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Irs com Publication 557 - Additional Material Table of Contents Appendix. Irs com Sample Articles of Organization, continued Organization Reference Chart Section of 1986 Code Description of organization General nature of activities Application  Form Annual return required to be  filed Contributions  allowable 501(c)(1) Corporations Organized under Act of Congress (including Federal Credit Unions) Instrumentalities of the  United States No Form None Yes, if made for exclusively public purposes 501(c)(2) Title Holding Corporation For Exempt Organization Holding title to property of an  exempt organization 1024 9901 or 990-EZ8 No2 501(c)(3) Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations Activities of nature implied by description of class of organization 1023 9901 or 990-EZ8, or 990-PF Yes, generally 501(c)(4) Civic Leagues, Social Welfare Organizations, and Local Associations of Employees Promotion of community welfare; charitable, educational, or recreational 1024 9901 or 990-EZ8 No, generally 2, 3 501(c)(5) Labor, Agricultural, and Horticultural Organizations Educational or instructive, the  purpose being to improve conditions of work, and to improve products of efficiency 1024 9901 or 990-EZ8 No2 501(c)(6) Business Leagues, Chambers of Commerce, Real Estate Boards, etc. Irs com Improvement of business  conditions of one or more lines of business 1024 9901 or 990-EZ8 No2 501(c)(7) Social and Recreational Clubs Pleasure, recreation, social activities 1024 9901 or 990-EZ8 No2 501(c)(8) Fraternal Beneficiary Societies  and Associations Lodge providing for payment of life, sickness, accident or other benefits  to members 1024 9901 or 990-EZ8 Yes, if for certain Sec. Irs com 501(c)(3) purposes 501(c)(9) Voluntary Employees Beneficiary Associations Providing for payment of life, sickness, accident, or other benefits to members 1024 9901 or 990-EZ8 No2 501(c)(10) Domestic Fraternal Societies  and Associations Lodge devoting its net earnings to charitable, fraternal, and other  specified purposes. Irs com No life, sickness, or accident benefits to members 1024 9901 or 990-EZ8 Yes, if for certain Sec. Irs com 501(c)(3) purposes 501(c)(11) Teachers' Retirement Fund Associations Teachers' association for payment of retirement benefits Letter6 9901 or 990-EZ8 No2 501(c)(12) Benevolent Life Insurance Associations, Mutual Ditch or  Irrigation Companies, Mutual or Cooperative Telephone Companies, etc. Irs com Activities of a mutually beneficial  nature similar to those implied by the description of class of organization 1024 9901 or 990-EZ8 No2 501(c)(13) Cemetery Companies Burials and incidental activities 1024 9901 or 990-EZ8 Yes, generally 501(c)(14) State-Chartered Credit Unions,  Mutual Reserve Funds Loans to members Letter6 9901 or 990-EZ8 No2 501(c)(15) Mutual Insurance Companies or Associations Providing insurance to members substantially at cost 1024 9901 or 990-EZ8 No2 501(c)(16) Cooperative Organizations to  Finance Crop Operations Financing crop operations in  conjunction with activities of a marketing  or purchasing association Form 1120-C6 9901 or 990-EZ8 No2 501(c)(17) Supplemental Unemployment  Benefit Trusts Provides for payment of  supplemental unemployment compensation benefits 1024 9901 or 990-EZ8 No2 501(c)(18) Employee Funded Pension Trust (created before June 25, 1959) Payment of benefits under a  pension plan funded by employees Letter6 9901 or 990-EZ8 No2 501(c)(19) Post or Organization of Past or  Present Members of the Armed Forces Activities implied by nature of organization 1024 9901 or 990-EZ8 No, generally7 501(c)(21) Black Lung Benefit Trusts Funded by coal mine operators to satisfy their liability for disability or  death due to black lung diseases Letter6 990-BL No4 501(c)(22) Withdrawal Liability Payment Fund To provide funds to meet the  liability of employers withdrawing from  a multi-employer pension fund Letter6 9901 or 990-EZ8 No5 501(c)(23) Veterans' Organization (created before 1880) To provide insurance and other  benefits to veterans Letter6 9901 or 990-EZ8 No, generally7 501(c)(25) Title Holding Corporations or Trusts with Multiple Parent Corporations Holding title and paying over  income from property to 35 or fewer parents or beneficiaries 1024 9901 or 990-EZ8 No 501(c)(26) State-Sponsored Organization Providing Health Coverage for High-Risk Individuals Provides health care coverage to high-risk individuals Letter6 9901 or 990-EZ8 No 501(c)(27) State-Sponsored Workers' Compensation Reinsurance Organization Reimburses members for losses  under workers' compensation acts Letter6 9901 or 990-EZ8 No 501(c)(28) National Railroad Retirement Investment Trust Manages and invests the assets of the Railroad Retirement Account No Form 99011 No11 501(c)(29) CO-OP health insurance issuers A qualified health insurance issuer which has received a loan or grant under the CO-OP program Letter and Form 871814 9901 No13 501(d) Religious and Apostolic Associations Regular business activities;  Communal religious community No Form 10659 No2 501(e) Cooperative Hospital Service Organizations Performs cooperative services for hospitals 1023 9901 or 990-EZ8 Yes 501(f) Cooperative Service Organizations  of Operating Educational Organizations Performs collective investment  services for educational organizations 1023 9901 or 990-EZ8 Yes 501(k) Child Care Organizations Provides care for children 1023 9901 or 990-EZ8 Yes 501(n) Charitable Risk Pools Pools certain insurance risks of sec. Irs com 501(c)(3) organizations 1023 9901 or 990-EZ8 Yes 501(q) Credit Counseling Organization Credit counseling services 1023 102312 No 521(a) Farmers' Cooperative Associations Cooperative marketing and  purchasing for agricultural procedures 1028 1120-C No 527 Political organizations A party, committee, fund,  association, etc. Irs com , that directly or indirectly accepts contributions or makes expenditures for political campaigns 8871 1120-POL10 9901 or 990-EZ8 No 1For exceptions to the filing requirement, see chapter 2 and the form instructions. Irs com Note: For annual tax periods beginning after 2006, most tax-exempt organizations, other than churches, are required to file an annual Form 990, 990-EZ, or 990-PF with the IRS or to submit an annual electronic notice, Form 990-N (e-Postcard), to the IRS. Irs com Tax-exempt organizations failing to file an annual return or submit an annual notice as required for 3 consecutive years will automatically lose their tax-exempt status. Irs com    2An organization exempt under a subsection of section 501 other than 501(c)(3) can establish a charitable fund, contributions to which are deductible. Irs com Such a fund must itself meet the requirements of section 501(c)(3) and the related notice requirements of section 508(a). Irs com    3Contributions to volunteer fire companies and similar organizations are deductible, but only if made for exclusively public purposes. Irs com    4Deductible as a business expense to the extent allowed by section 192. Irs com    5Deductible as a business expense to the extent allowed by section 194A. Irs com 6Application is by letter to the address shown on Form 8718. Irs com A copy of the organizing document should be attached and the letter should be signed by an officer. Irs com    7Contributions to these organizations are deductible only if 90% or more of the organization's members are war veterans. Irs com    8For limits on the use of Form 990-EZ, see chapter 2 and the general instructions for Form 990-EZ (or Form 990). Irs com    9Although the organization files a partnership return, all distributions are deemed dividends. Irs com The members are not entitled to pass through treatment of the organization's income or expenses. Irs com    10Form 1120-POL is required only if the organization has taxable income as defined in section 527(c). Irs com    11Only required to annually file so much of the Form 990 that relates to the names and addresses of the officers, directors, trustees, and key employees, and their titles, compensation, and hours devoted to their positions (Part VII of Form 990), and to complete Item I in the Heading of Form 990 to confirm its tax-exempt status under section 501(c)(28). Irs com    12See section 501(q) if the organization provides credit counseling services and seeks recognition of exemption under section 501(c)(4). Irs com Use Form 1024 if applying for recognition under section 501(c)(4). Irs com    13See section 501(c)(29) for details. Irs com    14See Revenue Procedure 2012-11, sec. Irs com 4. Irs com 01, 2012-7 I. Irs com R. Irs com B. Irs com 368, for details. Irs com Appendix. Irs com Sample Articles of Organization The following are examples of Articles of Incorporation (Draft A) and a declaration of trust (Draft B) that contain the required information as to purposes and powers of an organization and disposition of its assets upon dissolution. Irs com You should bear in mind that requirements for these instruments may vary under applicable state law. Irs com See Private Foundations and Public Charities , earlier for the special provisions required in a private foundation's governing instrument in order for it to qualify for exemption. Irs com DRAFT A  Articles of Incorporation of the undersigned, a majority of whom are citizens of the United States, desiring to form a Non-Profit Corporation under the Non-Profit Corporation Law of , do hereby certify: First: The name of the Corporation shall be . Irs com Second: The place in this state where the principal office of the Corporation is to be located is the City of , County. Irs com Third: Said corporation is organized exclusively for charitable, religious, educational, and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code. Irs com Fourth: The names and addresses of the persons who are the initial trustees of the corporation are as follows: Name , Address Fifth: No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in Article Third hereof. Irs com No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office. Irs com Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to be carried on (a) by a corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or (b) by a corporation, contributions to which are deductible under section 170(c)(2) of the Internal Revenue Code, or the corresponding section of any future federal tax code. Irs com   If reference to federal law in articles of incorporation imposes a limitation that is invalid in your state, you may wish to substitute the following for the last sentence of the preceding paragraph: “Notwithstanding any other provision of these articles, this corporation shall not, except to an insubstantial degree, engage in any activities or exercise any powers that are not in furtherance of the purposes of this corporation. Irs com ” Sixth: Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Irs com Any such assets not so disposed of shall be disposed of by a Court of Competent Jurisdiction of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall determine, which are organized and operated exclusively for such purposes. Irs com   In witness whereof, we have hereunto subscribed our names this day of , 20. Irs com Appendix. Irs com Sample Articles of Organization, continued Draft B The Charitable Trust. Irs com Declaration of Trust made as of the day of , 20 , by , of , and , of , who hereby declare and agree that they have received this day from , as Donor, the sum of Ten Dollars ($10) and that they will hold and manage the same, and any additions to it, in trust, as follows: First: This trust shall be called “The Charitable Trust. Irs com ” Second: The trustees may receive and accept property, whether real, personal, or mixed, by way of gift, bequest, or devise, from any person, firm, trust, or corporation, to be held, administered, and disposed of in accordance with and pursuant to the provisions of this Declaration of Trust; but no gift, bequest, or devise of any such property shall be received and accepted if it is conditioned or limited in such manner as to require the disposition of the income or its principal to any person or organization other than a “charitable organization” or for other than “charitable purposes” within the meaning of such terms as defined in Article Third of this Declaration of Trust, or as shall, in the opinion of the trustees, jeopardize the federal income tax exemption of this trust pursuant to section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code. Irs com Third: a) The principal and income of all property received and accepted by the trustees to be administered under this Declaration of Trust shall be held in trust by them, and the trustees may make payments or distributions from income or principal, or both, to or for the use of such charitable organizations, within the meaning of that term as defined in paragraph C, in such amounts and for such charitable purposes of the trust as the trustees shall from time to time select and determine; and the trustees may make payments or distributions from income or principal, or both, directly for such charitable purposes, within the meaning of that term as defined in paragraph D, in such amounts as the trustees shall from time to time select and determine without making use of any other charitable organization. Irs com The trustees may also make payments or distributions of all or any part of the income or principal to states, territories, or possessions of the United States, any political subdivision of any of the foregoing, or to the United States or the District of Columbia but only for charitable purposes within the meaning of that term as defined in paragraph D. Irs com Income or principal derived from contributions by corporations shall be distributed by the trustees for use solely within the United States or its possessions. Irs com No part of the net earnings of this trust shall inure or be payable to or for the benefit of any private shareholder or individual, and no substantial part of the activities of this trust shall be the carrying on of propaganda, or otherwise attempting to influence legislation. Irs com No part of the activities of this trust shall be the participation in, or intervention in (including the publishing or distributing of statements), any political campaign on behalf of or in opposition to any candidate for public office. Irs com b) The trust shall continue forever unless the trustees terminate it and distribute all of the principal and income, which action may be taken by the trustees in their discretion at any time. Irs com On such termination, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Irs com The donor authorizes and empowers the trustees to form and organize a nonprofit corporation limited to the uses and purposes provided for in this Declaration of Trust, such corporation to be organized under the laws of any state or under the laws of the United States as may be determined by the trustees; such corporation when organized to have power to administer and control the affairs and property and to carry out the uses, objects, and purposes of this trust. Irs com Upon the creation and organization of such corporation, the trustees are authorized and empowered to convey, transfer, and deliver to such corporation all the property and assets to which this trust may be or become entitled. Irs com The charter, bylaws, and other provisions for the organization and management of such corporation and its affairs and property shall be such as the trustees shall determine, consistent with the provisions of this paragraph. Irs com c) In this Declaration of Trust and in any amendments to it, references to “charitable organizations” or “charitable organization” mean corporations, trusts, funds, foundations, or community chests created or organized in the United States or in any of its possessions, whether under the laws of the United States, any state or territory, the District of Columbia, or any possession of the United States, organized and operated exclusively for charitable purposes, no part of the net earnings of which inures or is payable to or for the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, and which do not participate in or intervene in (including the publishing or distributing of statements) any political campaign on behalf of or in opposition to any candidate for public office. Irs com It is intended that the organization described in this paragraph C shall be entitled to exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code. Irs com d) In this Declaration of Trust and in any amendments to it, the term “charitable purposes” shall be limited to and shall include only religious, charitable, scientific, literary, or educational purposes within the meaning of those terms as used in section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, but only such purposes as also constitute public charitable purposes under the law of trusts of the State of. Irs com Fourth: This Declaration of Trust may be amended at any time or times by written instrument or instruments signed and sealed by the trustees, and acknowledged by any of the trustees, provided that no amendment shall authorize the trustees to conduct the affairs of this trust in any manner or for any purpose contrary to the provisions of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code. Irs com An amendment of the provisions of this Article Fourth (or any amendment to it) shall be valid only if and to the extent that such amendment further restricts the trustees' amending power. Irs com All instruments amending this Declaration of Trust shall be noted upon or kept attached to the executed original of this Declaration of Trust held by the trustees. Irs com Fifth: Any trustee under this Declaration of Trust may, by written instrument, signed and acknowledged, resign his office. Irs com The number of trustees shall be at all times not less than two, and whenever for any reason the number is reduced to one, there shall be, and at any other time there may be, appointed one or more additional trustees. Irs com Appointments shall be made by the trustee or trustees for the time in office by written instruments signed and acknowledged. Irs com Any succeeding or additional trustee shall, upon his or her acceptance of the office by written instrument signed and acknowledged, have the same powers, rights, and duties, and the same title to the trust estate jointly with the surviving or remaining trustee or trustees as if originally appointed. Irs com  None of the trustees shall be required to furnish any bond or surety. Irs com None of them shall be responsible or liable for the acts or omissions of any other of the trustees or of any predecessor or of a custodian, agent, depositary, or counsel selected with reasonable care. Irs com  The one or more trustees, whether original or successor, for the time being in office, shall have full authority to act even though one or more vacancies may exist. Irs com A trustee may, by appropriate written instrument, delegate all or any part of his or her powers to another or others of the trustees for such periods and subject to such conditions as such delegating trustee may determine. Irs com  The trustees serving under this Declaration of Trust are authorized to pay to themselves amounts for reasonable expenses incurred and reasonable compensation for services rendered in the administration of this trust, but in no event shall any trustee who has made a contribution to this trust ever receive any compensation thereafter. Irs com Sixth: In extension and not in limitation of the common law and statutory powers of trustees and other powers granted in this Declaration of Trust, the trustees shall have the following discretionary powers. Irs com a) To invest and reinvest the principal and income of the trust in such property, real, personal, or mixed, and in such manner as they shall deem proper, and from time to time to change investments as they shall deem advisable; to invest in or retain any stocks, shares, bonds, notes, obligations, or personal or real property (including without limitation any interests in or obligations of any corporation, association, business trust, investment trust, common trust fund, or investment company) although some or all of the property so acquired or retained is of a kind or size which but for this express authority would not be considered proper and although all of the trust funds are invested in the securities of one company. Irs com No principal or income, however, shall be loaned, directly or indirectly, to any trustee or to anyone else, corporate or otherwise, who has at any time made a contribution to this trust, nor to anyone except on the basis of an adequate interest charge and with adequate security. Irs com b) To sell, lease, or exchange any personal, mixed, or real property, at public auction or by private contract, for such consideration and on such terms as to credit or otherwise, and to make such contracts and enter into such undertakings relating to the trust property, as they consider advisable, whether or not such leases or contracts may extend beyond the duration of the trust. Irs com c) To borrow money for such periods, at such rates of interest, and upon such terms as the trustees consider advisable, and as security for such loans to mortgage or pledge any real or personal property with or without power of sale; to acquire or hold any real or personal property, subject to any mortgage or pledge on or of property acquired or held by this trust. Irs com d) To execute and deliver deeds, assignments, transfers, mortgages, pledges, leases, covenants, contracts, promissory notes, releases, and other instruments, sealed or unsealed, incident to any transaction in which they engage. Irs com e) To vote, to give proxies, to participate in the reorganization, merger, or consolidation of any concern, or in the sale, lease, disposition, or distribution of its assets; to join with other security holders in acting through a committee, depositary, voting trustees, or otherwise, and in this connection to delegate authority to such committee, depositary, or trustees and to deposit securities with them or transfer securities to them; to pay assessments levied on securities or to exercise subscription rights in respect of securities. Irs com f) To employ a bank or trust company as custodian of any funds or securities and to delegate to it such powers as they deem appropriate; to hold trust property without indication of fiduciary capacity but only in the name of a registered nominee, provided the trust property is at all times identified as such on the books of the trust; to keep any or all of the trust property or funds in any place or places in the United States of America; to employ clerks, accountants, investment counsel, investment agents, and any special services, and to pay the reasonable compensation and expenses of all such services in addition to the compensation of the trustees. Irs com Seventh: The trustees' powers are exercisable solely in the fiduciary capacity consistent with and in furtherance of the charitable purposes of this trust as specified in Article Third and not otherwise. Irs com Eighth: In this Declaration of Trust and in any amendment to it, references to “trustees” mean the one or more trustees, whether original or successor, for the time being in office. Irs com Ninth: Any person may rely on a copy, certified by a notary public, of the executed original of this Declaration of Trust held by the trustees, and of any of the notations on it and writings attached to it, as fully as he might rely on the original documents themselves. Irs com Any such person may rely fully on any statements of fact certified by anyone who appears from such original documents or from such certified copy to be a trustee under this Declaration of Trust. Irs com No one dealing with the trustees need inquire concerning the validity of anything the trustees purport to do. Irs com No one dealing with the trustees need see to the application of anything paid or transferred to or upon the order of the trustees of the trust. Irs com Tenth: This Declaration of Trust is to be governed in all respects by the laws of the State of . Irs com Trustee Trustee Prev  Up  Next   Home   More Online Publications
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Irs com 4. Irs com   Special Situations Table of Contents Condominiums CooperativesDepreciation Property Changed to Rental UseBasis of Property Changed to Rental Use Figuring the Depreciation Deduction Renting Part of Property Not Rented for ProfitPostponing decision. Irs com Example—Property Changed to Rental Use This chapter discusses some rental real estate activities that are subject to additional rules. Irs com Condominiums A condominium is most often a dwelling unit in a multi-unit building, but can also take other forms, such as a townhouse or garden apartment. Irs com If you own a condominium, you also own a share of the common elements, such as land, lobbies, elevators, and service areas. Irs com You and the other condominium owners may pay dues or assessments to a special corporation that is organized to take care of the common elements. Irs com Special rules apply if you rent your condominium to others. Irs com You can deduct as rental expenses all the expenses discussed in chapters 1 and 2. Irs com In addition, you can deduct any dues or assessments paid for maintenance of the common elements. Irs com You cannot deduct special assessments you pay to a condominium management corporation for improvements. Irs com However, you may be able to recover your share of the cost of any improvement by taking depreciation. Irs com Cooperatives If you live in a cooperative, you do not own your apartment. Irs com Instead, a corporation owns the apartments and you are a tenant-stockholder in the cooperative housing corporation. Irs com If you rent your apartment to others, you usually can deduct, as a rental expense, all the maintenance fees you pay to the cooperative housing corporation. Irs com In addition to the maintenance fees paid to the cooperative housing corporation, you can deduct your direct payments for repairs, upkeep, and other rental expenses, including interest paid on a loan used to buy your stock in the corporation. Irs com Depreciation You will be depreciating your stock in the corporation rather than the apartment itself. Irs com Figure your depreciation deduction as follows. Irs com Figure the depreciation for all the depreciable real property owned by the corporation. Irs com (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. Irs com ) If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. Irs com Multiply your cost per share by the total number of outstanding shares. Irs com Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. Irs com Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. Irs com Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. Irs com Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Irs com Multiply the result of (2) by the percentage you figured in (3). Irs com This is your depreciation on the stock. Irs com Your depreciation deduction for the year cannot be more than the part of your adjusted basis (defined in chapter 2) in the stock of the corporation that is allocable to your rental property. Irs com Payments added to capital account. Irs com   Payments earmarked for a capital asset or improvement, or otherwise charged to the corporation's capital account are added to the basis of your stock in the corporation. Irs com For example, you cannot deduct a payment used to pave a community parking lot, install a new roof, or pay the principal of the corporation's mortgage. Irs com   Treat as a capital cost the amount you were assessed for capital items. Irs com This cannot be more than the amount by which your payments to the corporation exceeded your share of the corporation's mortgage interest and real estate taxes. Irs com   Your share of interest and taxes is the amount the corporation elected to allocate to you, if it reasonably reflects those expenses for your apartment. Irs com Otherwise, figure your share in the following manner. Irs com Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Irs com Multiply the corporation's deductible interest by the number you figured in (1). Irs com This is your share of the interest. Irs com Multiply the corporation's deductible taxes by the number you figured in (1). Irs com This is your share of the taxes. Irs com Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. Irs com You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. Irs com You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Irs com However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). Irs com Example. Irs com Your tax year is the calendar year. Irs com You moved from your home in May and started renting it out on June 1. Irs com You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Irs com Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Irs com When figuring depreciation, treat the property as placed in service on June 1. Irs com Basis of Property Changed to Rental Use When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion. Irs com Fair market value. Irs com   This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Irs com Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property. Irs com Figuring the basis. Irs com   The basis for depreciation is the lesser of: The fair market value of the property on the date you changed it to rental use, or Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. Irs com For other increases and decreases to basis, see Adjusted Basis in chapter 2. Irs com Example. Irs com Several years ago you built your home for $140,000 on a lot that cost you $14,000. Irs com Before changing the property to rental use this year, you added $28,000 of permanent improvements to the house and claimed a $3,500 casualty loss deduction for damage to the house. Irs com Part of the improvements qualified for a $500 residential energy credit, which you claimed on your 2010 tax return. Irs com Because land is not depreciable, you can only include the cost of the house when figuring the basis for depreciation. Irs com The adjusted basis of the house at the time of the change in its use was $164,000 ($140,000 + $28,000 − $3,500 − $500). Irs com On the date of the change in use, your property had a fair market value of $168,000, of which $21,000 was for the land and $147,000 was for the house. Irs com The basis for depreciation on the house is the fair market value on the date of the change ($147,000), because it is less than your adjusted basis ($164,000). Irs com Cooperatives If you change your cooperative apartment to rental use, figure your allowable depreciation as explained earlier. Irs com (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. Irs com ) The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. Irs com The fair market value of the property on the date you change your apartment to rental use. Irs com This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. Irs com The corporation's adjusted basis in the property on that date. Irs com Do not subtract depreciation when figuring the corporation's adjusted basis. Irs com If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1) under Depreciation (under Cooperatives, near the beginning of this chapter). Irs com The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. Irs com Figuring the Depreciation Deduction To figure the deduction, use the depreciation system in effect when you convert your residence to rental use. Irs com Generally, that will be MACRS for any conversion after 1986. Irs com Treat the property as placed in service on the conversion date. Irs com Example. Irs com Your converted residence (see previous example under Figuring the basis) was available for rent on August 1. Irs com Using Table 2-2d (see chapter 2), the percentage for Year 1 beginning in August is 1. Irs com 364% and the depreciation deduction for Year 1 is $2,005 ($147,000 × . Irs com 01364). Irs com Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. Irs com You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). Irs com You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity, or painting the outside of the house. Irs com There is no change in the types of expenses deductible for the personal-use part of your property. Irs com Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Irs com You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Irs com You do not have to divide the expenses that belong only to the rental part of your property. Irs com For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. Irs com If you install a second phone line strictly for your tenant's use, all of the cost of the second line is deductible as a rental expense. Irs com You can deduct depreciation on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. Irs com How to divide expenses. Irs com   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. Irs com You can use any reasonable method for dividing the expense. Irs com It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Irs com The two most common methods for dividing an expense are (1) the number of rooms in your home, and (2) the square footage of your home. Irs com Example. Irs com You rent a room in your house. Irs com The room is 12 × 15 feet, or 180 square feet. Irs com Your entire house has 1,800 square feet of floor space. Irs com You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. Irs com If your heating bill for the year for the entire house was $600, $60 ($600 × . Irs com 10) is a rental expense. Irs com The balance, $540, is a personal expense that you cannot deduct. Irs com Duplex. Irs com   A common situation is the duplex where you live in one unit and rent out the other. Irs com Certain expenses apply to the entire property, such as mortgage interest and real estate taxes, and must be split to determine rental and personal expenses. Irs com Example. Irs com You own a duplex and live in one half, renting the other half. Irs com Both units are approximately the same size. Irs com Last year, you paid a total of $10,000 mortgage interest and $2,000 real estate taxes for the entire property. Irs com You can deduct $5,000 mortgage interest and $1,000 real estate taxes on Schedule E (Form 1040), and if you itemize your deductions, you can deduct the other $5,000 mortgage interest and $1,000 real estate taxes on Schedule A (Form 1040). Irs com Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. Irs com You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. Irs com Where to report. Irs com   Report your not-for-profit rental income on Form 1040 or 1040NR, line 21. Irs com For example, if you are filing Form 1040, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. Irs com   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. Irs com You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Irs com Presumption of profit. Irs com   If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. Irs com Postponing decision. Irs com   If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. Irs com You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. Irs com You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Irs com More information. Irs com   For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. Irs com Example—Property Changed to Rental Use In January, Eileen Johnson bought a condominium apartment to live in. Irs com Instead of selling the house she had been living in, she decided to change it to rental property. Irs com Eileen selected a tenant and started renting the house on February 1. Irs com Eileen charges $750 a month for rent and collects it herself. Irs com Eileen also received a $750 security deposit from her tenant. Irs com Because she plans to return it to her tenant at the end of the lease, she does not include it in her income. Irs com Her rental expenses for the year are as follows. Irs com   Mortgage interest $1,800     Fire insurance (1-year policy) 100     Miscellaneous repairs (after renting) 297     Real estate taxes imposed and paid 1,200   Eileen must divide the real estate taxes, mortgage interest, and fire insurance between the personal use of the property and the rental use of the property. Irs com She can deduct eleven-twelfths of these expenses as rental expenses. Irs com She can include the balance of the allowable taxes and mortgage interest on Schedule A (Form 1040) if she itemizes. Irs com She cannot deduct the balance of the fire insurance because it is a personal expense. Irs com Eileen bought this house in 1984 for $35,000. Irs com Her property tax was based on assessed values of $10,000 for the land and $25,000 for the house. Irs com Before changing it to rental property, Eileen added several improvements to the house. Irs com She figures her adjusted basis as follows:   Improvements Cost     House $25,000     Remodeled kitchen 4,200     Recreation room 5,800     New roof 1,600     Patio and deck 2,400     Adjusted basis $39,000   On February 1, when Eileen changed her house to rental property, the property had a fair market value of $152,000. Irs com Of this amount, $35,000 was for the land and $117,000 was for the house. Irs com Because Eileen's adjusted basis is less than the fair market value on the date of the change, Eileen uses $39,000 as her basis for depreciation. Irs com As specified for residential rental property, Eileen must use the straight line method of depreciation over the GDS or ADS recovery period. Irs com She chooses the GDS recovery period of 27. Irs com 5 years. Irs com She uses Table 2-2d to find her depreciation percentage. Irs com Since she placed the property in service in February, the percentage is 3. Irs com 182%. Irs com On April 1, Eileen bought a new dishwasher for the rental property at a cost of $425. Irs com The dishwasher is personal property used in a rental real estate activity, which has a 5-year recovery period. Irs com She uses Table 2-2a to find the percentage for Year 1 under “Half-year convention” (20%) to figure her depreciation deduction. Irs com On May 1, Eileen paid $4,000 to have a furnace installed in the house. Irs com The furnace is residential rental property. Irs com Because she placed the property in service in May, the percentage from Table 2-2d is 2. Irs com 273%. Irs com Eileen figures her net rental income or loss for the house as follows: Total rental income received  ($750 × 11) $8,250 Minus: Expenses     Mortgage interest ($1,800 × 11/12) $1,650   Fire insurance ($100 × 11/12) 92   Miscellaneous repairs 297   Real estate taxes ($1,200 × 11/12) 1,100   Total expenses 3,139 Balance $5,111 Minus: Depreciation     House ($39,000 × . Irs com 03182) $1,241   Dishwasher ($425 × . Irs com 20) 85   Furnace ($4,000 × . Irs com 02273) 91   Total depreciation 1,417 Net rental income for house   $3,694       Eileen uses Schedule E, Part I, to report her rental income and expenses. Irs com She enters her income, expenses, and depreciation for the house in the column for Property A. Irs com Since all property was placed in service this year, Eileen must use Form 4562 to figure the depreciation. Irs com See the Instructions for Form 4562 for more information on preparing the form. Irs com Prev  Up  Next   Home   More Online Publications