a tax return. The requirement to file a federal tax return depends on your filing status, age and types and amounts of income. To find out if you are required to file a federal tax return, use the IRS Interactive Tax Assistant (ITA).
  5. Short coverage gap. You went without coverage for less than three consecutive months during the year. For more information, see question 22.
  6. Hardship. You have suffered a hardship that makes you unable to obtain coverage, as defined in final regulations issued by the Department of Health and Human Services. See question 21 for more information on claiming hardship exemptions..
  7. Affordability. You can’t afford coverage because the minimum amount you must pay for the premiums is more than eight percent of your household income.
  8. Incarceration. You are in a jail, prison, or similar penal institution or correctional facility after the disposition of charges against you.
  9. Not lawfully present. You are not a U.S. citizen, a U.S. national or an alien lawfully present in the U.S.

7. What do I need to do if I want to be sure I have minimum essential coverage or an exemption for 2014?

The vast majority of coverage that people have today counts as minimum essential coverage. For those who do not have coverage, who anticipate discontinuing the coverage they have currently, or who want to explore whether more affordable options are available, the Health Insurance Marketplace is open in every state and the District of Columbia. The Marketplace helps individuals compare available coverage options, assess their eligibility for financial assistance and find minimum essential coverage that fits their budget.

For those seeking an exemption from the individual responsibility provision, the Marketplace is able to provide certificates of exemption for many of the exemption categories. HHS has issued final regulations on how the Health Insurance Marketplace grants these exemptions. Individuals will also be able to claim certain exemptions for 2014 when they file their federal income tax returns in 2015. Individuals who are not required to file a federal income tax return because their gross income falls below the return filing threshold do not need to take any further action to secure an exemption. See question 21 for further information on how to claim an exemption.

For more information about the Marketplace, visit the Health Insurance Marketplace website. For more information about financial assistance, see our Questions and Answers on the premium tax credit.

8. Is more detailed information available about the individual shared responsibility provision?

Yes. The Treasury Department and the IRS have issued final regulations on the new individual shared responsibility provision, and the IRS has created an individual shared responsibility page. In addition, the Treasury Department and the IRS have issued proposed regulations, which provide guidance on additional issues that were identified in the preamble to the final regulations. Additional information on exemptions and minimum essential coverage is available in final regulations issued by the Department of Health and Human Services and in a Shared Responsibility Provision Question and Answer issued by the Centers for Medicare & Medicaid Services

Who is Affected?

9. Are children subject to the individual shared responsibility provision?

Yes. Each child must have minimum essential coverage or qualify for an exemption for each month in the calendar year. Otherwise, the adult or married couple who can claim the child as a dependent for federal income tax purposes will generally owe a shared responsibility payment for the child..

10. Are senior citizens subject to the individual shared responsibility provision?

Yes. Senior citizens must have minimum essential coverage or qualify for an exemption for each month in a calendar year. Both Medicare Part A and Medicare Part C (also known as Medicare Advantage) qualify as minimum essential coverage.  

11. Are all individuals living in the United States subject to the individual shared responsibility provision?

All U.S. citizens living in the United States are subject to the individual shared responsibility provision as are all permanent residents and all foreign nationals who are in the United States long enough during a calendar year to qualify as resident aliens for tax purposes. Foreign nationals who live in the United States for a short enough period that they do not become resident aliens for federal income tax purposes are not subject to the individual shared responsibility payment even though they may have to file a U.S. income tax return. The IRS has more information available on when a foreign national becomes a resident alien for federal income tax purposes.

12. Are US citizens living abroad subject to the individual shared responsibility provision?

Yes. However, U.S. citizens who are not physically present in the United States for at least 330 full days within a 12-month period are treated as having minimum essential coverage for that 12-month period. In addition, U.S. citizens who are bona fide residents of a foreign country (or countries) for an entire taxable year are treated as having minimum essential coverage for that year. In general, these are individuals who qualify for a foreign earned income exclusion under section 911 of the Internal Revenue Code. Individuals may qualify for this rule even if they cannot use the exclusion for all of their foreign earned income because, for example, they are employees of the United States. Individuals that qualify for this rule need take no further action to comply with the individual shared responsibility provision during the months when they qualify. See Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for further information on the foreign earned income exclusion.  

U.S. citizens who meet neither the physical presence nor residency requirements will need to maintain minimum essential coverage, qualify for an exemption or make a shared responsibility payment for each month of the year. For this purpose, minimum essential coverage includes a group health plan provided by an overseas employer. One exemption that may be particularly relevant to U.S. citizens living abroad for a small part of a year is the exemption for a short coverage gap. This exemption provides that no shared responsibility payment will be due for a once-per-year gap in coverage that lasts less than three months.  

13. Are residents of the territories subject to the individual shared responsibility provision?

All bona fide residents of the United States territories are treated by law as having minimum essential coverage. They are not required to take any action to comply with the individual shared responsibility provision.

Minimum Essential Coverage

14. If I receive my coverage from my spouse’s employer, will I have minimum essential coverage?

Yes. Employer-sponsored coverage is generally minimum essential coverage. (See question 5 for information on specialized types of coverage that are not minimum essential coverage.) If an employee enrolls in employer-sponsored coverage that provides minimum value for himself and his family, the employee and all of the covered family members have minimum essential coverage.

15. Do my spouse and dependent children have to be covered under the same policy or plan that covers me?

No. You, your spouse and your dependent children do not have to be covered under the same policy or plan. However, you, your spouse and each dependent child for whom you may claim a personal exemption on your federal income tax return must have minimum essential coverage or qualify for an exemption, or you will owe a shared responsibility payment when you file a return.

16. My employer tells me that our company’s health plan is “grandfathered.” Does my employer’s plan provide minimum essential coverage?

Yes. Grandfathered group health plans provide minimum essential coverage.

17. I am a retiree, and I am too young to be eligible for Medicare. I receive my health coverage through a retiree plan made available by my former employer. Is the retiree plan minimum essential coverage?

Yes. Retiree health plans are generally minimum essential coverage.

18. I work for a local government that provides me with health coverage. Is my coverage minimum essential coverage?

Yes. Employer-sponsored coverage is minimum essential coverage regardless of whether the employer is a governmental, nonprofit or for-profit entity.

19. Do I have to be covered for an entire calendar month to avoid the shared responsibility payment liability for not having minimum essential coverage for that month?

No. You will be treated as having minimum essential coverage for a month as long as you have coverage for at least one day during that month.

20. If I change health coverage during the year and end up with a gap when I am not covered, will I owe a payment?

Individuals are treated as having minimum essential coverage for a calendar month if they have coverage for at least one day during that month. Additionally, as long as the gap in coverage is less than three months, you may qualify for an exemption and not owe a payment. See question 22 for more information on the exemption for a short coverage gap.

Exemptions

21. If I think I qualify for an exemption, how do I obtain it?

It depends upon the exemption for which you qualify.

  • The religious conscience exemption and most hardship exemptions are available only by going to the Health Insurance Marketplace and applying for an exemption certificate. Information on obtaining these exemptions is available in final rules issued by the Department of Health and Human Services.
  • The exemptions for members of federally recognized Indian tribes, members of health care sharing ministries and individuals who are incarcerated are available either by going to a Marketplace or Exchange and applying for an exemption certificate or by claiming the exemption as part of filing a federal income tax return.
  • The exemptions for lack of affordable coverage, a short coverage gap, certain hardships, household income below the filing threshold and individuals who are not lawfully present in the United States may be claimed only as part of filing a federal income tax return.

22. What qualifies as a short coverage gap?

In general, a gap in coverage that lasts less than three months qualifies as a short coverage gap. If an individual has more than one short coverage gap during a year, the short coverage gap exemption only applies to the first gap.

23. If my income is so low that I am not required to file a federal income tax return, do I need to do anything special to claim an exemption from the individual shared responsibility provision?

No. If you are not required to file a federal income tax return for a year because your gross income is below your return filing threshold, you are automatically exempt from the shared responsibility provision for that year and do not need to take any further action to secure an exemption. If you are not required to file a tax return for a year but file one anyway, you will be able to claim the exemption on your tax return.

24. If I am exempt from the shared responsibility payment, can I still be eligible for the premium tax credit?

In many cases, yes, but it depends upon the exemption. If you are exempt because you are incarcerated or because you are not lawfully present in the United States, you are not eligible to enroll in a qualified health plan through the Marketplace and therefore cannot claim a premium tax credit. However, individuals with other types of exemptions may obtain coverage through the Marketplace and claim a premium tax credit if they otherwise qualify for the credit.

Reporting Coverage or Exemptions or Making Payments

25. Will I have to do something on my federal income tax return to show that I had coverage or an exemption?

The individual shared responsibility provision goes into effect in 2014. You will not have to account for coverage or exemptions or to make any payments until you file your 2014 federal income tax return in 2015. Information will be made available later about how the income tax return will take account of coverage and exemptions. Insurers will be required to provide everyone that they cover each year with information that will help them demonstrate they had coverage beginning with the 2015 tax year.

26. What happens if I do not have minimum essential coverage or an exemption, and I cannot afford to make the shared responsibility payment when filing my tax return?

The IRS routinely works with taxpayers who owe amounts they cannot afford to pay. The law prohibits the IRS from using liens or levies to collect any individual shared responsibility payment. However, if you owe a shared responsibility payment, the IRS may offset that liability against any tax refund that may be due to you.

Page Last Reviewed or Updated: 25-Mar-2014

The Federal Income Tax Return

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