Liberty Tax Service Online
Basic Income Tax Course.
Lesson 15
1
Chapter 14 Homework
HOMEWORK 1:
Ken E. (SSN 555-00-4321, born 12/6/1969) and Mary
Ellen Busser (SSN 543-00-2221, born 11/13/1971)
are married and file a joint return. They live at 608
South Apollo St., Virginia Beach, VA 23462. They
have no dependents.
Ken works as a drug counselor. In 2008, Mary Ellen
began making crafts and selling them at a local store.
She received a Form 1099-MISC from Krafty Krafts
for the sale of her crafts. She spent $450 for
materials and supplies to make her crafts. Her
principal business code is 424990.
The Bussers are taking the standard deduction.
Complete a tax return for the Bussers.
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HOMEWORK 2:
Thomas R. Zawady (SSN 333-11-2334, born
3/12/1958) is single, and runs a bookkeeping
business out of his house at 8829 Plain Ave,
Bismarck, ND 58503.
He uses one of eight rooms in his house for his
business. He meets the qualifying tests for his home
office. He uses the cash method of accounting. In
2008, he had gross receipts of $38,345.
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Chapter 14 Homework
Tom’s expenses for 2008 are the following:
Mortgage interest
$3,945 Real estate taxes
Home insurance
550 Utilities
Advertising
450 Supplies
Business cards
65 Office expenses
Painting the office
125
The local sales tax rate for Bismarck is 1%.
$1,300
1,380
1,060
120
Tom placed his car in service on May 13, 2007. He used
the standard mileage rate. Tom drove 2,355 miles for
business in 2008 (1,235 miles from 1/1/2008 to
6/30/2008) and he drove 11,215 personal miles. It is
his only vehicle and he has written records.
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Chapter 14 Homework
Tom started his bookkeeping business in October 1998.
The adjusted basis of his house was $100,000
including a land value of $20,000. The FMV of his
house was $115,000 including a land value of
$25,000.
Other expenses Tom paid in 2008 were:
Medical bills
$ 880
Charitable
contributions* 1,099
* No single gift of $250 or
Dental costs
State balance paid
with 2007 return
more.
$660
550
After adjusting for one-half of self-employment tax,
Tom’s AGI is $31,684.
Complete Schedules A, C, SE and Form 8829 for Tom.
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Chapter 15: Rental Real Estate, Royalties,
Partnerships, etc.
Chapter Content
 Rental Real Estate
 Rental Income
 Rental Expenses
 Deduction Limits Based on Property Use
 Personal Use of a Vacation Home or Dwelling
Unit
 Limits on Rental Losses
 Reporting Rental Income and Expenses
 Other Schedule E Income
 Key Ideas
Objectives
 Understand Rental Income and Expenses
 Become Familiar with Schedule E
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Rental Real Estate, Royalties,
Partnerships, etc.
I.
Schedule E
A. Use Schedule E to figure income and loss from
rental activities and other supplemental income
producing activities.
B. Do not use Schedule E for:
1. Rental income from the rental of personal
property
2. Some types of royalties, such as those subject
to SE tax.
C. Enter the net income or loss on line 17 of Form
1040.
Form 1040, Page 1
29
Rental Real Estate, Royalties,
Partnerships, etc.
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Rental Real Estate, Royalties,
Partnerships, etc.
31
Rental Real Estate, Royalties,
Partnerships, etc.
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Rental Real Estate, Royalties,
Partnerships, etc.
33
RENTAL REAL ESTATE
You are taxed on the amount of rental income
that exceeds your related expenses,
including depreciation. If your expenses are
greater than the rents you receive, you have
a loss. There are special rules related to
expenses for property used partly for
business and partly for personal purposes.
There are also special rules called “passive
activity loss rules” which may limit the
amount of the loss you can claim.
Report rental income in the year you actually
or constructively receive it. You
constructively receive income when it is
made available to you, as when it is credited
to your bank account.
34
RENTAL REAL ESTATE
Rental Income
A. Any amount you receive for the use or
occupation of residential or nonresidential
property is rental income that must be
included in gross income.
B. In addition to rent payments, rental income
includes:
1. Advance rent
2. Cancellation of lease payments
3. Expenses paid by a tenant
4. The FMV services provided by a tenant
5. Any security deposit that is not returned
to a tenant
6. Security deposit intended to be the last
35
month’s rent is advance rent.
RENTAL REAL ESTATE
In January 2008, Carry Ann signed a 5-year lease to
rent her property. In 2008, she received $6,000 for
the first year’s rent and $6,000 for the last year’s
rent. She must include $12,000 in her income for
2008.
Larry Landlord rents apartments. Prior to 2008, he paid
a lawn service company $100 a month ($1,200 per
year) to do yard work and plow in the winter. In
2008, he agreed to have one of his tenants do this
work as part of the rent. Larry must include $1,200
in his gross rental income for 2008 and he can
deduct $1,200 as an expense.
36
RENTAL REAL ESTATE
Rental Expenses
A. Deduct rental expenses in the year you pay
or incur them.
B. May be able to include certain expenses for
property held for rent (NOT loss of rental
income) while the property is vacant:
1. From the time the property is available
for rent
2. Until the property is sold.
C. If property is sometimes used for personal
purposes, expenses must be divided
between rental and personal use and the
deductions may be limited.
37
RENTAL REAL ESTATE
REPAIRS AND IMPROVEMENTS
D. You can deduct expenses for repairs but
not improvements.
1. A repair maintains the property
2. An improvement adds to the value of the
property, prolongs its useful life, or
adapts it to new uses
3. The cost of improvements is recovered by
taking depreciation deductions
4. Refer to Table 15-1 for examples of
improvements.
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RENTAL REAL ESTATE
39
RENTAL REAL ESTATE – Problem 1
Roland bought a house to use as rental
property in June 2008. He began advertising
for tenants immediately. He did not rent the
house until September 2008.
He can deduct his ordinary and necessary
expenses for managing, conserving, and
maintaining the property starting in June
2008. He can also deduct the rent he lost
while the house was vacant in June, July,
and August.
True or False?
40
RENTAL REAL ESTATE – Problem 1
Roland bought a house to use as rental
property in June 2008. He began advertising
for tenants immediately. He did not rent the
house until September 2008. He can deduct
his ordinary and necessary expenses for
managing, conserving, and maintaining the
property starting in June 2008. He can also
deduct the rent he lost while the house was
vacant in June, July, and August.
False
41
RENTAL REAL ESTATE – Problem 2
Albert rents a house to James. From October
2008 until December 2008, James failed to
pay the $600 per month rent. Albert cannot
deduct the $1,800 that James failed to pay
him as a rental expense.
True or False?
42
RENTAL REAL ESTATE – Problem 2
Albert rents a house to James. From October
2008 until December 2008, James failed to
pay the $600 per month rent. Albert cannot
deduct the $1,800 that James failed to pay
him as a rental expense.
True
43
RENTAL REAL ESTATE – Problem 3
If Roland paints the interior of the house he is
renting out, the cost is a deductible repair.
If he puts an addition on the house, is this
an improvement or a repair?
a. Improvement
b. Repair
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RENTAL REAL ESTATE – Problem 3
If Roland paints the interior of the house he is
renting out, the cost is a deductible repair.
If he puts an addition on the house, is this
an improvement or a repair?
a. Improvement
This is an improvement and the entire cost
including any painting must be depreciated
as if the addition were separate property.
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RENTAL REAL ESTATE
OTHER EXPENSES
E. Auto and travel expenses are deductible if the main
purpose of the travel is to collect rental income or to
manage or maintain the rental property.
1. If you travel away from home, you can deduct
50% of your meals.
2. You must keep written records of all travel
expenses and allocate expenses between rental
and non-rental activities.
3. If you use your personal vehicle, you can deduct
either the standard mileage rate (48.5 cents in
2007) or actual expenses for all business miles.
4. To deduct car expenses under either method, Part
V of Form 4562 must be completed.
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RENTAL REAL ESTATE
Clay began renting apartments in the building he owns
in June 2008. He drove to the building to collect
rents, make repairs, and carry out other rental
activities.
His records show that of his total mileage of 23,000
miles in 2008 including 8,000 miles for rental
activities. He drove 4,600 of these rental activity
miles in the first six months of the year. Clay bought
the car, a Ford Escort, on April 8, 2007 for $16,000.
Using the standard mileage rate, his deduction is
$4,312. He fills out Part V of Form 4562 as follows:
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RENTAL REAL ESTATE
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RENTAL REAL ESTATE
F. Other deductible expenses include:
1. Advertising
2. Cleaning and maintenance
3. Commissions
4. Insurance
5. Legal and other professional fees (the part of the
tax preparation related to preparing Part I of
Schedule E)
6. Mortgage interest, supplies, taxes, and utilities
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RENTAL REAL ESTATE
DEPRECIATION
G. You can deduct some or all of what you paid for
income-producing property by taking yearly
depreciation.
1. You will generally use MACRS to figure the
depreciation deduction for property acquired or
converted to rental use after 1986.
2. Do NOT include the land value in the basis of the
real property.
3. Use the mid-month convention to depreciate real
property.
4. Residential rental property is depreciated over
27 .5 years under MACRS.
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RENTAL REAL ESTATE
5. Nonresidential real property is depreciated over
31.5 years if placed in service before 5/13/1993
and over 39 years if placed in service after
5/12/1993.
6. Personal property used in rental activities
(appliances, furniture) is depreciated using the
half-year or mid-quarter convention.
7. Certain personal property (appliances, furniture,
carpets, etc) used in the rental property is
classified as 5 year property.
8. Refer to Table 15-2 for a summary of the MACRS
recovery periods for property used in rental
activities.
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RENTAL REAL ESTATE
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RENTAL REAL ESTATE
YOU CANNOT CLAIM A SECTION 179 DEDUCTION FOR
PROPERTY USED IN RENTAL ACTIVITIES.
There are certain types of property eligible for an
additional 50% (or 30% if applicable) special
depreciation allowance. These properties are
primarily limited to the following:
 Qualified Liberty Zone property
 Qualified Gulf Opportunity Zone (GO Zone) property
 Qualified Recovery Assistance property ( property in
the Kansas disaster area)
 Qualified disaster assistance property (property in
federally declared disaster areas)
 Certain qualified property placed in service after
December 31, 2007, and before January 1, 2010.
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RENTAL REAL ESTATE
Deduction Limits Based On Property Use
A. Not-for-profit rental property is property that is
rented at less than the fair rental price of the
property.
1. Deduct only expenses that do not exceed income
2. Deduct only if you itemize deductions on Schedule
A; do not use Schedule E
3. Do not carry forward any expenses that exceed
income
4. Report income on line 21 of Form 1040.
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RENTAL REAL ESTATE – Problem 4
Buddy and Dolores rented their upstairs flat to
their cousin for $100 per month, which is
less than the fair rental value of the
property. They are not considered to be
renting for a profit. They report the $1,200
income on line 21 of Form 1040. Can any of
their expenses be deducted?
Yes or No?
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RENTAL REAL ESTATE – Problem 4
Buddy and Dolores rented their upstairs flat to
their cousin for $100 per month, which is
less than the fair rental value of the
property. They are not considered to be
renting for a profit. They report the $1,200
income on line 21 of Form 1040. Can any of
their expenses be deducted?
Yes
Any expenses they have (not exceeding
$1,200) can be deducted on Schedule A, line
23, if they itemize their deductions.
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RENTAL REAL ESTATE
PROPERTY CHANGED TO RENTAL USE
B. If you change property from personal to rental use
after the beginning of the year, allocate yearly
expenses between rental and personal use.
1. Depreciation basis for rental use is the LESSER of
the FMV on the date the property is changed to
rental use or the adjusted cost basis.
2. Deduct rental expenses on Schedule E.
3. Personal use mortgage interest and taxes (not
depreciation or insurance) may be deducted on
Schedule A if you itemize deductions.
Luke and Kate moved from their personal residence on
June 30, 2008 and started renting it on July 1, 2008.
They can deduct, as rental expenses on Schedule E,
one-half of their yearly expenses, such as taxes and
insurance.
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RENTAL REAL ESTATE
PROPERTY PARTLY USED FOR RENTAL PURPOSES
C. If you rent part of your property and use a separate
part for personal purposes you must divide expenses
as if you had two separate pieces of property.
1. Expenses for the rental part of the property may
be deducted from rental income on Schedule E.
2. You can deduct as a rental expense the entire cost
of expenses that belong only to the rental part of
the property.
3. You can deduct part of some expenses (mortgage
interest, property taxes) as a rental expense and
part as a personal expense on Schedule A if you
itemize deductions.
4. You can deduct depreciation on the rental part of
the property only.
5. You can use any reasonable method to divide
expenses.
6. The most common method is based on square
footage.
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RENTAL REAL ESTATE
Ma Perkins rents a room in her house. The
room is 180 square feet. The house has
1,800 square feet of floor space. Ma can
deduct as a rental expense 10% (180 is
10% of 1,800) of any expense that must be
divided between rental use and personal
use.
If her heating bill for the year for the entire
house was $600, she can deduct $60 ($600
x 10%) as a rental expense. The balance,
$540, is a personal expense
and cannot be deducted.
If Ma paints the room she rents or puts in a
second phone line for her tenant, 100% of
these costs are deductible as rental
expenses.
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RENTAL REAL ESTATE
Personal Use Of A Vacation Home Or Dwelling Unit
A. Dwelling unit includes houses, apartments,
condominiums, mobile homes, boats, and similar
property.
Birdie rents out a room in her home that is always
available for short-term occupancy by paying
customers. She does not use the room herself, and
only paying customers are allowed to use the room.
The room is considered a hotel, motel or similar
establishment and is not a dwelling unit.
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RENTAL REAL ESTATE
USE AS A HOME
B. If you have any personal use of a dwelling unit, you
must divide expenses between personal and rental
use.
1. Rental use is limited to the days the property is
actually rented.
C. If you use the dwelling unit as a home, you are also
limited in the deductions you can take.
D. You use a dwelling unit as a home if you used it for
personal purposes more than the greater of:
1. 14 days, or
2. 10% of the total days it is rented at a fair rental
price.
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RENTAL REAL ESTATE
E. A day of personal use of a dwelling unit is any day it
is used by:
1. You or any other person who has an interest in it.
2. A member of your family or a member of the
family of any other person who has an interest in
it, unless the family member uses the unit as his
or her main home (the home lived in most of the
time) and pays a fair rental price.
3. Anyone under an arrangement that lets you use
some other dwelling unit.
4. Anyone at less than a fair rental price.
F. For purposes of determining if the dwelling unit is
used as a home, count as a day of personal use any
day you used it for personal purposes while it was
rented.
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RENTAL REAL ESTATE – Problem 5
Steve rented out a bedroom in his home at a fair rental
price for a total of 27 days during several weekends
the local college team played at home. His brother
stayed in the room rent free for 21 days that same
year. Are Steve’s expenses subject to the deduction
limits?
Yes or No?
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RENTAL REAL ESTATE – Problem 5
Steve rented out a bedroom in his home at a fair rental
price for a total of 27 days during several weekends
the local college team played at home. His brother
stayed in the room rent free for 21 days that same
year. Are Steve’s expenses subject to the deduction
limits?
Yes
Twenty-one days is more than the greater of 14 days or
10% of the total of 27 days that it was rented, so the
room was used as a home. Steve’s expenses will be
subject to the deduction limits.
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RENTAL REAL ESTATE – Problem 6
Lauren owns a vacation condominium in Miami, which
she rented at a fair rental price for 160 days in 2008.
In July of 2008, she swapped units with a friend in
Boca Raton. The friend stayed rent free at Lauren’s
condominium and Lauren stayed rent free in Boca
Raton for 15 days. The condominium was not used as
a home because it was not used for personal
purposes more than 16 days which is the greater of
14 days or 10% of the total days it was rented
at a fair rental price (160 days). Are Lauren’s
expenses subject to the special deduction limits?
Yes or No?
65
RENTAL REAL ESTATE – Problem 6
Lauren owns a vacation condominium in Miami, which
she rented at a fair rental price for 160 days in 2008.
In July of 2008, she swapped units with a friend in
Boca Raton. The friend stayed rent free at Lauren’s
condominium and Lauren stayed rent free in Boca
Raton for 15 days. The condominium was not used as
a home because it was not used for personal
purposes more than 16 days which is the greater of
14 days or 10% of the total days it was rented
at a fair rental price (160 days). Are Lauren’s
expenses subject to the special deduction limits?
No
Lauren still has to divide the expenses between rental
and personal use, but her expenses are not subject
to the special deduction limits.
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RENTAL REAL ESTATE
G. If the dwelling unit is your main home, do not count
as personal use days the days before or after renting
it or offering it for rent if:
1. You rented or tried to rent the property for 12 or
more consecutive months, or
2. 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.
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RENTAL REAL ESTATE
On February 28, Alex Marshall moved out of the house
he had lived in for 6 years because he had accepted a
job in another town. He rented the house at a fair
market price from March 15 of that year to May 14 of
the next year. On the following June 1, he moved
back into his old house. To determine whether he
used the house as a home, the days he used it as his
main home from January 1 to February 28 and from
June 1 to December 31 of the next year are not
counted as days of personal use.
If Alex had sold the property after renting it for six
months, he would not have to count the time from
January 1 to February 28 as days of personal use. If
he had moved back into his old home after renting it
out for only 8 months, he would have to treat the
time before and after he rented it as personal-use
days.
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RENTAL REAL ESTATE
This special rule for your main home applies only to
determining if the dwelling is considered a home for
purposes of limiting your deductions. It does not
apply when dividing expenses between rental and
personal use.
Alex, from the above example, can deduct as rental
expenses only the part of his expenses (mortgage
interest, taxes, insurance, maintenance, etc.)
incurred while he was renting the property.
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RENTAL REAL ESTATE
DIVIDING RENTAL AND PERSONAL EXPENSES
H. Divide your expenses between rental and personal
use days based on the number of days used for each
purpose.
1. Count any day the unit is rented as a day of rental
use even if you use it for personal purposes that
day.
2. Do not count as a day of rental use any day that
the property is available for rent but not rented.
70
RENTAL REAL ESTATE
Callie owns a beach cottage which she rents for part of
the summer. She lived in the cottage the last two
weeks in May (14 days). The cottage is available for
rent from June 1 through August 31. Callie could not
find a renter for the first week (7 days) of June.
After that, she had tenants who paid a fair rental price
to rent the cottage until August 31, 2008. Over the
July 4th holiday, the tenants let Callie use the
cottage for two days while they visited relatives.
They paid the rent for those two days. The cottage
was not used at any other time during the year.
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RENTAL REAL ESTATE
June 1 through August 31 is 92 days. Of that time, the
cottage was used for rental purposes for 85 days.
Although it was available for rent, the first week in
June is not counted as days of rental use because it
was not actually rented. The two days Callie stayed
over July 4th are days of rental use for figuring
expenses because she received a fair rental price for
those days.
She used the cottage for personal use for 14 days (the
last two weeks in May). The total use of the cottage
was 99 days (14 days personal use plus 85 days
rental use). Callie’s rental expenses are 85/99
(86%) of the expenses for the cottage.
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RENTAL REAL ESTATE
When determining whether she used the cottage as a
home, Callie must count the days she stayed there in
July as personal use days. Therefore, she had 16
days of personal use and 83 days of rental use for
this purpose.
Because she used the cottage for personal purposes
more than the greater of 14 days or 10% of the days
used for rental purposes, she used it as a home. If
she has a net loss, she may not be able to deduct all
of her rental expenses.
73
RENTAL REAL ESTATE
FIGURING NET INCOME AND LOSS
I. If you do not use the dwelling unit as a home, report
all rental income and deduct all rental losses as
you would with any rental property.
J. There are special rules for figuring net income and
loss for property used as a home.
1. If rented for fewer than 15 days, do not include
any rental income in your gross income and do
not deduct any expenses as rental expenses.
2. If rented for 15 days or more, include all rental
income in your gross income.
3. If you had a net profit, deduct all your rental
expenses.
4. If you had a net loss, your deduction for certain
rental expenses is limited.
5. Refer to Table 15-3 to see how you figure the
limits on rental deductions for a dwelling unit
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used as a home.
RENTAL REAL ESTATE – Problem 7
In 2008, Zeke rented his home for a week to delegates
to the cheese producer’s convention and received
$1,400 rent. This is the only rent he received during
the year. Does Zeke have to report the $1,400 he
received for rent?
Yes or No?
75
RENTAL REAL ESTATE – Problem 7
In 2008, Zeke rented his home for a week to delegates
to the cheese producer’s convention and received
$1,400 rent. This is the only rent he received during
the year. Does Zeke have to report the $1,400 he
received for rent?
No
No he does not but he cannot deduct the cost of
utilities, maintenance, etc. for that week.
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RENTAL REAL ESTATE
Limits On Rental Losses
A. Rental real estate activities for which you receive
income mainly from the use of tangible property are
considered passive activities.
1. The amount of passive activity loss you can deduct
from non-passive income is limited by at-risk
rules and passive activity rules.
2. These rules do not apply to a dwelling unit used
as a home.
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RENTAL REAL ESTATE
AT-RISK RULES
B. At-risk rules limit deductible losses from holding most
real property placed in service after 1986.
1. Losses from real property placed in service before
1987 are not subject to at-risk rules.
2. Your loss cannot exceed the amount of money or
property you have at risk at the end of the tax
year.
3. The at-risk amount includes: your cash investment;
the adjusted basis of other property you paid for
the rental property; loans for which you are
personally liable.
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RENTAL REAL ESTATE
PASSIVE ACTIVITY LIMITS
C. Rental activities are passive activities and you
generally cannot offset non-passive income with
rental losses.
1. Rental activities in which you materially
participated are not passive activities if you were
a real estate professional.
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RENTAL REAL ESTATE
SPECIAL LOSS ALLOWANCE
D. If you actively participated in a passive rental
activity, you may be able to deduct a special loss
allowance of up to $25,000 of loss from non-passive
income.
1. To actively participate, you must own at least 10%
of the rental property and make significant and
bona fide management decisions.
2. The special loss allowance is reduced to up to
$12,500 if married filing a separate return and
lived apart from your spouse for all of the
year – NO loss if married, filing a separate return
and lived with your spouse at any time.
3. There is a phase-out of the allowance based on
modified AGI.
81
RENTAL REAL ESTATE
In 2008, Pat received Form W-2 wages of $33,000,
taxable interest income of $500, and dividend income
of $1,200. This is all non-passive income. He also had
a $3,500 loss from the apartment house he owns. Pat
advertised and rented the units himself. He collected
the rents and arranged for repairs. Because Pat
owned 100% of the rental property and made
significant and bona fide management decisions, he
can use the entire $3,500 loss to offset his other
non-passive activity income even though the loss
was from a passive activity.
82
RENTAL REAL ESTATE
Reporting Rental Income And Expenses
A. Use Part I of Schedule E for most rental expenses.
1. Do not report not-for-profit activities on Schedule E
2. Use Schedule C if you provide significant services
for your tenant’s convenience.
B. If you have more than 3 rental properties, complete
as many Schedules E as are needed.
1. Combine the totals on only one Schedule E.
2. Attach all the schedules to Form 1040.
C. Attach Form 4562 for depreciation deductions, if
required.
83
RENTAL REAL ESTATE
The following example shows how to report your rental
income and expenses.
In January, Eileen E. Johnson bought a condominium
apartment to live in. Instead of selling the house she
had been living in, she decided to change it to rental
property. Eileen selected a tenant and started renting
the house on February 1, 2008.
Eileen charges $750 a month for rent and collects it
herself. Eileen received a $750 security deposit from
her tenant. Because she plans to return it to her
tenant at the end of the lease, she does not include it
in her income. Her house expenses for the year are
as follows:
Mortgage interest ......................................... $1,800
Fire insurance (1-year policy) ............................ 100
Real estate taxes imposed and paid .................1,200
Miscellaneous repairs (after renting) ................. 297
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RENTAL REAL ESTATE
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.
She can deduct eleven-twelfths of these expenses as
rental expenses. She can include the balance of the
allowable taxes and mortgage interest on Schedule
A if she itemizes. She cannot deduct the balance of
the fire insurance because it is a personal expense.
Eileen bought this house in 1983 for $35,000. Her
property tax was based on assessed values of
$10,000 for the land and $25,000 for the house.
Before changing it to rental property, Eileen added
several improvements to the house. She figures her
adjusted basis as follows:
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RENTAL REAL ESTATE
House ......................................................... $25,000
Improvements
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 FMV of $152,000.
Of this amount, $35,000 was for the land and
$117,000 was for the house. Because Eileen's
adjusted basis is less than the FMV on the date of the
change, Eileen must use $39,000 as her basis for
depreciation.
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RENTAL REAL ESTATE
Because the house is residential rental property, she
must use the straight-line method of depreciation over
either the GDS recovery period or the ADS recovery
period. She uses the GDS recovery period of 27.5
years. She uses MACRS Table A-6 to find her
depreciation percentage. Because she placed the
property in service in February, she finds the
percentage to be 3.182%.
On June 1, Eileen bought a new dishwasher for the
rental property at a cost of $425. The dishwasher is
personal property used in a rental real estate
activity, which has a 5-year recovery period. She uses
the percentage under “Half-year convention” in
MACRS Table A-1 to figure her depreciation deduction
for the dishwasher. She finds the percentage to be
20%.
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RENTAL REAL ESTATE
On May 1, Eileen paid $4,000 to have a furnace
installed in the house. The furnace is depreciated as
residential rental property. Because she placed the
property in service in May, she finds the percentage
from MACRS Table A-6 to be 2.273%.
Eileen figures her net rental income or loss for the
house as follows:
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RENTAL REAL ESTATE
Total rental income received ($750 × 11)
Minus Expenses
Mortgage interest ($1,800 ×11 /12)
Fire insurance ($100 ×11 /12)
Miscellaneous repairs
Real estate taxes ($1,200 ×11 /12)
Total expenses
Balance
Minus: Depreciation
House ($39,000 × 3.182%)
Dishwasher ($425 × 20%)
Furnace ($4,000 × 2.273%)
Total depreciation
Net rental income for house
$8,250
$1,650
92
297
1,100
3,139
$5,111
$1,241
85
91
1,417
$3,694
Eileen uses Part I of Schedule E to report her rental income and loss.
She enters her income, expenses, and depreciation for the house
in the column for Property A.
She uses Form 4562 to figure and report her depreciation.
Eileen's Schedule E and Form 4562 are shown on the following slides.
89
RENTAL REAL ESTATE
90
RENTAL REAL ESTATE
91
RENTAL REAL ESTATE
92
RENTAL REAL ESTATE
93
OTHER SCHEDULE E INCOME
Royalties
A. Royalties are payments for granting the right to use
certain intellectual property such as a patent or to
extract natural resources.
1. Payer of $10 or more in royalties should send you
a Form 1099-MISC
2. Report income and expenses in Part I of Schedule E
3. If in business as a self-employed writer or artist,
etc., use Schedule C.
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OTHER SCHEDULE E INCOME
Partnership And S Corporations
B. Partnership and S corporation income is taxed to the
partners or shareholders.
1. If you are a partner, your share of the income
is reported to you on Schedule K-1 (Form
1065)
2. If you are an S corporation shareholder, your
share of the income is reported to you on
Schedule K-1 (Form 1120S)
3. Report your income and expenses and figure your
losses in Part II of Schedule E.
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OTHER SCHEDULE E INCOME
Estates And Trusts
C. Estates and trusts often generate income before the
principal is distributed to the beneficiaries.
1. Your distributive share of income as a beneficiary
of an estate or trust is reported to you on
Schedule K-1 (Form 1041).
2. Report your share of trust income and losses in
Part III of Schedule E.
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OTHER SCHEDULE E INCOME
Schedule K-1
D. A different Schedule K-1 is issued from each type of
entity to report your share of income, deductions,
credits, and losses to you.
Shown on the next slide is a partner’s Schedule K-1.
97
OTHER SCHEDULE E INCOME
98
OTHER SCHEDULE E INCOME
99
OTHER SCHEDULE E INCOME
100
OTHER SCHEDULE E INCOME
101
Rental Real Estate, Royalties,
Partnerships, etc.
KEY IDEAS
♦ Report your rental income and your rental expenses on
Schedule E. You are taxed on your net rental income which
is the amount of rental income that exceeds your rental
expenses. If your expenses exceed your income you may
be able to deduct the loss from your other income such as
your wages on Form 1040.
♦ If you use your rental property partly for personal purposes
or change the use of your property from personal to rental,
you must divide your expenses between the rental and
personal use.
♦ The number of days you use a vacation home or other
dwelling unit for personal purposes determines whether
you use it as a home. If you use the unit as a home, you
cannot deduct certain rental expenses to produce a loss.
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Rental Real Estate, Royalties,
Partnerships, etc.
KEY IDEAS
♦ If your rental expenses exceed your income, your loss may
be limited by at-risk and/or passive activity limits. If you
actively participated in a passive rental real estate activity,
you may be able to claim a loss of up to $25,000 depending
on your modified AGI and filing status. If you are married,
are filing a separate return and lived with your spouse at
any time during the year, this special allowance is not
available.
♦ You figure your net income or loss from rental real estate
on Schedule E. Schedule E is also used to figure net
income or loss from other sources of income including
royalties and partnerships.
♦ Total net income or loss from rental real estate, royalty,
partnership, and other sources is entered on line 17 of
Form 1040.
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Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 1: True or False.
(1) Percy charges $450 a month rent for the apartments he
owns. His tenant Bud does minor repairs in the apartment
building and shovels the driveway in the winter. In
exchange Percy charges him only $350 a month. Percy
must include $450 a month for Bud’s apartment in the
rental income he reports on Schedule E.
(2) On March 31, 2008, Bonita moved out of the home she
had lived in for 4 years. She rented out the house until
October 31, 2008 and sold it on November 1, 2008. The
three months she lived in the house are not considered
days of personal use when determining if the dwelling
was used as a home.
(3) Cornelia owns a house that she rents out. In 2008, she
had to replace the furnace at a cost of $5,000. Cornelia
can deduct the $5,000 as a rental expense.
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Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 1: True or False.
(4) Kevin is a freelance writer. He will report the royalties he
receives for his books in Part I of Schedule E.
(5) Kelsey is married filing a separate return and he lived
with his spouse for 9 months of 2008. Kelsey has a rental
property in which he actively participates. He had a loss of
$3,450 on the rental property and his AGI is $45,100.
Kelsey can take the $3,450 loss on his 2008 tax return.
(6) In 2008, Bill’s tenant failed to pay him three months rent
amounting to $1,800. Bill can deduct this amount as a
rental expense in 2008.
(7) In most cases, if you actively participate in a rental real
estate activity, you can deduct a loss of up to $25,000 a
year from your non-rental income.
105
Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 1: True or False.
(8) Payment for cancellation of a lease is considered gross
rent and is included in income in the year it is received.
(9) Deke rented out his condominium in Florida for 270 days
in 2008. He used the condo for 32 days. For 3 of those
days he worked full time on painting the kitchen. Deke is
considered to have used the condo as a home in 2008.
(10) You can deduct your expenses for renting not-for-profit
property on Schedule E up to the amount of your rental
income.
(11) Candace owns a residential rental property. In 2008, she
spent $2,500 to put up a fence on the property. She can
deduct the $2,500 on her 2008 tax return.
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Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 1: True or False.
(12) The special loss allowance for a passive rental real
estate activity is eliminated if your modified AGI is
$150,000 or more ($75,000 or more if married filing a
separate return and did not live with your spouse at any
time during the year).
(13) In 2008, Conner signed a three-year lease with Lincoln
to rent a house that he owns for $700 per month. Conner
received the first and last months rent at the time the
lease was signed. Conner must include the $700 he
received for the last month’s rent in his 2008 rental
income.
(14) Orin is single and his modified AGI is $42,000. In 2008,
he owned 50% of an apartment building. He significantly
participated in all management decisions relating to
approving new tenants, deciding on rental terms, and
approving expenditures. Orin’s loss from the rental
property is $800. He can deduct that loss from his nonpassive income.
107
Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 1: True or False.
(1) Percy charges $450 a month rent for the apartments he
owns. His tenant Bud does minor repairs in the apartment
building and shovels the driveway in the winter. In
exchange Percy charges him only $350 a month. Percy
must include $450 a month for Bud’s apartment in the
rental income he reports on Schedule E. T
(2) On March 31, 2008, Bonita moved out of the home she
had lived in for 4 years. She rented out the house until
October 31, 2008 and sold it on November 1, 2008. The
three months she lived in the house are not considered
days of personal use when determining if the dwelling
was used as a home. T
(3) Cornelia owns a house that she rents out. In 2008, she
had to replace the furnace at a cost of $5,000. Cornelia
can deduct the $5,000 as a rental expense. F
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Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 1: True or False.
(4) Kevin is a freelance writer. He will report the royalties he receives
for his books in Part I of Schedule E. F
(5) Kelsey is married filing a separate return and he lived with his
spouse for 9 months of 2008. Kelsey has a rental property in
which he actively participates. He had a loss of $3,450 on the
rental property and his AGI is $45,100. Kelsey can take the
$3,450 loss on his 2008 tax return. F
(6) In 2008, Bill’s tenant failed to pay him three months rent
amounting to $1,800. Bill can deduct this amount as a rental
expense in 2008. F
(7) In most cases, if you actively participate in a rental real estate
activity, you can deduct a loss of up to $25,000 a year from your
non-rental income. T
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Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 1: True or False.
(8) Payment for cancellation of a lease is considered gross
rent and is included in income in the year it is received. T
(9) Deke rented out his condominium in Florida for 270 days
in 2008. He used the condo for 32 days. For 3 of those
days he worked full time on painting the kitchen. Deke is
considered to have used the condo as a home in 2008. T
(10) You can deduct your expenses for renting not-for-profit
property on Schedule E up to the amount of your rental
income. F
(11) Candace owns a residential rental property. In 2008, she
spent $2,500 to put up a fence on the property. She can
deduct the $2,500 on her 2008 tax return. F
110
Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 1: True or False.
(12) The special loss allowance for a passive rental real
estate activity is eliminated if your modified AGI is
$150,000 or more ($75,000 or more if married filing a
separate return and did not live with your spouse at any
time during the year). T
(13) In 2008, Conner signed a three-year lease with Lincoln
to rent a house that he owns for $700 per month. Conner
received the first and last months rent at the time the
lease was signed. Conner must include the $700 he
received for the last month’s rent in his 2008 rental
income. T
(14) Orin is single and his modified AGI is $42,000. In 2008,
he owned 50% of an apartment building. He significantly
participated in all management decisions relating to
approving new tenants, deciding on rental terms, and
approving expenditures. Orin’s loss from the rental
property is $800. He can deduct that loss from his nonpassive income. T
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Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 2: Diane moved from her home in May
2008 and began advertising for a tenant on June 1,
2008. The house was available for rent but she did
not rent it until July 1, 2008.
Diane’s rental income for 2008 was $7,000. Her
mortgage interest payments for the year totaled
$3,800. Her real property tax was $2,100. She also
paid $2,200 for her homeowner’s insurance policy
and $800 for repairs and maintenance in November
2007. Diane’s AGI is $45,000 and she will file as
single. Her depreciation for 2008 will be $1,330.
Answer the following questions about Diane’s rental
property:
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Rental Real Estate, Royalties,
Partnerships, etc.
1. How many months in 2008 was the house
used for rental purposes?
2. What allocation of the expenses can Diane
deduct on Schedule E?
3. What are Diane’s total rental expenses?
4. Which, if any, of these expenses can be
reported elsewhere on her 2008 tax return
and which allocation is being used?
113
Rental Real Estate, Royalties,
Partnerships, etc.
1. How many months in 2008 was the house used for rental
purposes? 7 months
2. What allocation of the expenses can Diane deduct on
Schedule E? 7/12
3. What are Diane’s total rental expenses?
$6,855 (7/12 of ($3,800, $2,100, $2,200) + $800+ $1,330)
4. Which, if any, of these expenses can be reported elsewhere
on her 2008 tax return and which allocation is being
used?
Schedule A, mortgage interest and taxes (5/12 of $3,800,
$2,100)
114
Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 3: Determine whether the following costs
for a rental house can be claimed as an expense (E)
or as an item that must be depreciated (D):
1. purchase and installation of wall to wall carpeting
2. replacing a section of gutter that fell off
3. a new roof
4. patching a leak in the roof around the chimney
5. a new fence
115
Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 3: Determine whether the following costs
for a rental house can be claimed as an expense (E)
or as an item that must be depreciated (D):
6. replacing the water pipes
7. a refrigerator
8. painting the house inside and out
9. adding a bathroom
10. putting in a new driveway
116
Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 3: Determine whether the following costs
for a rental house can be claimed as an expense (E)
or as an item that must be depreciated (D):
1. purchase and installation of wall to wall carpeting
Depreciated
2. replacing a section of gutter that fell off Expense
3. a new roof Depreciated
4. patching a leak in the roof around the chimney
Expense
5. a new fence Depreciated
117
Rental Real Estate, Royalties,
Partnerships, etc.
CLASSWORK 3: Determine whether the following costs
for a rental house can be claimed as an expense (E)
or as an item that must be depreciated (D):
6. replacing the water pipes Depreciated
7. a refrigerator Depreciated
8. painting the house inside and out Expense
9. adding a bathroom Depreciated
10. putting in a new driveway Depreciated
118
Questions & Answers
119