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H&r Block Free Military Taxes

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H&r Block Free Military Taxes

H&r block free military taxes 3. H&r block free military taxes   Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. H&r block free military taxes Leveraged leases. H&r block free military taxes Leveraged leases of limited-use property. H&r block free military taxes Taxes on Leased Property Cost of Getting a Lease Improvements by Lessee Capitalizing Rent Expenses Introduction This chapter discusses the tax treatment of rent or lease payments you make for property you use in your business but do not own. H&r block free military taxes It also discusses how to treat other kinds of payments you make that are related to your use of this property. H&r block free military taxes These include payments you make for taxes on the property. H&r block free military taxes Topics - This chapter discusses: The definition of rent Taxes on leased property The cost of getting a lease Improvements by the lessee Capitalizing rent expenses Rent Rent is any amount you pay for the use of property you do not own. H&r block free military taxes In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. H&r block free military taxes If you have or will receive equity in or title to the property, the rent is not deductible. H&r block free military taxes Unreasonable rent. H&r block free military taxes   You cannot take a rental deduction for unreasonable rent. H&r block free military taxes Ordinarily, the issue of reasonableness arises only if you and the lessor are related. H&r block free military taxes Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. H&r block free military taxes Rent is not unreasonable just because it is figured as a percentage of gross sales. H&r block free military taxes For examples of related persons, see Related persons in chapter 2, Publication 544. H&r block free military taxes Rent on your home. H&r block free military taxes   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. H&r block free military taxes You must meet the requirements for business use of your home. H&r block free military taxes For more information, see Business use of your home in chapter 1. H&r block free military taxes Rent paid in advance. H&r block free military taxes   Generally, rent paid in your trade or business is deductible in the year paid or accrued. H&r block free military taxes If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. H&r block free military taxes You can deduct the rest of your payment only over the period to which it applies. H&r block free military taxes Example 1. H&r block free military taxes You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. H&r block free military taxes Your rent is $12,000 per year. H&r block free military taxes You paid the first year's rent ($12,000) on June 30. H&r block free military taxes You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. H&r block free military taxes Example 2. H&r block free military taxes You are a calendar year taxpayer. H&r block free military taxes Last January you leased property for 3 years for $6,000 a year. H&r block free military taxes You paid the full $18,000 (3 × $6,000) during the first year of the lease. H&r block free military taxes Each year you can deduct only $6,000, the part of the lease that applies to that year. H&r block free military taxes Canceling a lease. H&r block free military taxes   You generally can deduct as rent an amount you pay to cancel a business lease. H&r block free military taxes Lease or purchase. H&r block free military taxes   There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. H&r block free military taxes You must first determine whether your agreement is a lease or a conditional sales contract. H&r block free military taxes Payments made under a conditional sales contract are not deductible as rent expense. H&r block free military taxes Conditional sales contract. H&r block free military taxes   Whether an agreement is a conditional sales contract depends on the intent of the parties. H&r block free military taxes Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. H&r block free military taxes No single test, or special combination of tests, always applies. H&r block free military taxes However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. H&r block free military taxes The agreement applies part of each payment toward an equity interest you will receive. H&r block free military taxes You get title to the property after you make a stated amount of required payments. H&r block free military taxes The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. H&r block free military taxes You pay much more than the current fair rental value of the property. H&r block free military taxes You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. H&r block free military taxes Determine this value when you make the agreement. H&r block free military taxes You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. H&r block free military taxes The agreement designates part of the payments as interest, or that part is easy to recognize as interest. H&r block free military taxes Leveraged leases. H&r block free military taxes   Leveraged lease transactions may not be considered leases. H&r block free military taxes Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. H&r block free military taxes Usually the lease term covers a large part of the useful life of the leased property, and the lessee's payments to the lessor are enough to cover the lessor's payments to the lender. H&r block free military taxes   If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. H&r block free military taxes Revenue Procedure 2001-28 on page 1156 of Internal Revenue Bulletin 2001-19 contains the guidelines the IRS will use to determine if a leveraged lease is a lease for federal income tax purposes. H&r block free military taxes Revenue Procedure 2001-29 on page 1160 of the same Internal Revenue Bulletin provides the information required to be furnished in a request for an advance ruling on a leveraged lease transaction. H&r block free military taxes Internal Revenue Bulletin 2001-19 is available at www. H&r block free military taxes irs. H&r block free military taxes gov/pub/irs-irbs/irb01-19. H&r block free military taxes pdf. H&r block free military taxes   In general, Revenue Procedure 2001-28 provides that, for advance ruling purposes only, the IRS will consider the lessor in a leveraged lease transaction to be the owner of the property and the transaction to be a valid lease if all the factors in the revenue procedure are met, including the following. H&r block free military taxes The lessor must maintain a minimum unconditional “at risk” equity investment in the property (at least 20% of the cost of the property) during the entire lease term. H&r block free military taxes The lessee may not have a contractual right to buy the property from the lessor at less than fair market value when the right is exercised. H&r block free military taxes The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. H&r block free military taxes The lessee may not lend any money to the lessor to buy the property or guarantee the loan used by the lessor to buy the property. H&r block free military taxes The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. H&r block free military taxes   The IRS may charge you a user fee for issuing a tax ruling. H&r block free military taxes For more information, see Revenue Procedure 2014-1 available at  www. H&r block free military taxes irs. H&r block free military taxes gov/irb/2014-1_IRB/ar05. H&r block free military taxes html. H&r block free military taxes Leveraged leases of limited-use property. H&r block free military taxes   The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. H&r block free military taxes Limited-use property is property not expected to be either useful to or usable by a lessor at the end of the lease term except for continued leasing or transfer to a lessee. H&r block free military taxes See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. H&r block free military taxes Leases over $250,000. H&r block free military taxes   Special rules are provided for certain leases of tangible property. H&r block free military taxes The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. H&r block free military taxes Rents increase during the lease. H&r block free military taxes Rents decrease during the lease. H&r block free military taxes Rents are deferred (rent is payable after the end of the calendar year following the calendar year in which the use occurs and the rent is allocated). H&r block free military taxes Rents are prepaid (rent is payable before the end of the calendar year preceding the calendar year in which the use occurs and the rent is allocated). H&r block free military taxes These rules do not apply if your lease specifies equal amounts of rent for each month in the lease term and all rent payments are due in the calendar year to which the rent relates (or in the preceding or following calendar year). H&r block free military taxes   Generally, if the special rules apply, you must use an accrual method of accounting (and time value of money principles) for your rental expenses, regardless of your overall method of accounting. H&r block free military taxes In addition, in certain cases in which the IRS has determined that a lease was designed to achieve tax avoidance, you must take rent and stated or imputed interest into account under a constant rental accrual method in which the rent is treated as accruing ratably over the entire lease term. H&r block free military taxes For details, see section 467 of the Internal Revenue Code. H&r block free military taxes Taxes on Leased Property If you lease business property, you can deduct as additional rent any taxes you have to pay to or for the lessor. H&r block free military taxes When you can deduct these taxes as additional rent depends on your accounting method. H&r block free military taxes Cash method. H&r block free military taxes   If you use the cash method of accounting, you can deduct the taxes as additional rent only for the tax year in which you pay them. H&r block free military taxes Accrual method. H&r block free military taxes   If you use an accrual method of accounting, you can deduct taxes as additional rent for the tax year in which you can determine all the following. H&r block free military taxes That you have a liability for taxes on the leased property. H&r block free military taxes How much the liability is. H&r block free military taxes That economic performance occurred. H&r block free military taxes   The liability and amount of taxes are determined by state or local law and the lease agreement. H&r block free military taxes Economic performance occurs as you use the property. H&r block free military taxes Example 1. H&r block free military taxes Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. H&r block free military taxes Oak leases land for use in its business. H&r block free military taxes Under state law, owners of real property become liable (incur a lien on the property) for real estate taxes for the year on January 1 of that year. H&r block free military taxes However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. H&r block free military taxes Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. H&r block free military taxes If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. H&r block free military taxes Oak cannot deduct the real estate taxes as rent until the tax bill is issued. H&r block free military taxes This is when Oak's liability under the lease becomes fixed. H&r block free military taxes Example 2. H&r block free military taxes The facts are the same as in Example 1 except that, according to the terms of the lease, Oak becomes liable for the real estate taxes when the owner of the property becomes liable for them. H&r block free military taxes As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. H&r block free military taxes This is the year in which Oak's liability under the lease becomes fixed. H&r block free military taxes Cost of Getting a Lease You may either enter into a new lease with the lessor of the property or get an existing lease from another lessee. H&r block free military taxes Very often when you get an existing lease from another lessee, you must pay the previous lessee money to get the lease, besides having to pay the rent on the lease. H&r block free military taxes If you get an existing lease on property or equipment for your business, you generally must amortize any amount you pay to get that lease over the remaining term of the lease. H&r block free military taxes For example, if you pay $10,000 to get a lease and there are 10 years remaining on the lease with no option to renew, you can deduct $1,000 each year. H&r block free military taxes The cost of getting an existing lease of tangible property is not subject to the amortization rules for section 197 intangibles discussed in chapter 8. H&r block free military taxes Option to renew. H&r block free military taxes   The term of the lease for amortization includes all renewal options plus any other period for which you and the lessor reasonably expect the lease to be renewed. H&r block free military taxes However, this applies only if less than 75% of the cost of getting the lease is for the term remaining on the purchase date (not including any period for which you may choose to renew, extend, or continue the lease). H&r block free military taxes Allocate the lease cost to the original term and any option term based on the facts and circumstances. H&r block free military taxes In some cases, it may be appropriate to make the allocation using a present value computation. H&r block free military taxes For more information, see Regulations section 1. H&r block free military taxes 178-1(b)(5). H&r block free military taxes Example 1. H&r block free military taxes You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. H&r block free military taxes Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. H&r block free military taxes Because $7,000 is less than 75% of the total $10,000 cost of the lease (or $7,500), you must amortize the $10,000 over 30 years. H&r block free military taxes That is the remaining life of your present lease plus the periods for renewal. H&r block free military taxes Example 2. H&r block free military taxes The facts are the same as in Example 1, except that you paid $8,000 for the original lease and $2,000 for the renewal options. H&r block free military taxes You can amortize the entire $10,000 over the 20-year remaining life of the original lease. H&r block free military taxes The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). H&r block free military taxes Cost of a modification agreement. H&r block free military taxes   You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. H&r block free military taxes You must capitalize these payments and amortize them over the remaining period of the lease. H&r block free military taxes You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. H&r block free military taxes Example. H&r block free military taxes You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. H&r block free military taxes However, before you occupy it, you decide that you really need less space. H&r block free military taxes The lessor agrees to reduce your rent from $7,000 to $6,000 per year and to release the excess space from the original lease. H&r block free military taxes In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. H&r block free military taxes   You must capitalize the $3,000 and amortize it over the 20-year term of the lease. H&r block free military taxes Your amortization deduction each year will be $150 ($3,000 ÷ 20). H&r block free military taxes You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. H&r block free military taxes Commissions, bonuses, and fees. H&r block free military taxes   Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. H&r block free military taxes You must amortize these costs over the term of the lease. H&r block free military taxes Loss on merchandise and fixtures. H&r block free military taxes   If you sell at a loss merchandise and fixtures that you bought solely to get a lease, the loss is a cost of getting the lease. H&r block free military taxes You must capitalize the loss and amortize it over the remaining term of the lease. H&r block free military taxes Improvements by Lessee If you add buildings or make other permanent improvements to leased property, depreciate the cost of the improvements using the modified accelerated cost recovery system (MACRS). H&r block free military taxes Depreciate the property over its appropriate recovery period. H&r block free military taxes You cannot amortize the cost over the remaining term of the lease. H&r block free military taxes If you do not keep the improvements when you end the lease, figure your gain or loss based on your adjusted basis in the improvements at that time. H&r block free military taxes For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. H&r block free military taxes Assignment of a lease. H&r block free military taxes   If a long-term lessee who makes permanent improvements to land later assigns all lease rights to you for money and you pay the rent required by the lease, the amount you pay for the assignment is a capital investment. H&r block free military taxes If the rental value of the leased land increased since the lease began, part of your capital investment is for that increase in the rental value. H&r block free military taxes The rest is for your investment in the permanent improvements. H&r block free military taxes   The part that is for the increased rental value of the land is a cost of getting a lease, and you amortize it over the remaining term of the lease. H&r block free military taxes You can depreciate the part that is for your investment in the improvements over the recovery period of the property as discussed earlier, without regard to the lease term. H&r block free military taxes Capitalizing Rent Expenses Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. H&r block free military taxes Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. H&r block free military taxes You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. H&r block free military taxes Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. H&r block free military taxes Uniform capitalization rules. H&r block free military taxes   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. H&r block free military taxes Produce real property or tangible personal property. H&r block free military taxes For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. H&r block free military taxes Acquire property for resale. H&r block free military taxes However, these rules do not apply to the following property. H&r block free military taxes Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. H&r block free military taxes Property you produce if you meet either of the following conditions. H&r block free military taxes Your indirect costs of producing the property are $200,000 or less. H&r block free military taxes You use the cash method of accounting and do not account for inventories. H&r block free military taxes Example 1. H&r block free military taxes You rent construction equipment to build a storage facility. H&r block free military taxes If you are subject to the uniform capitalization rules, you must capitalize as part of the cost of the building the rent you paid for the equipment. H&r block free military taxes You recover your cost by claiming a deduction for depreciation on the building. H&r block free military taxes Example 2. H&r block free military taxes You rent space in a facility to conduct your business of manufacturing tools. H&r block free military taxes If you are subject to the uniform capitalization rules, you must include the rent you paid to occupy the facility in the cost of the tools you produce. H&r block free military taxes More information. H&r block free military taxes   For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. H&r block free military taxes Prev  Up  Next   Home   More Online Publications
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The H&r Block Free Military Taxes

H&r block free military taxes 5. H&r block free military taxes   Personal Use of Dwelling Unit (Including Vacation Home) Table of Contents Dividing Expenses Dwelling Unit Used as a HomeMain home. H&r block free military taxes Shared equity financing agreement. H&r block free military taxes Donation of use of the property. H&r block free military taxes Examples. H&r block free military taxes Days used for repairs and maintenance. H&r block free military taxes Days used as a main home before or after renting. H&r block free military taxes Reporting Income and DeductionsNot used as a home. H&r block free military taxes Used as a home but rented less than 15 days. H&r block free military taxes Used as a home and rented 15 days or more. H&r block free military taxes 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. H&r block free military taxes 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. H&r block free military taxes Only your rental expenses may deducted on Schedule E (Form 1040). H&r block free military taxes Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). H&r block free military taxes You must also determine if the dwelling unit is considered a home. H&r block free military taxes The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. H&r block free military taxes Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. H&r block free military taxes 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. H&r block free military taxes Dwelling unit. H&r block free military taxes   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. H&r block free military taxes It also includes all structures or other property belonging to the dwelling unit. H&r block free military taxes A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. H&r block free military taxes   A dwelling unit does not include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment. H&r block free military taxes 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. H&r block free military taxes Example. H&r block free military taxes You rent a room in your home that is always available for short-term occupancy by paying customers. H&r block free military taxes You do not use the room yourself and you allow only paying customers to use the room. H&r block free military taxes This room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. H&r block free military taxes 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. H&r block free military taxes When dividing your expenses, follow these rules. H&r block free military taxes 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. H&r block free military taxes (This rule does not apply when determining whether you used the unit as a home. H&r block free military taxes ) Any day that the unit is available for rent but not actually rented is not a day of rental use. H&r block free military taxes Fair rental price. H&r block free military taxes   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. H&r block free military taxes 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. H&r block free military taxes   Ask yourself the following questions when comparing another property with yours. H&r block free military taxes 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. H&r block free military taxes Example. H&r block free military taxes Your beach cottage was available for rent from June 1 through August 31 (92 days). H&r block free military taxes 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. H&r block free military taxes 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. H&r block free military taxes Your family also used the cottage during the last 2 weeks of May (14 days). H&r block free military taxes The cottage was not used at all before May 17 or after August 31. H&r block free military taxes You figure the part of the cottage expenses to treat as rental expenses as follows. H&r block free military taxes The cottage was used for rental a total of 85 days (92 − 7). H&r block free military taxes The days it was available for rent but not rented (7 days) are not days of rental use. H&r block free military taxes The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. H&r block free military taxes You used the cottage for personal purposes for 14 days (the last 2 weeks in May). H&r block free military taxes The total use of the cottage was 99 days (14 days personal use + 85 days rental use). H&r block free military taxes Your rental expenses are 85/99 (86%) of the cottage expenses. H&r block free military taxes Note. H&r block free military taxes 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. H&r block free military taxes Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. H&r block free military taxes 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. H&r block free military taxes If you have a net loss, you may not be able to deduct all of the rental expenses. H&r block free military taxes See Dwelling Unit Used as a Home, next. H&r block free military taxes 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. H&r block free military taxes 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. H&r block free military taxes See What is a day of personal use , later. H&r block free military taxes 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. H&r block free military taxes Instead, count it as a day of personal use in applying both (1) and (2) above. H&r block free military taxes 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. H&r block free military taxes 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). H&r block free military taxes However, see Days used as a main home before or after renting , later. H&r block free military taxes 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. H&r block free military taxes Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. H&r block free military taxes ), and lineal descendants (children, grandchildren, etc. H&r block free military taxes ). H&r block free military taxes Anyone under an arrangement that lets you use some other dwelling unit. H&r block free military taxes Anyone at less than a fair rental price. H&r block free military taxes Main home. H&r block free military taxes   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. H&r block free military taxes Shared equity financing agreement. H&r block free military taxes   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. H&r block free military taxes Donation of use of the property. H&r block free military taxes   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. H&r block free military taxes Examples. H&r block free military taxes   The following examples show how to determine if you have days of personal use. H&r block free military taxes Example 1. H&r block free military taxes You and your neighbor are co-owners of a condominium at the beach. H&r block free military taxes Last year, you rented the unit to vacationers whenever possible. H&r block free military taxes The unit was not used as a main home by anyone. H&r block free military taxes Your neighbor used the unit for 2 weeks last year; you did not use it at all. H&r block free military taxes 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. H&r block free military taxes Example 2. H&r block free military taxes You and your neighbors are co-owners of a house under a shared equity financing agreement. H&r block free military taxes Your neighbors live in the house and pay you a fair rental price. H&r block free military taxes 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. H&r block free military taxes This is because your neighbors rent the house as their main home under a shared equity financing agreement. H&r block free military taxes Example 3. H&r block free military taxes You own a rental property that you rent to your son. H&r block free military taxes Your son does not own any interest in this property. H&r block free military taxes He uses it as his main home and pays you a fair rental price. H&r block free military taxes 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. H&r block free military taxes Example 4. H&r block free military taxes You rent your beach house to Rosa. H&r block free military taxes Rosa rents her cabin in the mountains to you. H&r block free military taxes You each pay a fair rental price. H&r block free military taxes 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. H&r block free military taxes Example 5. H&r block free military taxes You rent an apartment to your mother at less than a fair rental price. H&r block free military taxes 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. H&r block free military taxes Days used for repairs and maintenance. H&r block free military taxes   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. H&r block free military taxes 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. H&r block free military taxes Example. H&r block free military taxes Corey owns a cabin in the mountains that he rents for most of the year. H&r block free military taxes He spends a week at the cabin with family members. H&r block free military taxes 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. H&r block free military taxes Corey's family members, however, work substantially full time on the cabin each day during the week. H&r block free military taxes The main purpose of being at the cabin that week is to do maintenance work. H&r block free military taxes Therefore, the use of the cabin during the week by Corey and his family will not be considered personal use by Corey. H&r block free military taxes Days used as a main home before or after renting. H&r block free military taxes   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. H&r block free military taxes Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. H&r block free military taxes 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. H&r block free military taxes However, this special rule does not apply when dividing expenses between rental and personal use. H&r block free military taxes See Property Changed to Rental Use in chapter 4. H&r block free military taxes Example 1. H&r block free military taxes 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. H&r block free military taxes You rented your house at a fair rental price from March 15, 2012, to May 14, 2013 (14 months). H&r block free military taxes On June 1, 2013, you moved back into your old house. H&r block free military taxes 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. H&r block free military taxes Therefore, you would use the rules in chapter 1 when figuring your rental income and expenses. H&r block free military taxes Example 2. H&r block free military taxes On January 31, you moved out of the condominium where you had lived for 3 years. H&r block free military taxes You offered it for rent at a fair rental price beginning on February 1. H&r block free military taxes You were unable to rent it until April. H&r block free military taxes On September 15, you sold the condominium. H&r block free military taxes 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. H&r block free military taxes Examples. H&r block free military taxes   The following examples show how to determine whether you used your rental property as a home. H&r block free military taxes Example 1. H&r block free military taxes You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. H&r block free military taxes You rented the basement apartment at a fair rental price to college students during the regular school year. H&r block free military taxes You rented to them on a 9-month lease (273 days). H&r block free military taxes You figured 10% of the total days rented to others at a fair rental price is 27 days. H&r block free military taxes During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. H&r block free military taxes Your basement apartment was used as a home because you used it for personal purposes for 30 days. H&r block free military taxes Rent-free use by your brothers is considered personal use. H&r block free military taxes Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). H&r block free military taxes Example 2. H&r block free military taxes 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). H&r block free military taxes Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. H&r block free military taxes You figured 10% of the total days rented to others at a fair rental price is 3 days. H&r block free military taxes The room was used as a home because you used it for personal purposes for 21 days. H&r block free military taxes That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). H&r block free military taxes Example 3. H&r block free military taxes You own a condominium apartment in a resort area. H&r block free military taxes You rented it at a fair rental price for a total of 170 days during the year. H&r block free military taxes 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. H&r block free military taxes Your family actually used the apartment for 10 of those days. H&r block free military taxes Therefore, the apartment is treated as having been rented for 160 (170 – 10) days. H&r block free military taxes You figured 10% of the total days rented to others at a fair rental price is 16 days. H&r block free military taxes Your family also used the apartment for 7 other days during the year. H&r block free military taxes You used the apartment as a home because you used it for personal purposes for 17 days. H&r block free military taxes That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). H&r block free military taxes Minimal rental use. H&r block free military taxes   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. H&r block free military taxes See Used as a home but rented less than 15 days, later, for more information. H&r block free military taxes Limit on deductions. H&r block free military taxes   Renting a dwelling unit that is considered a home is not a passive activity. H&r block free military taxes 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. H&r block free military taxes 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. H&r block free military taxes Any expenses carried forward to the next year will be subject to any limits that apply for that year. H&r block free military taxes 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. H&r block free military taxes   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 5–1. H&r block free military taxes Reporting Income and Deductions Property not used for personal purposes. H&r block free military taxes   If you do not use a dwelling unit for personal purposes, see chapter 3 for how to report your rental income and expenses. H&r block free military taxes Property used for personal purposes. H&r block free military taxes   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. H&r block free military taxes Not used as a home. H&r block free military taxes   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. H&r block free military taxes 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 . H&r block free military taxes The expenses for personal use are not deductible as rental expenses. H&r block free military taxes   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses in chapter 3. H&r block free military taxes Used as a home but rented less than 15 days. H&r block free military taxes   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). H&r block free military taxes You are not required to report the rental income and rental expenses from this activity. H&r block free military taxes The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). H&r block free military taxes See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. H&r block free military taxes Used as a home and rented 15 days or more. H&r block free military taxes   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. H&r block free military taxes 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 . H&r block free military taxes The expenses for personal use are not deductible as rental expenses. H&r block free military taxes   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. H&r block free military taxes You do not need to use Worksheet 5-1. H&r block free military taxes   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. H&r block free military taxes To figure your deductible rental expenses and any carryover to next year, use Worksheet 5–1. H&r block free military taxes Worksheet 5-1. H&r block free military taxes 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. H&r block free military taxes Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . H&r block free military taxes ) 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. H&r block free military taxes Rental Use Percentage A. H&r block free military taxes Total days available for rent at fair rental price A. H&r block free military taxes       B. H&r block free military taxes Total days available for rent (line A) but not rented B. H&r block free military taxes       C. H&r block free military taxes Total days of rental use. H&r block free military taxes Subtract line B from line A C. H&r block free military taxes       D. H&r block free military taxes Total days of personal use (including days rented at less than fair rental price) D. H&r block free military taxes       E. H&r block free military taxes Total days of rental and personal use. H&r block free military taxes Add lines C and D E. H&r block free military taxes       F. H&r block free military taxes Percentage of expenses allowed for rental. H&r block free military taxes Divide line C by line E     F. H&r block free military taxes . H&r block free military taxes PART II. H&r block free military taxes Allowable Rental Expenses 1. H&r block free military taxes Enter rents received 1. H&r block free military taxes   2a. H&r block free military taxes Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. H&r block free military taxes       b. H&r block free military taxes Enter the rental portion of real estate taxes b. H&r block free military taxes       c. H&r block free military taxes Enter the rental portion of deductible casualty and theft losses (see instructions) c. H&r block free military taxes       d. H&r block free military taxes Enter direct rental expenses (see instructions) d. H&r block free military taxes       e. H&r block free military taxes Fully deductible rental expenses. H&r block free military taxes Add lines 2a–2d. H&r block free military taxes Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. H&r block free military taxes   3. H&r block free military taxes Subtract line 2e from line 1. H&r block free military taxes If zero or less, enter -0- 3. H&r block free military taxes   4a. H&r block free military taxes Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. H&r block free military taxes       b. H&r block free military taxes Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. H&r block free military taxes       c. H&r block free military taxes Carryover of operating expenses from 2012 worksheet c. H&r block free military taxes       d. H&r block free military taxes Add lines 4a–4c d. H&r block free military taxes       e. H&r block free military taxes Allowable expenses. H&r block free military taxes Enter the smaller of line 3 or line 4d (see instructions) 4e. H&r block free military taxes   5. H&r block free military taxes Subtract line 4e from line 3. H&r block free military taxes If zero or less, enter -0- 5. H&r block free military taxes   6a. H&r block free military taxes Enter the rental portion of excess casualty and theft losses (see instructions) 6a. H&r block free military taxes       b. H&r block free military taxes Enter the rental portion of depreciation of the dwelling unit b. H&r block free military taxes       c. H&r block free military taxes Carryover of excess casualty losses and depreciation from 2012 worksheet c. H&r block free military taxes       d. H&r block free military taxes Add lines 6a–6c d. H&r block free military taxes       e. H&r block free military taxes Allowable excess casualty and theft losses and depreciation. H&r block free military taxes Enter the smaller of  line 5 or line 6d (see instructions) 6e. H&r block free military taxes   PART III. H&r block free military taxes Carryover of Unallowed Expenses to Next Year 7a. H&r block free military taxes Operating expenses to be carried over to next year. H&r block free military taxes Subtract line 4e from line 4d 7a. H&r block free military taxes   b. H&r block free military taxes Excess casualty and theft losses and depreciation to be carried over to next year. H&r block free military taxes  Subtract line 6e from line 6d b. H&r block free military taxes   Worksheet 5-1 Instructions. H&r block free military taxes Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. H&r block free military taxes 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. H&r block free military taxes Line 2a. H&r block free military taxes Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. H&r block free military taxes Do not include interest on a loan that did not benefit the dwelling unit. H&r block free military taxes 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. H&r block free military taxes Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. H&r block free military taxes Include the rental portion of this interest in the total you enter on line 2a of the worksheet. H&r block free military taxes   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. H&r block free military taxes See the Schedule A instructions. H&r block free military taxes However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. H&r block free military taxes See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. H&r block free military taxes Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. H&r block free military taxes   Note. H&r block free military taxes Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. H&r block free military taxes Instead, figure the personal portion on a separate Schedule A. H&r block free military taxes 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. H&r block free military taxes           Line 2c. H&r block free military taxes 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. H&r block free military taxes To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. H&r block free military taxes If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. H&r block free military taxes On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. H&r block free military taxes Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. H&r block free military taxes   Note. H&r block free military taxes Do not file this Form 4684 or use it to figure your personal losses on Schedule A. H&r block free military taxes Instead, figure the personal portion on a separate Form 4684. H&r block free military taxes           Line 2d. H&r block free military taxes Enter the total of your rental expenses that are directly related only to the rental activity. H&r block free military taxes These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. H&r block free military taxes Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. H&r block free military taxes           Line 2e. H&r block free military taxes 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. H&r block free military taxes Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. H&r block free military taxes           Line 4b. H&r block free military taxes 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. H&r block free military taxes 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. H&r block free military taxes Do not include interest on a loan that did not benefit the dwelling unit  (as explained in the line 2a instructions). H&r block free military taxes           Line 4e. H&r block free military taxes 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. H&r block free military taxes *           Line 6a. H&r block free military taxes To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. H&r block free military taxes   A. H&r block free military taxes Enter the amount from Form 4684, line 10       B. H&r block free military taxes Enter the rental portion of line A       C. H&r block free military taxes Enter the amount from line 2c of this worksheet       D. H&r block free military taxes Subtract line C from line B. H&r block free military taxes Enter the result here and on line 6a of this worksheet               Line 6e. H&r block free military taxes 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. H&r block free military taxes * *Allocating the limited deduction. H&r block free military taxes 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. H&r block free military taxes Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. H&r block free military taxes Prev  Up  Next   Home   More Online Publications