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File your taxes free online 5. File your taxes free online   Personal Use of Dwelling Unit (Including Vacation Home) Table of Contents Dividing Expenses Dwelling Unit Used as a HomeMain home. File your taxes free online Shared equity financing agreement. File your taxes free online Donation of use of the property. File your taxes free online Examples. File your taxes free online Days used for repairs and maintenance. File your taxes free online Days used as a main home before or after renting. File your taxes free online Reporting Income and DeductionsNot used as a home. File your taxes free online Used as a home but rented less than 15 days. File your taxes free online Used as a home and rented 15 days or more. File your taxes free online 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. File your taxes free online 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. File your taxes free online Only your rental expenses may deducted on Schedule E (Form 1040). File your taxes free online Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). File your taxes free online You must also determine if the dwelling unit is considered a home. File your taxes free online The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. File your taxes free online Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. File your taxes free online 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. File your taxes free online Dwelling unit. File your taxes free online   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. File your taxes free online It also includes all structures or other property belonging to the dwelling unit. File your taxes free online A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. File your taxes free online   A dwelling unit does not include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment. File your taxes free online 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. File your taxes free online Example. File your taxes free online You rent a room in your home that is always available for short-term occupancy by paying customers. File your taxes free online You do not use the room yourself and you allow only paying customers to use the room. File your taxes free online This room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. File your taxes free online 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. File your taxes free online When dividing your expenses, follow these rules. File your taxes free online 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. File your taxes free online (This rule does not apply when determining whether you used the unit as a home. File your taxes free online ) Any day that the unit is available for rent but not actually rented is not a day of rental use. File your taxes free online Fair rental price. File your taxes free online   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. File your taxes free online 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. File your taxes free online   Ask yourself the following questions when comparing another property with yours. File your taxes free online Is it used for the same purpose? Is it approximately the same size? Is it in approximately the same condition? Does it have similar furnishings? Is it in a similar location? If any of the answers are no, the properties probably are not similar. File your taxes free online Example. File your taxes free online Your beach cottage was available for rent from June 1 through August 31 (92 days). File your taxes free online 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 during that time. File your taxes free online 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. File your taxes free online Your family also used the cottage during the last 2 weeks of May (14 days). File your taxes free online The cottage was not used at all before May 17 or after August 31. File your taxes free online You figure the part of the cottage expenses to treat as rental expenses as follows. File your taxes free online The cottage was used for rental a total of 85 days (92 − 7). File your taxes free online The days it was available for rent but not rented (7 days) are not days of rental use. File your taxes free online The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. File your taxes free online You used the cottage for personal purposes for 14 days (the last 2 weeks in May). File your taxes free online The total use of the cottage was 99 days (14 days personal use + 85 days rental use). File your taxes free online Your rental expenses are 85/99 (86%) of the cottage expenses. File your taxes free online Note. File your taxes free online 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. File your taxes free online Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. File your taxes free online 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. File your taxes free online If you have a net loss, you may not be able to deduct all of the rental expenses. File your taxes free online See Dwelling Unit Used as a Home, next. File your taxes free online 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. File your taxes free online 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. File your taxes free online See What is a day of personal use , later. File your taxes free online If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price (discussed earlier), do not count that day as a day of rental use in applying (2) above. File your taxes free online Instead, count it as a day of personal use in applying both (1) and (2) above. File your taxes free online 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. File your taxes free online You or any other person who owns an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). File your taxes free online However, see Days used as a main home before or after renting , later. File your taxes free online A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. File your taxes free online Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. File your taxes free online ), and lineal descendants (children, grandchildren, etc. File your taxes free online ). File your taxes free online Anyone under an arrangement that lets you use some other dwelling unit. File your taxes free online Anyone at less than a fair rental price. File your taxes free online Main home. File your taxes free online   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. File your taxes free online Shared equity financing agreement. File your taxes free online   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. File your taxes free online Donation of use of the property. File your taxes free online   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. File your taxes free online Examples. File your taxes free online   The following examples show how to determine if you have days of personal use. File your taxes free online Example 1. File your taxes free online You and your neighbor are co-owners of a condominium at the beach. File your taxes free online Last year, you rented the unit to vacationers whenever possible. File your taxes free online The unit was not used as a main home by anyone. File your taxes free online Your neighbor used the unit for 2 weeks last year; you did not use it at all. File your taxes free online 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. File your taxes free online Example 2. File your taxes free online You and your neighbors are co-owners of a house under a shared equity financing agreement. File your taxes free online Your neighbors live in the house and pay you a fair rental price. File your taxes free online 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. File your taxes free online This is because your neighbors rent the house as their main home under a shared equity financing agreement. File your taxes free online Example 3. File your taxes free online You own a rental property that you rent to your son. File your taxes free online Your son does not own any interest in this property. File your taxes free online He uses it as his main home and pays you a fair rental price. File your taxes free online 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. File your taxes free online Example 4. File your taxes free online You rent your beach house to Rosa. File your taxes free online Rosa rents her cabin in the mountains to you. File your taxes free online You each pay a fair rental price. File your taxes free online You are using your beach house for personal purposes on the days that Rosa uses it because your house is used by Rosa under an arrangement that allows you to use her cabin. File your taxes free online Example 5. File your taxes free online You rent an apartment to your mother at less than a fair rental price. File your taxes free online You are using the apartment for personal purposes on the days that your mother rents it because you rent it for less than a fair rental price. File your taxes free online Days used for repairs and maintenance. File your taxes free online   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. File your taxes free online 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. File your taxes free online Example. File your taxes free online Corey owns a cabin in the mountains that he rents for most of the year. File your taxes free online He spends a week at the cabin with family members. File your taxes free online Corey works on maintenance of the cabin 3 or 4 hours each day during the week and spends the rest of the time fishing, hiking, and relaxing. File your taxes free online Corey's family members, however, work substantially full time on the cabin each day during the week. File your taxes free online The main purpose of being at the cabin that week is to do maintenance work. File your taxes free online Therefore, the use of the cabin during the week by Corey and his family will not be considered personal use by Corey. File your taxes free online Days used as a main home before or after renting. File your taxes free online   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. File your taxes free online Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. File your taxes free online 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. File your taxes free online However, this special rule does not apply when dividing expenses between rental and personal use. File your taxes free online See Property Changed to Rental Use in chapter 4. File your taxes free online Example 1. File your taxes free online On February 29, 2012, you moved out of the house you had lived in for 6 years because you accepted a job in another town. File your taxes free online You rented your house at a fair rental price from March 15, 2012, to May 14, 2013 (14 months). File your taxes free online On June 1, 2013, you moved back into your old house. File your taxes free online The days you used the house as your main home from January 1 to February 29, 2012, and from June 1 to December 31, 2013, are not counted as days of personal use. File your taxes free online Therefore, you would use the rules in chapter 1 when figuring your rental income and expenses. File your taxes free online Example 2. File your taxes free online On January 31, you moved out of the condominium where you had lived for 3 years. File your taxes free online You offered it for rent at a fair rental price beginning on February 1. File your taxes free online You were unable to rent it until April. File your taxes free online On September 15, you sold the condominium. File your taxes free online The days you used the condominium as your main home from January 1 to January 31 are not counted as days of personal use when determining whether you used it as a home. File your taxes free online Examples. File your taxes free online   The following examples show how to determine whether you used your rental property as a home. File your taxes free online Example 1. File your taxes free online You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. File your taxes free online You rented the basement apartment at a fair rental price to college students during the regular school year. File your taxes free online You rented to them on a 9-month lease (273 days). File your taxes free online You figured 10% of the total days rented to others at a fair rental price is 27 days. File your taxes free online During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. File your taxes free online Your basement apartment was used as a home because you used it for personal purposes for 30 days. File your taxes free online Rent-free use by your brothers is considered personal use. File your taxes free online Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). File your taxes free online Example 2. File your taxes free online 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). File your taxes free online Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. File your taxes free online You figured 10% of the total days rented to others at a fair rental price is 3 days. File your taxes free online The room was used as a home because you used it for personal purposes for 21 days. File your taxes free online That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). File your taxes free online Example 3. File your taxes free online You own a condominium apartment in a resort area. File your taxes free online You rented it at a fair rental price for a total of 170 days during the year. File your taxes free online For 12 of these days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. File your taxes free online Your family actually used the apartment for 10 of those days. File your taxes free online Therefore, the apartment is treated as having been rented for 160 (170 – 10) days. File your taxes free online You figured 10% of the total days rented to others at a fair rental price is 16 days. File your taxes free online Your family also used the apartment for 7 other days during the year. File your taxes free online You used the apartment as a home because you used it for personal purposes for 17 days. File your taxes free online That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). File your taxes free online Minimal rental use. File your taxes free online   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. File your taxes free online See Used as a home but rented less than 15 days, later, for more information. File your taxes free online Limit on deductions. File your taxes free online   Renting a dwelling unit that is considered a home is not a passive activity. File your taxes free online 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. File your taxes free online 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. File your taxes free online Any expenses carried forward to the next year will be subject to any limits that apply for that year. File your taxes free online 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. File your taxes free online   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 5–1. File your taxes free online Reporting Income and Deductions Property not used for personal purposes. File your taxes free online   If you do not use a dwelling unit for personal purposes, see chapter 3 for how to report your rental income and expenses. File your taxes free online Property used for personal purposes. File your taxes free online   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. File your taxes free online Not used as a home. File your taxes free online   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. File your taxes free online 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 this chapter under Dividing Expenses . File your taxes free online The expenses for personal use are not deductible as rental expenses. File your taxes free online   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses in chapter 3. File your taxes free online Used as a home but rented less than 15 days. File your taxes free online   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). File your taxes free online You are not required to report the rental income and rental expenses from this activity. File your taxes free online The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). File your taxes free online See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. File your taxes free online Used as a home and rented 15 days or more. File your taxes free online   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. File your taxes free online 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 this chapter under Dividing Expenses . File your taxes free online The expenses for personal use are not deductible as rental expenses. File your taxes free online   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. File your taxes free online You do not need to use Worksheet 5-1. File your taxes free online   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. File your taxes free online To figure your deductible rental expenses and any carryover to next year, use Worksheet 5–1. File your taxes free online Worksheet 5-1. File your taxes free online 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. File your taxes free online Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . File your taxes free online ) 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. File your taxes free online Rental Use Percentage A. File your taxes free online Total days available for rent at fair rental price A. File your taxes free online       B. File your taxes free online Total days available for rent (line A) but not rented B. File your taxes free online       C. File your taxes free online Total days of rental use. File your taxes free online Subtract line B from line A C. File your taxes free online       D. File your taxes free online Total days of personal use (including days rented at less than fair rental price) D. File your taxes free online       E. File your taxes free online Total days of rental and personal use. File your taxes free online Add lines C and D E. File your taxes free online       F. File your taxes free online Percentage of expenses allowed for rental. File your taxes free online Divide line C by line E     F. File your taxes free online . File your taxes free online PART II. File your taxes free online Allowable Rental Expenses 1. File your taxes free online Enter rents received 1. File your taxes free online   2a. File your taxes free online Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. File your taxes free online       b. File your taxes free online Enter the rental portion of real estate taxes b. File your taxes free online       c. File your taxes free online Enter the rental portion of deductible casualty and theft losses (see instructions) c. File your taxes free online       d. File your taxes free online Enter direct rental expenses (see instructions) d. File your taxes free online       e. File your taxes free online Fully deductible rental expenses. File your taxes free online Add lines 2a–2d. File your taxes free online Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. File your taxes free online   3. File your taxes free online Subtract line 2e from line 1. File your taxes free online If zero or less, enter -0- 3. File your taxes free online   4a. File your taxes free online Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. File your taxes free online       b. File your taxes free online Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. File your taxes free online       c. File your taxes free online Carryover of operating expenses from 2012 worksheet c. File your taxes free online       d. File your taxes free online Add lines 4a–4c d. File your taxes free online       e. File your taxes free online Allowable expenses. File your taxes free online Enter the smaller of line 3 or line 4d (see instructions) 4e. File your taxes free online   5. File your taxes free online Subtract line 4e from line 3. File your taxes free online If zero or less, enter -0- 5. File your taxes free online   6a. File your taxes free online Enter the rental portion of excess casualty and theft losses (see instructions) 6a. File your taxes free online       b. File your taxes free online Enter the rental portion of depreciation of the dwelling unit b. File your taxes free online       c. File your taxes free online Carryover of excess casualty losses and depreciation from 2012 worksheet c. File your taxes free online       d. File your taxes free online Add lines 6a–6c d. File your taxes free online       e. File your taxes free online Allowable excess casualty and theft losses and depreciation. File your taxes free online Enter the smaller of  line 5 or line 6d (see instructions) 6e. File your taxes free online   PART III. File your taxes free online Carryover of Unallowed Expenses to Next Year 7a. File your taxes free online Operating expenses to be carried over to next year. File your taxes free online Subtract line 4e from line 4d 7a. File your taxes free online   b. File your taxes free online Excess casualty and theft losses and depreciation to be carried over to next year. File your taxes free online  Subtract line 6e from line 6d b. File your taxes free online   Worksheet 5-1 Instructions. File your taxes free online Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. File your taxes free online 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. File your taxes free online Line 2a. File your taxes free online Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. File your taxes free online Do not include interest on a loan that did not benefit the dwelling unit. File your taxes free online 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. File your taxes free online Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. File your taxes free online Include the rental portion of this interest in the total you enter on line 2a of the worksheet. File your taxes free online   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. File your taxes free online See the Schedule A instructions. File your taxes free online However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. File your taxes free online See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. File your taxes free online Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. File your taxes free online   Note. File your taxes free online Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. File your taxes free online Instead, figure the personal portion on a separate Schedule A. File your taxes free online 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. File your taxes free online           Line 2c. File your taxes free online 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. File your taxes free online To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. File your taxes free online If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. File your taxes free online On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. File your taxes free online Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. File your taxes free online   Note. File your taxes free online Do not file this Form 4684 or use it to figure your personal losses on Schedule A. File your taxes free online Instead, figure the personal portion on a separate Form 4684. File your taxes free online           Line 2d. File your taxes free online Enter the total of your rental expenses that are directly related only to the rental activity. File your taxes free online These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. File your taxes free online Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. File your taxes free online           Line 2e. File your taxes free online 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. File your taxes free online Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. File your taxes free online           Line 4b. File your taxes free online On line 2a, you entered the rental portion of the mortgage interest or qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. File your taxes free online 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. File your taxes free online Do not include interest on a loan that did not benefit the dwelling unit  (as explained in the line 2a instructions). File your taxes free online           Line 4e. File your taxes free online 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. File your taxes free online *           Line 6a. File your taxes free online To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. File your taxes free online   A. File your taxes free online Enter the amount from Form 4684, line 10       B. File your taxes free online Enter the rental portion of line A       C. File your taxes free online Enter the amount from line 2c of this worksheet       D. File your taxes free online Subtract line C from line B. File your taxes free online Enter the result here and on line 6a of this worksheet               Line 6e. File your taxes free online 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. File your taxes free online * *Allocating the limited deduction. File your taxes free online 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. File your taxes free online Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. File your taxes free online Prev  Up  Next   Home   More Online Publications
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File your taxes free online 3. File your taxes free online   Reporting Rental Income, Expenses, and Losses Table of Contents Which Forms To UseSchedule E (Form 1040) Schedule C (Form 1040), Profit or Loss From Business Qualified Joint Venture Limits on Rental LossesAt-Risk Rules Passive Activity Limits Casualties and Thefts Example Figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on Schedule E (Form 1040). File your taxes free online There are activities which do not qualify to use Schedule E, such as when the activity is not engaged in to make a profit or when you provide substantial services in conjunction with the property. File your taxes free online There are also the limitations which may need to be applied if you have a net loss on Schedule E. File your taxes free online There are two: (1) the limitation based on the amount of investment you have at risk in your rental activity, and (2) the special limits imposed on passive activities. File your taxes free online You may also have a gain or loss related to your rental property from a casualty or theft. File your taxes free online This is considered separately from the income and expense information you report on Schedule E. File your taxes free online Which Forms To Use The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). File your taxes free online However, do not use that schedule to report a not-for-profit activity. File your taxes free online See Not Rented for Profit , in chapter 4. File your taxes free online There are also other rental situations in which forms other than Schedule E would be used. File your taxes free online Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. File your taxes free online , you normally report your rental income and expenses on Schedule E, Part I. File your taxes free online List your total income, expenses, and depreciation for each rental property. File your taxes free online Be sure to enter the number of fair rental and personal use days on line 2. File your taxes free online If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. File your taxes free online Complete lines 1 and 2 for each property. File your taxes free online However, fill in lines 23a through 26 on only one Schedule E. File your taxes free online On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. File your taxes free online To find out if you need to attach Form 4562, see Form 4562 , later. File your taxes free online If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. File your taxes free online Form 6198, At-Risk Limitations. File your taxes free online See At-Risk Rules , later. File your taxes free online Also see Publication 925. File your taxes free online Form 8582, Passive Activity Loss Limitations. File your taxes free online See Passive Activity Limits , later. File your taxes free online Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. File your taxes free online 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. File your taxes free online Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). File your taxes free online Form 4562. File your taxes free online   You must complete and attach Form 4562 for rental activities only if you are claiming: Depreciation, including the special depreciation allowance, on property placed in service during 2013; Depreciation on listed property (such as a car), regardless of when it was placed in service; or Any other car expenses, including the standard mileage rate or lease expenses. File your taxes free online Otherwise, figure your depreciation on your own worksheet. File your taxes free online You do not have to attach these computations to your return, but you should keep them in your records for future reference. File your taxes free online   See Publication 946 for information on preparing Form 4562. File your taxes free online Schedule C (Form 1040), Profit or Loss From Business Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer. File your taxes free online Providing substantial services. File your taxes free online   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you 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. File your taxes free online Use Form 1065, U. File your taxes free online S. File your taxes free online Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). File your taxes free online Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. File your taxes free online For information, see Publication 334, Tax Guide for Small Business. File your taxes free online Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. File your taxes free online For a discussion of “substantial services,” see Real Estate Rents in Publication 334, chapter 5. File your taxes free online Qualified Joint Venture If you and your spouse each materially participate (see Material participation under Passive Activity Limits, later) 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. File your taxes free online 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. File your taxes free online If you make this election, you must report rental real estate income on Schedule E (or Schedule C if you provide substantial services). File your taxes free online You will not be required to file Form 1065 for any year the election is in effect. File your taxes free online Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive activity limits. File your taxes free online If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect. File your taxes free online For more information on qualified joint ventures, go to IRS. File your taxes free online gov and enter “qualified joint venture” in the search box. File your taxes free online 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. File your taxes free online You must consider these rules in the order shown below. File your taxes free online Both are discussed in this section. File your taxes free online At-risk rules. File your taxes free online These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. File your taxes free online This applies only if the real property was placed in service after 1986. File your taxes free online Passive activity limits. File your taxes free online 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. File your taxes free online However, there are exceptions. File your taxes free online 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. File your taxes free online Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. File your taxes free online 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. File your taxes free online 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. File your taxes free online Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. File your taxes free online See Publication 925 for a discussion of the at-risk rules. File your taxes free online Form 6198. File your taxes free online   If you are subject to the at-risk rules, file Form 6198, At-Risk Limitations, with your tax return. File your taxes free online Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. File your taxes free online 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. File your taxes free online For a discussion of activities that are not considered rental activities, see Rental Activities in Publication 925. File your taxes free online Deductions or losses from passive activities are limited. File your taxes free online You generally cannot offset income, other than passive income, with losses from passive activities. File your taxes free online Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. File your taxes free online Any excess loss or credit is carried forward to the next tax year. File your taxes free online Exceptions to the rules for figuring passive activity limits for personal use of a dwelling unit and for rental real estate with active participation are discussed later. File your taxes free online For a detailed discussion of these rules, see Publication 925. File your taxes free online Real estate professionals. File your taxes free online   If you are a real estate professional, complete line 43 of Schedule E. File your taxes free online      You qualify as a real estate professional for the tax year if you meet both of the following requirements. File your taxes free online More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate. File your taxes free online You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. File your taxes free online If you qualify as a real estate professional, rental real estate activities in which you materially participated are not passive activities. File your taxes free online For purposes of determining whether you materially participated in your rental real estate activities, each interest in rental real estate is a separate activity unless you elect to treat all your interests in rental real estate as one activity. File your taxes free online   Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. File your taxes free online You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest. File your taxes free online   Do not count your spouse's personal services to determine whether you met the requirements listed earlier to qualify as a real estate professional. File your taxes free online However, you can count your spouse's participation in an activity in determining if you materially participated. File your taxes free online Real property trades or businesses. File your taxes free online   A real property trade or business is a trade or business that does any of the following with real property. File your taxes free online Develops or redevelops it. File your taxes free online Constructs or reconstructs it. File your taxes free online Acquires it. File your taxes free online Converts it. File your taxes free online Rents or leases it. File your taxes free online Operates or manages it. File your taxes free online Brokers it. File your taxes free online Choice to treat all interests as one activity. File your taxes free online   If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. File your taxes free online You can make this choice for any year that you qualify as a real estate professional. File your taxes free online If you forgo making the choice for one year, you can still make it for a later year. File your taxes free online   If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. File your taxes free online This is true even if you are not a real estate professional in any intervening year. File your taxes free online (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules. File your taxes free online )   See the Instructions for Schedule E for information about making this choice. File your taxes free online Material participation. File your taxes free online   Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. File your taxes free online For details, see Publication 925 or the Instructions for Schedule C. File your taxes free online Participating spouse. File your taxes free online   If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. File your taxes free online Do this even if your spouse owns no interest in the activity or files a separate return for the year. File your taxes free online Form 8582. File your taxes free online    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. File your taxes free online See Form 8582 not required , later in this chapter, to determine if you must complete Form 8582. File your taxes free online   If you are required to complete Form 8582 and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible loss) in column (b) of Form 8582, Worksheet 1 or 3, as required. File your taxes free online 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. File your taxes free online Instead, follow the rules explained in chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). File your taxes free online Exception for Rental Real Estate 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. File your taxes free online This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. File your taxes free online 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. File your taxes free online Example. File your taxes free online Jane is single and has $40,000 in wages, $2,000 of passive income from a limited partnership, and $3,500 of passive loss from a rental real estate activity in which she actively participated. File your taxes free online $2,000 of Jane's $3,500 loss offsets her passive income. File your taxes free online The remaining $1,500 loss can be deducted from her $40,000 wages. File your taxes free online The special allowance is not available if you were married, lived with your spouse at any time during the year, and are filing a separate return. File your taxes free online Active participation. File your taxes free online   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. File your taxes free online Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions. File your taxes free online Example. File your taxes free online Mike is single and had the following income and losses during the tax year:   Salary $42,300     Dividends 300     Interest 1,400     Rental loss (4,000)   The rental loss was from the rental of a house Mike owned. File your taxes free online Mike had advertised and rented the house to the current tenant himself. File your taxes free online He also collected the rents, which usually came by mail. File your taxes free online All repairs were either made or contracted out by Mike. File your taxes free online Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other income. File your taxes free online Maximum special allowance. File your taxes free online   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. File your taxes free online   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. File your taxes free online 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. File your taxes free online   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. File your taxes free online Modified adjusted gross income (MAGI). File your taxes free online   This is your adjusted gross income from Form 1040, U. File your taxes free online S. File your taxes free online Individual Income Tax Return, line 38, or Form 1040NR, U. File your taxes free online S. File your taxes free online Nonresident Alien Income Tax Return, line 37, figured without taking into account: The taxable amount of social security or equivalent tier 1 railroad retirement benefits, The deductible contributions to traditional individual retirement accounts (IRAs) and section 501(c)(18) pension plans, The exclusion from income of interest from Series EE and I U. File your taxes free online S. File your taxes free online savings bonds used to pay higher educational expenses, The exclusion of amounts received under an employer's adoption assistance program, Any passive activity income or loss included on Form 8582, Any rental real estate loss allowed to real estate professionals, Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582), The deduction allowed for one-half of self-employment tax, The deduction allowed for interest paid on student loans, The deduction for qualified tuition and related fees, and The domestic production activities deduction (see the Instructions for Form 8903). File your taxes free online Form 8582 not required. File your taxes free online   Do not complete Form 8582 if you meet all of the following conditions. File your taxes free online Your only passive activities were rental real estate activities in which you actively participated. File your taxes free online Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately and you lived apart from your spouse all year). File your taxes free online If married filing separately, you lived apart from your spouse all year. File your taxes free online You have no prior year unallowed losses from these (or any other passive) activities. File your taxes free online You have no current or prior year unallowed credits from passive activities. File your taxes free online Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year). File your taxes free online You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust. File your taxes free online   If you meet all of the conditions listed above, your rental real estate activities are not limited by the passive activity rules and you do not have to complete Form 8582. File your taxes free online On lines 23a through 23e of your Schedule E, enter the applicable amounts. File your taxes free online Casualties and Thefts As a result of a casualty or theft, you may have a loss related to your rental property. File your taxes free online You may be able to deduct the loss on your income tax return. File your taxes free online Casualty. File your taxes free online   This is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. File your taxes free online Such events include a storm, fire, or earthquake. File your taxes free online Theft. File your taxes free online   This is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it. File your taxes free online Gain from casualty or theft. File your taxes free online   It is also possible to have a gain from a casualty or theft if you receive money, including insurance, that is more than your adjusted basis in the property. File your taxes free online Generally, you must report this gain. File your taxes free online However, under certain circumstances, you may defer paying tax by choosing to postpone reporting the gain. File your taxes free online To do this, you generally must buy replacement property within 2 years after the close of the first tax year in which any part of your gain is realized. File your taxes free online In certain circumstances, the replacement period can be greater than 2 years; see Replacement Period in Publication 547 for more information. File your taxes free online The cost of the replacement property must be equal to or more than the net insurance or other payment you received. File your taxes free online More information. File your taxes free online   For information on business and nonbusiness casualty and theft losses, see Publication 547. File your taxes free online How to report. File your taxes free online    If you had a casualty or theft that involved property used in your rental activity, figure the net gain or loss in Section B of Form 4684, Casualties and Thefts. File your taxes free online Follow the Instructions for Form 4684 for where to carry your net gain or loss. File your taxes free online Example In February 2008, Marie Pfister bought a rental house for $135,000 (house $120,000 and land $15,000) and immediately began renting it out. File your taxes free online In 2013, she rented it all 12 months for a monthly rental fee of $1,125. File your taxes free online In addition to her rental income of $13,500 (12 x $1,125), Marie had the following expenses. File your taxes free online Mortgage interest $8,000 Fire insurance (1-year policy) 250 Miscellaneous repairs 400 Real estate taxes imposed and paid 500 Maintenance 200 Marie depreciates the residential rental property under MACRS GDS. File your taxes free online This means using the straight line method over a recovery period of 27. File your taxes free online 5 years. File your taxes free online She uses Table 2-2d to find her depreciation percentage. File your taxes free online Because she placed the property in service in February 2008, she continues to use that row of Table 2-2d. File your taxes free online For year 6, the rate is 3. File your taxes free online 636%. File your taxes free online Marie figures her net rental income or loss for the house as follows: Total rental income received  ($1,125 × 12) $13,500 Minus: Expenses     Mortgage interest $8,000   Fire insurance 250   Miscellaneous repairs 400   Real estate taxes 500   Maintenance 200   Total expenses 9,350 Balance $4,150 Minus: Depreciation ($120,000 x 3. File your taxes free online 636%) 4,363 Net rental (loss) for house ($213)       Marie had a net loss for the year. File your taxes free online Because she actively participated in her passive rental real estate activity and her loss was less than $25,000, she can deduct the loss on her return. File your taxes free online Marie also meets all of the requirements for not having to file Form 8582. File your taxes free online She uses Schedule E, Part I, to report her rental income and expenses. File your taxes free online She enters her income, expenses, and depreciation for the house in the column for Property A and enters her loss on line 22. File your taxes free online Form 4562 is not required. File your taxes free online Prev  Up  Next   Home   More Online Publications