2023 Publication 527

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Department of the Treasury

Internal Revenue Service

Publication 527

Cat. No. 15052W

Residential

Rental

Property

(Including Rental of

Vacation Homes)

For use in preparing

2023 Returns

Get forms and other information faster and easier at:

• IRS.gov (English)

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•

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Contents

What’s New ............................... 2

Reminders ............................... 2

Introduction .............................. 2

Chapter 1. Rental Income and Expenses (If No

Personal Use of Dwelling) ................ 3

Rental Income .......................... 4

Rental Expenses ........................ 5

Chapter 2. Depreciation of Rental Property ..... 8

The Basics ............................. 9

Special Depreciation Allowance ............. 12

MACRS Depreciation .................... 12

Claiming the Correct Amount of Depreciation ... 18

Chapter 3. Reporting Rental Income,

Expenses, and Losses .................. 18

Which Forms To Use ..................... 18

Limits on Rental Losses .................. 19

At-Risk Rules ....................... 20

Passive Activity Limits ................. 20

Casualties and Thefts .................... 22

Example ............................. 22

Chapter 4. Special Situations ............... 23

Condominiums ......................... 23

Cooperatives .......................... 23

Property Changed to Rental Use ............ 24

Renting Part of Property .................. 25

Not Rented for Profit ..................... 25

Example—Property Changed to Rental Use .... 25

Chapter 5. Personal Use of Dwelling Unit

(Including Vacation Home) ............... 26

Dividing Expenses ...................... 27

Dwelling Unit Used as a Home .............. 27

Reporting Income and Deductions ........... 29

Worksheet 5-1. Worksheet for Figuring

Rental Deductions for a Dwelling Unit Used

as a Home .......................... 30

Chapter 6. How To Get Tax Help ............. 33

Index .................................. 37

Future Developments

For the latest information about developments related to

Pub. 527, such as legislation enacted after it was

published, go to IRS.gov/Pub527.

Jan 24, 2024

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What’s New

Standard mileage rate. For 2023, the standard mileage

rate for the cost of operating your car, van, pickup, or

panel truck increased to 65.5 cents a mile.

Section 179 deduction dollar limits. For tax years be-

ginning in 2023, the maximum section 179 expense de-

duction is $1,160,000. This limit is reduced by the amount

by which the cost of section 179 property placed in serv-

ice during the tax year exceeds $2,890,000.

Qualified paid sick leave and qualified paid family

leave payroll tax credit. Generally, the credit for quali-

fied sick and family leave wages, as enacted under the

Families First Coronavirus Response Act (FFCRA) and

amended and extended by the COVID-related Tax Relief

Act of 2020, for leave taken after March 31, 2020, and be-

fore April 1, 2021, and the credit for qualified sick and fam-

ily leave wages under sections 3131, 3132, and 3133 of

the Internal Revenue Code, as enacted under the Ameri-

can Rescue Plan Act of 2021 (the ARP), for leave taken

after March 31, 2021, and before October 1, 2021, have

expired. However, employers that pay qualified sick and

family leave wages in 2023 for leave taken after March 31,

2020, and before October 1, 2021, are eligible to claim a

credit for qualified sick and family leave wages in the quar-

ter of 2023 in which the qualified wages were paid. For

more information, see Form 941, lines 11b, 11d, 13c, and

13e; and Form 944, lines 8b, 8d, 10d, and 10f. You must

include the full amount (both the refundable and nonre-

fundable portions) of the credit for qualified sick and family

leave wages in gross income on line 3 or 4 of Schedule E

(Form 1040), as applicable, for the tax year that includes

the last day of any calendar quarter with respect to which

a credit is allowed. A credit is available only if the leave

was taken after March 31, 2020, and before October 1,

2021, and only after the qualified leave wages were paid,

which might, under certain circumstances, not occur until

a quarter after September 30, 2021, including qualifying

quarterly payments made during 2023. Accordingly, all

lines related to qualified sick and family leave wages re-

main on the employment tax returns for 2023.

Note. A credit is available only if the leave was taken

after March 31, 2020, and before October 1, 2021, and

only after the qualified leave wages were paid, which

might, under certain circumstances, not occur until a quar-

ter after September 30, 2021, including qualifying quar-

terly payments made during 2023. Accordingly, all lines re-

lated to qualified sick and family leave wages remain on

the employment tax returns for 2023.

Commercial clean vehicle credit. Businesses that buy

a qualified commercial clean vehicle may qualify for a

clean vehicle tax credit. See Form 8936 and its instruc-

tions for more information.

Bonus depreciation. The bonus depreciation deduction

under section 168(k) begins its phaseout in 2023 with a

reduction of the applicable limit from 100% to 80%.

Reminders

Net Investment Income Tax (NIIT). You may be subject

to the NIIT. NIIT is a 3.8% tax on the lesser of net invest-

ment income or the excess of modified adjusted gross in-

come (MAGI) over the threshold amount. Net investment

income may include rental income and other income from

passive activities. Use Form 8960 to figure this tax. For

more information on NIIT, go to IRS.gov/NIIT.

Form 7205, Energy Efficient Commercial Buildings

Deduction. This form and its separate instructions are

used to claim the section 179D deduction for qualifying

energy efficient commercial building expense(s).

Excess business loss limitation. If you report a loss on

line 26, 32, 37, or 39 of your Schedule E (Form 1040), you

may be subject to a business loss limitation. The disal-

lowed loss resulting from the limitation will not be reflected

on line 26, 32, 37, or 39 of your Schedule E. Instead, use

Form 461 to determine the amount of your excess busi-

ness loss, which will be included as income on Schedule

1 (Form 1040), line 8p. Any disallowed loss resulting from

this limitation will be treated as a net operating loss that

must be carried forward and deducted in a subsequent

year.

See Form 461 and its instructions for details on the ex-

cess business loss limitation.

Photographs of missing children. The Internal Reve-

nue Service is a proud partner with the National Center for

Missing & Exploited Children® (NCMEC). Photographs of

missing children selected by the Center may appear in

this publication on pages that would otherwise be blank.

You can help bring these children home by looking at the

photographs and calling 1-800-THE-LOST

(1-800-843-5678) if you recognize a child.

Introduction

Do you own a second house that you rent out all the time?

Do you own a vacation home that you rent out when you

or your family isn't using it?

These are two common types of residential rental activ-

ities discussed in this publication. In most cases, all rental

income must be reported on your tax return, but there are

differences in the expenses you are allowed to deduct and

in the way the rental activity is reported on your return.

Chapter 1 discusses rental-for-profit activity in which

there is no personal use of the property. It examines some

common types of rental income and when each is repor-

ted, as well as some common types of expenses and

which are deductible.

Chapter 2 discusses depreciation as it applies to your

rental real estate activity—what property can be depreci-

ated and how much it can be depreciated.

Chapter 3 covers the reporting of your rental income

and deductions, including casualties and thefts, limitations

on losses, and claiming the correct amount of deprecia-

tion.

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Chapter 4 discusses special rental situations. These in-

clude condominiums, cooperatives, property changed to

rental use, renting only part of your property, and a

not-for-profit rental activity.

Chapter 5 discusses the rules for rental income and ex-

penses when there is also personal use of the dwelling

unit, such as a vacation home.

Finally, chapter 6 explains how to get tax help from the

IRS.

Sale or exchange of rental property. For information

on how to figure and report any gain or loss from the sale,

exchange, or other disposition of your rental property, see

Pub. 544.

Sale of main home used as rental property. For in-

formation on how to figure and report any gain or loss from

the sale or other disposition of your main home that you

also used as rental property, see Pub. 523.

Tax-free exchange of rental property occasionally

used for personal purposes. If you meet certain quali-

fying use standards, you may qualify for a tax-free ex-

change (a like-kind or section 1031 exchange) of one

piece of rental property you own for a similar piece of

rental property, even if you have used the rental property

for personal purposes.

For information on the qualifying use standards, see

Revenue Procedure 2008-16, 2008-10 I.R.B. 547, availa-

ble at IRS.gov/irb/2008-10_IRB#RP-2008-16. For more in-

formation on like-kind exchanges, see chapter 1 of Pub.

544.

Comments and suggestions. We welcome your com-

ments about this publication and suggestions for future

editions.

You can send us comments through IRS.gov/

FormComments. Or, you can write to the Internal Revenue

Service, Tax Forms and Publications, 1111 Constitution

Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each com-

ment received, we do appreciate your feedback and will

consider your comments and suggestions as we revise

our tax forms, instructions, and publications. Don’t send

tax questions, tax returns, or payments to the above ad-

dress.

Getting answers to your tax questions. If you have

a tax question not answered by this publication or the How

To Get Tax Help section at the end of this publication, go

to the IRS Interactive Tax Assistant page at IRS.gov/

Help/ITA where you can find topics by using the search

feature or viewing the categories listed.

Getting tax forms, instructions, and publications.

Go to IRS.gov/Forms to download current and prior-year

forms, instructions, and publications.

Ordering tax forms, instructions, and publications.

Go to IRS.gov/OrderForms to order current forms, instruc-

tions, and publications; call 800-829-3676 to order

prior-year forms and instructions. The IRS will process

your order for forms and publications as soon as possible.

Don’t resubmit requests you’ve already sent us. You can

get forms and publications faster online.

Useful Items

You may want to see:

Publication

463 Travel, Gift, and Car Expenses

523 Selling Your Home

534 Depreciating Property Placed in Service Before

1987

544 Sales and Other Dispositions of Assets

547 Casualties, Disasters, and Thefts

551 Basis of Assets

925 Passive Activity and At-Risk Rules

946 How To Depreciate Property

Form (and Instructions)

461 Excess Business Loss Limitation

4562 Depreciation and Amortization

5213 Election To Postpone Determination as To

Whether the Presumption Applies That an

Activity Is Engaged in for Profit

7205 Energy Efficient Commercial Buildings

Deduction

8582 Passive Activity Loss Limitations

8960 Net Investment Income Tax—Individuals,

Estates, and Trusts

Schedule E (Form 1040) Supplemental Income

and Loss

Rental Income and

Expenses (If No Personal

Use of Dwelling)

This chapter discusses the various types of rental income

and expenses for a residential rental activity with no per-

sonal use of the dwelling. Generally, each year, you will re-

port all income and deduct all out-of-pocket expenses in

full. The deduction to recover the cost of your rental prop-

erty—depreciation—is taken over a prescribed number of

years, and is discussed in chapter 2.

463

523

534

544

547

551

925

946

461

4562

5213

7205

8582

8960

Schedule E (Form 1040)

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Use of Dwelling)

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If your rental income is from property you also use

personally or rent to someone at less than a fair

rental price, first read chapter 5.

Rental Income

In most cases, you must include in your gross income all

amounts you receive as rent. Rental income is any pay-

ment you receive for the use or occupation of property. It

isn’t limited to amounts you receive as normal rental pay-

ments.

When To Report

When you report rental income on your tax return gener-

ally depends on whether you are a cash or an accrual ba-

sis taxpayer. Most individual taxpayers use the cash

method.

Cash method. You are a cash basis taxpayer if you re-

port income on your return in the year you actually or con-

structively receive it, regardless of when it was earned.

You constructively receive income when it is made availa-

ble to you, for example, by being credited to your bank ac-

count.

Accrual method. If you are an accrual basis taxpayer,

you generally report income when you earn it, rather than

when you receive it. You generally deduct your expenses

when you incur them, rather than when you pay them.

More information. See Pub. 538, Accounting Periods

and Methods, for more information about when you con-

structively receive income and accrual methods of ac-

counting.

Types of Income

The following are common types of rental income.

Advance rent. Advance rent is any amount you receive

before the period that it covers. Include advance rent in

your rental income in the year you receive it regardless of

the period covered or the method of accounting you use.

Example. On March 18, 2023, you signed a 10-year

lease to rent your property. During 2023, you received

$9,600 for the first year's rent and $9,600 as rent for the

last year of the lease. You must include $19,200 in your

rental income in 2023.

Canceling a lease. If your tenant pays you to cancel a

lease, the amount you receive is rent. Include the payment

in your rental income in the year you receive it regardless

of your method of accounting.

Expenses paid by tenant. If your tenant pays any of

your expenses, those payments are rental income. Be-

cause you must include this amount in income, you can

also deduct the expenses if they are deductible rental ex-

penses. For more information, see Rental Expenses, later.

CAUTION

Example 1. Your tenant pays the water and sewage

bill for your rental property and deducts the amount from

the normal rent payment. Under the terms of the lease,

your tenant doesn’t have to pay this bill. Include the utility

bill paid by the tenant and any amount received as a rent

payment in your rental income. You can deduct the utility

payment made by your tenant as a rental expense.

Example 2. While you are out of town, the furnace in

your rental property stops working. Your tenant pays for

the necessary repairs and deducts the repair bill from the

rent payment. Include the repair bill paid by the tenant and

any amount received as a rent payment in your rental in-

come. You can deduct the repair payment made by your

tenant as a rental expense.

Property or services. If you receive property or services

as rent, instead of money, include the fair market value

(FMV) of the property or services in your rental income.

If the services are provided at an agreed upon or speci-

fied price, that price is the FMV unless there is evidence to

the contrary.

Example. Your tenant is a house painter. He offers to

paint your rental property instead of paying 2 months rent.

You accept his offer.

Include in your rental income the amount the tenant

would have paid for 2 months rent. You can deduct that

same amount as a rental expense for painting your prop-

erty.

Security deposits. Don’t include a security deposit in

your income when you receive it if you plan to return it to

your tenant at the end of the lease. But if you keep part or

all of the security deposit during any year because your

tenant doesn’t live up to the terms of the lease, include the

amount you keep in your income in that year.

If an amount called a security deposit is to be used as a

final payment of rent, it is advance rent. Include it in your

income when you receive it.

Other Sources of Rental Income

Lease with option to buy. If the rental agreement gives

your tenant the right to buy your rental property, the pay-

ments you receive under the agreement are generally

rental income. If your tenant exercises the right to buy the

property, the payments you receive for the period after the

date of sale are considered part of the selling price.

Part interest. If you own a part interest in rental property,

you must report your part of the rental income from the

property.

Rental of property also used as your home. If you rent

property that you also use as your home and you rent it

less than 15 days during the tax year, don’t include the

rent you receive in your income. Also, expenses from this

activity are not considered rental expenses. For more in-

formation, see Used as a home but rented less than 15

days under Reporting Income and Deductions in chap-

ter 5.

4 Chapter 1 Rental Income and Expenses (If No Personal

Use of Dwelling)

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Rental Expenses

In most cases, the expenses of renting your property, such

as maintenance, insurance, taxes, and interest, can be

deducted from your rental income.

Personal use of rental property. If you sometimes use

your rental property for personal purposes, you must di-

vide your expenses between rental and personal use.

Also, your rental expense deductions may be limited. See

chapter 5.

Part interest. If you own a part interest in rental property,

you can deduct expenses you paid according to your per-

centage of ownership.

Example. Roger owns a one-half undivided interest in

a rental house. Last year, he paid $968 for necessary re-

pairs on the property. Roger can deduct $484 (50% (0.50)

× $968) as a rental expense. He is entitled to reimburse-

ment for the remaining half from the co-owner.

When To Deduct

You generally deduct your rental expenses in the year you

pay them.

If you use the accrual method, see Pub. 538 for more

information.

Types of Expenses

Listed below are the most common rental expenses.

•

Advertising.

•

Auto and travel expenses.

•

Cleaning and maintenance.

•

Commissions.

•

Depreciation.

•

Insurance.

•

Interest (other).

•

Legal and other professional fees.

•

Local transportation expenses.

•

Management fees.

•

Mortgage interest paid to banks, etc.

•

Points.

•

Rental payments.

•

Repairs.

•

Taxes.

•

Utilities.

Some of these expenses, as well as other less common

ones, are discussed below.

Depreciation. Depreciation is a capital expense. It is the

mechanism for recovering your cost in an income-produc-

ing property and must be taken over the expected life of

the property.

You can begin to depreciate rental property when it is

ready and available for rent. See Placed in Service under

When Does Depreciation Begin and End? in chapter 2.

Insurance premiums paid in advance. If you pay an in-

surance premium for more than 1 year in advance, you

can’t deduct the total premium in the year you pay it. For

each year of coverage, you can deduct only the part of the

premium payment that applies to that year.

Interest expense. You can deduct mortgage interest you

pay on your rental property. When you refinance a rental

property for more than the previous outstanding balance,

the portion of the interest allocable to loan proceeds not

related to rental use generally can’t be deducted as a

rental expense.

Expenses paid to obtain a mortgage. Certain ex-

penses you pay to obtain a mortgage on your rental prop-

erty can’t be deducted as interest. These expenses, which

include mortgage commissions, abstract fees, and record-

ing fees, are capital expenses that are part of your basis in

the property.

Form 1098, Mortgage Interest Statement. If you

paid $600 or more of mortgage interest on your rental

property to any one person, you should receive a Form

1098 or similar statement showing the interest you paid for

the year. If you and at least one other person (other than

your spouse if you file a joint return) were liable for, and

paid interest on, the mortgage, and the other person re-

ceived the Form 1098, report your share of the interest on

Schedule E (Form 1040), line 13. Attach a statement to

your return showing the name and address of the other

person. On the dotted line next to line 13, enter “See at-

tached.”

Legal and other professional fees. You can deduct, as

a rental expense, legal and other professional expenses

such as tax return preparation fees you paid to prepare

Schedule E, Part I. For example, on your 2023 Sched-

ule E, you can deduct fees paid in 2023 to prepare Part I

of your 2022 Schedule E. You can also deduct, as a rental

expense, any expense (other than federal taxes and pen-

alties) you paid to resolve a tax underpayment related to

your rental activities.

Local benefit taxes. In most cases, you can’t deduct

charges for local benefits that increase the value of your

property, such as charges for putting in streets, sidewalks,

or water and sewer systems. These charges are nonde-

preciable capital expenditures and must be added to the

basis of your property. However, you can deduct local

benefit taxes that are for maintaining, repairing, or paying

interest charges for the benefits.

Local transportation expenses. You may be able to de-

duct your ordinary and necessary local transportation ex-

penses if you incur them to collect rental income or to

manage, conserve, or maintain your rental property. How-

ever, transportation expenses incurred to travel between

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your home and a rental property generally constitute non-

deductible commuting costs unless you use your home as

your principal place of business. See Pub. 587, Business

Use of Your Home, for information on determining if your

home office qualifies as a principal place of business.

Generally, if you use your personal car, pickup truck, or

light van for rental activities, you can deduct the expenses

using one of two methods: actual expenses or the stand-

ard mileage rate. For 2023, the standard mileage rate is

65.5 cents a mile. For more information, see chapter 4 of

Pub. 463.

To deduct car expenses under either method, you

must keep records that follow the rules in chap-

ter 5 of Pub. 463. In addition, you must complete

Form 4562, Part V, and attach it to your tax return.

Pre-rental expenses. You can deduct your ordinary and

necessary expenses for managing, conserving, or main-

taining rental property from the time you make it available

for rent.

Rental of equipment. You can deduct the rent you pay

for equipment that you use for rental purposes. However,

in some cases, lease contracts are actually purchase con-

tracts. If so, you can’t deduct these payments. You can re-

cover the cost of purchased equipment through deprecia-

tion.

Rental of property. You can deduct the rent you pay for

property that you use for rental purposes. If you buy a

leasehold for rental purposes, you can deduct an equal

part of the cost each year over the term of the lease.

Travel expenses. You can deduct the ordinary and nec-

essary expenses of traveling away from home if the pri-

mary purpose of the trip is to collect rental income or to

manage, conserve, or maintain your rental property. You

must properly allocate your expenses between rental and

nonrental activities. You can’t deduct the cost of traveling

away from home if the primary purpose of the trip is to im-

prove the property. The cost of improvements is recovered

by taking depreciation. For information on travel expenses,

see chapter 1 of Pub. 463.

To deduct travel expenses, you must keep records

that follow the rules in chapter 5 of Pub. 463.

Uncollected rent. If you are a cash basis taxpayer, don’t

deduct uncollected rent. Because you haven’t included it

in your income, it’s not deductible.

If you use an accrual method, report income when you

earn it. If you are unable to collect the rent, you may be

able to deduct it as a business bad debt. See section 166

and its regulations for more information about business

bad debts.

Vacant rental property. If you hold property for rental

purposes, you may be able to deduct your ordinary and

necessary expenses (including depreciation) for manag-

ing, conserving, or maintaining the property while the

RECORDS

property is vacant. However, you can’t deduct any loss of

rental income for the period the property is vacant.

Vacant while listed for sale. If you sell property you

held for rental purposes, you can deduct the ordinary and

necessary expenses for managing, conserving, or main-

taining the property until it is sold. If the property isn’t held

out and available for rent while listed for sale, the expen-

ses aren’t deductible rental expenses.

Points

The term “points” is often used to describe some of the

charges paid, or treated as paid, by a borrower to take out

a loan or a mortgage. These charges are also called loan

origination fees, maximum loan charges, or premium

charges. Any of these charges (points) that are solely for

the use of money are interest. Because points are prepaid

interest, you generally can’t deduct the full amount in the

year paid, but must deduct the interest over the term of the

loan.

The method used to figure the amount of points you

can deduct each year follows the original issue discount

(OID) rules. In this case, points paid (or treated as paid

(such as seller paid points)), by a borrower to a lender in-

crease OID which is the excess of:

•

Stated redemption price at maturity (generally the sta-

ted principal amount of the mortgage loan) over

•

Issue price (generally the amount borrowed reduced

by the points).

Note. For more detailed information to determine OID

on a mortgage loan, including how to determine the stated

redemption price at maturity and issue price of a mort-

gage loan, see the regulations under section 1273.

The first step to determine the amount of your deduc-

tion for the points is to determine whether your total OID

on the mortgage loan, including the OID resulting from the

points is de minimis. If the OID isn’t de minimis, you must

use the constant-yield method to figure how much you can

deduct.

De minimis OID. The OID is de minimis if it is less than

one-fourth of 1% (0.0025) of the stated redemption price

at maturity multiplied by the number of full years from the

date of original issue to maturity (term of the loan).

If the OID is de minimis, you can choose one of the fol-

lowing ways to figure the amount of points you can deduct

each year.

•

On a constant-yield basis over the term of the loan.

•

On a straight line basis over the term of the loan.

•

In proportion to stated interest payments.

•

In its entirety at maturity of the loan.

You make this choice by deducting the OID (including the

points) in a manner consistent with the method chosen on

your timely filed tax return for the tax year in which the

loan is issued.

6 Chapter 1 Rental Income and Expenses (If No Personal

Use of Dwelling)

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Example. Carol took out a $100,000 mortgage loan on

January 1, 2023, to buy a house she will use as a rental

during 2023. The loan is to be repaid over 30 years. The

loan requires interest payable each year at a fixed rate.

During 2023, Carol paid $10,000 of mortgage interest

(stated interest) to the lender. When the loan was made,

she paid $1,500 in points to the lender. The amount of the

OID on the loan is $1,500, which is the difference between

the stated redemption price at maturity of $100,000 less

the issue price of $98,500 (the amount borrowed of

$100,000 minus the points paid of $1,500). Carol deter-

mines that the points (OID) she paid are de minimis based

on the following computation.

Stated redemption price at maturity (principal amount

of the loan in this case) .................. $100,000

Multiplied by: The term of the

loan in complete years ................... × 30

Multiplied by .......................... × 0.0025

De minimis amount .....................

$ 7,500

The points (OID) she paid ($1,500) are less than the de

minimis amount ($7,500). Therefore, Carol has de minimis

OID and she can choose one of the four ways discussed

earlier to figure the amount she can deduct each year. Un-

der the straight line method, she can deduct $50 each

year for 30 years.

Constant-yield method. If the OID (including the points)

isn’t de minimis, you must use the constant-yield method

to figure how much you can deduct each year.

You figure your deduction for the first year in the follow-

ing manner.

1. Determine the issue price of the loan. If you paid

points on the loan, the issue price is generally the dif-

ference between the amount borrowed and the points.

2. Multiply the result in (1) by the yield to maturity (de-

fined later).

3. Subtract any qualified stated interest payments (de-

fined later) from the result in (2). This is the OID you

can deduct in the first year.

Yield to maturity (YTM). This rate is generally shown

in the literature you receive from your lender. If you don’t

have this information, consult your lender or tax advisor. In

general, the YTM is the discount rate that, when used in

computing the present value of all principal and interest

payments, produces an amount equal to the issue price of

the loan.

Qualified stated interest (QSI). In general, this is the

stated interest that is unconditionally payable in cash or

property (other than another debt instrument of the bor-

rower) at least annually over the term of the loan at a fixed

rate.

Example—Year 1. The facts are the same as in the

previous example. The YTM on Carol's loan is 10.2467%,

compounded annually.

She figured the amount of points (OID) she could de-

duct in 2023 as follows.

Amount borrowed ...................... $100,000

Minus: Points (OID) ..................... – 1,500

Issue price of the loan .................... $ 98,500

Multiplied by: YTM ...................... × 0.102467

Total ............................... 10,093

Minus: QSI ........................... –10,000

Points (OID) deductible in 2023 .............

$ 93

To figure your deduction in any subsequent year, you

start with the adjusted issue price. To get the adjusted is-

sue price, add to the issue price figured in Year 1 any OID

previously deducted. Then, follow steps (2) and (3), ear-

lier.

Example—Year 2. Carol figured the deduction for

2024 as follows.

Issue price ........................... $98,500

Plus: Points (OID) deducted

in 2023 ............................

+ 93

Adjusted issue price ..................... $98,593

Multiplied by: YTM ...................... × 0.102467

Total ............................... 10,103

Minus: QSI ........................... –10,000

Points (OID) deductible in 2024 .............

$ 103

Loan or mortgage ends. If your loan or mortgage ends,

you may be able to deduct any remaining points (OID) in

the tax year in which the loan or mortgage ends. A loan or

mortgage may end due to a refinancing, prepayment, fore-

closure, or similar event. However, if the refinancing is with

the same lender, the remaining points (OID) generally

aren’t deductible in the year in which the refinancing oc-

curs, but may be deductible over the term of the new mort-

gage or loan.

Points when loan refinance is more than the previous

outstanding balance. When you refinance a rental prop-

erty for more than the previous outstanding balance, the

portion of the points allocable to loan proceeds not rela-

ted to rental use generally can’t be deducted as a rental

expense.

Example. You refinanced a loan with a balance of

$100,000. The amount of the new loan was $120,000. You

used the additional $20,000 to purchase a car. The points

allocable to the $20,000 would be treated as nondeducti-

ble personal interest.

Repairs and Improvements

Generally, an expense for repairing or maintaining your

rental property may be deducted if you aren’t required to

capitalize the expense.

Improvements. You must capitalize any expense you

pay to improve your rental property. An expense is for an

improvement if it results in a betterment to your property,

restores your property, or adapts your property to a new or

different use. Table 1-1 shows examples of many improve-

ments.

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Betterments. Expenses that may result in a better-

ment to your property include expenses for fixing a pre-ex-

isting defect or condition, enlarging or expanding your

property, or increasing the capacity, strength, or quality of

your property.

Restoration. Expenses that may be for restoration in-

clude expenses for replacing a substantial structural part

of your property, repairing damage to your property after

you properly adjusted the basis of your property as a re-

sult of a casualty loss, or rebuilding your property to a

like-new condition.

Adaptation. Expenses that may be for adaptation in-

clude expenses for altering your property to a use that isn’t

consistent with the intended ordinary use of your property

when you began renting the property.

De minimis safe harbor for tangible property. If

you elect this de minimis safe harbor for your rental activity

for the tax year, you aren’t required to capitalize the de

minimis costs of acquiring or producing certain real and

tangible personal property and may deduct these

amounts as rental expenses on line 19 of Schedule E. For

more information on electing and using the de minimis

safe harbor for tangible property, see Tangible Property

Regulations-Frequently Asked Questions.

Safe harbor for routine maintenance. If you deter-

mine that your cost was for an improvement to a building

or equipment, you may still be able to deduct your cost un-

der the routine maintenance safe harbor. See Tangible

Property Regulations-Frequently Asked Questions for

more information.

Separate the costs of repairs and improvements,

and keep accurate records. You will need to know

the cost of improvements when you sell or depre-

ciate your property.

The expenses you capitalize for improving your prop-

erty can generally be depreciated as if the improvement

were separate property.

RECORDS

Depreciation of Rental

Property

You recover the cost of income-producing property

through yearly tax deductions. You do this by depreciating

the property; that is, by deducting some of the cost each

year on your tax return.

Three factors determine how much depreciation you can

deduct each year: (1) your basis in the property, (2) the re-

covery period for the property, and (3) the depreciation

method used. You can’t simply deduct your mortgage or

principal payments, or the cost of furniture, fixtures, and

equipment, as an expense.

You can deduct depreciation only on the part of your prop-

erty used for rental purposes. Depreciation reduces your

basis for figuring gain or loss on a later sale or exchange.

You may have to use Form 4562 to figure and report your

depreciation. See Which Forms To Use in chapter 3. Also,

see Pub. 946.

Section 179 deduction. The section 179 deduction is a

means of recovering part or all of the cost of certain quali-

fying property in the year you place the property in serv-

ice. It is separate from your depreciation deduction. See

chapter 2 of Pub. 946 for more information about claiming

this deduction.

Alternative minimum tax (AMT). If you use accelerated

depreciation, you may be subject to the AMT. Accelerated

depreciation allows you to deduct more depreciation ear-

lier in the recovery period than you could deduct using a

straight line method (same deduction each year).

The prescribed depreciation methods for rental real es-

tate aren’t accelerated, so the depreciation deduction isn’t

adjusted for the AMT. However, accelerated methods are

generally used for other property connected with rental

activities (for example, appliances and wall-to-wall

carpeting).

Examples of Improvements

Additions

Bedroom

Bathroom

Deck

Garage

Porch

Patio

Lawn & Grounds

Landscaping

Driveway

Walkway

Fence

Retaining wall

Sprinkler system

Swimming pool

Miscellaneous

Storm windows, doors

New roof

Central vacuum

Wiring upgrades

Satellite dish

Security system

Heating & Air Conditioning

Heating system

Central air conditioning

Furnace

Duct work

Central humidifier

Filtration system

Plumbing

Septic system

Water heater

Soft water system

Filtration system

Interior Improvements

Built-in appliances

Kitchen modernization

Flooring

Wall-to-wall carpeting

Insulation

Attic

Walls, floor

Pipes, duct work

Table 1-1.

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To find out if you are subject to the AMT, see the In-

structions for Form 6251.

The Basics

The following section discusses the information you will

need to have about the rental property and the decisions

to be made before figuring your depreciation deduction.

What Rental Property Can Be

Depreciated?

You can depreciate your property if it meets all the follow-

ing requirements.

•

You own the property.

•

You use the property in your business or income-pro-

ducing activity (such as rental property).

•

The property has a determinable useful life.

•

The property is expected to last more than 1 year.

Property you own. To claim depreciation, you must usu-

ally be the owner of the property. You are considered to be

the owner of the property even if it’s subject to a debt.

Rented property. Generally, if you pay rent for prop-

erty, you can’t depreciate that property. Usually, only the

owner can depreciate it. However, if you make permanent

improvements to leased property, you may be able to de-

preciate the improvements. See Additions or improve-

ments to property, later in this chapter, under Recovery

Periods Under GDS.

Cooperative apartments. If you are a tenant-stock-

holder in a cooperative housing corporation and rent your

cooperative apartment to others, you can depreciate your

stock in the corporation. See chapter 4.

Property having a determinable useful life. To be de-

preciable, your property must have a determinable useful

life. This means that it must be something that wears out,

decays, gets used up, becomes obsolete, or loses its

value from natural causes.

What Rental Property Can’t Be Depreciated?

Certain property can’t be depreciated. This includes land

and certain excepted property.

Land. You can’t depreciate the cost of land because land

generally doesn’t wear out, become obsolete, or get used

up. But if it does, the loss is accounted for upon disposi-

tion. The costs of clearing, grading, planting, and land-

scaping are usually all part of the cost of land and can’t be

depreciated. You may, however, be able to depreciate cer-

tain land preparation costs if the costs are so closely as-

sociated with other depreciable property that you can de-

termine a life for them along with the life of the associated

property.

Example. You built a new house to use as a rental and

paid for grading, clearing, seeding, and planting bushes

and trees. Some of the bushes and trees were planted

right next to the house, while others were planted around

the outer border of the lot. If you replace the house, you

would have to destroy the bushes and trees right next to it.

These bushes and trees are closely associated with the

house, so they have a determinable useful life. Therefore,

you can depreciate them. Add your other land preparation

costs to the basis of your land because they have no de-

terminable life and you can’t depreciate them.

Excepted property. Even if the property meets all the re-

quirements listed earlier under What Rental Property Can

Be Depreciated, you can’t depreciate the following prop-

erty.

•

Property placed in service and disposed of (or taken

out of business use) in the same year.

•

Equipment used to build capital improvements. You

must add otherwise allowable depreciation on the

equipment during the period of construction to the ba-

sis of your improvements.

For more information, see chapter 1 of Pub. 946.

When Does Depreciation Begin and

End?

You begin to depreciate your rental property when you

place it in service for the production of income. You stop

depreciating it either when you have fully recovered your

cost or other basis, or when you retire it from service,

whichever happens first.

Placed in Service

You place property in service in a rental activity when it is

ready and available for a specific use in that activity. Even

if you aren’t using the property, it is in service when it is

ready and available for its specific use.

Example 1. On November 22 of last year, you pur-

chased a dishwasher for your rental property. The appli-

ance was delivered on December 7, but wasn’t installed

and ready for use until January 3 of this year. Because the

dishwasher wasn’t ready for use last year, it isn’t consid-

ered placed in service until this year.

If the appliance had been installed and ready for use

when it was delivered in December of last year, it would

have been considered placed in service in December,

even if it wasn’t actually used until this year.

Example 2. On April 6, you purchased a house to use

as residential rental property. You made extensive repairs

to the house and had it ready for rent on July 5. You began

to advertise the house for rent in July and actually rented it

beginning September 1. The house is considered placed

in service in July when it was ready and available for rent.

You can begin to depreciate the house in July.

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Example 3. You moved from your home in July. During

August and September, you made several repairs to the

house. On October 1, you listed the property for rent with

a real estate company, which rented it on December 1.

The property is considered placed in service on October

1, the date when it was available for rent.

Conversion to business use. If you place property in

service in a personal activity, you can’t claim depreciation.

However, if you change the property's use to business or

the production of income, you can begin to depreciate it at

the time of the change. You place the property in service

for business or income-producing use on the date of the

change.

Example. You bought a house and used it as your per-

sonal home several years before you converted it to rental

property. Although its specific use was personal and no

depreciation was allowable, you placed the home in serv-

ice when you began using it as your home. You can begin

to claim depreciation in the year you converted it to rental

property because at that time its use changed to the pro-

duction of income.

Idle Property

Continue to claim a deduction for depreciation on property

used in your rental activity even if it is temporarily idle (not

in use). For example, if you must make repairs after a ten-

ant moves out, you still depreciate the rental property dur-

ing the time it isn’t available for rent.

Cost or Other Basis Fully Recovered

You must stop depreciating property when the total of your

yearly depreciation deductions equals your cost or other

basis of your property. For this purpose, your yearly depre-

ciation deductions include any depreciation that you were

allowed to claim, even if you didn’t claim it. See Basis of

Depreciable Property, later.

Retired From Service

You stop depreciating property when you retire it from

service, even if you haven’t fully recovered its cost or other

basis. You retire property from service when you perma-

nently withdraw it from use in a trade or business or from

use in the production of income because of any of the fol-

lowing events.

•

You sell or exchange the property.

•

You convert the property to personal use.

•

You abandon the property.

•

The property is destroyed.

Depreciation Methods

Generally, you must use the Modified Accelerated Cost

Recovery System (MACRS) to depreciate residential

rental property placed in service after 1986.

If you placed rental property in service before 1987, you

are using one of the following methods.

•

Accelerated Cost Recovery System (ACRS) for prop-

erty placed in service after 1980 but before 1987.

•

Straight line or declining balance method over the

useful life of property placed in service before 1981.

See MACRS Depreciation, later, for more information.

Rental property placed in service before 2023. Con-

tinue to use the same method of figuring depreciation that

you used in the past.

Use of real property changed. Generally, you must use

MACRS to depreciate real property that you acquired for

personal use before 1987 and changed to business or in-

come-producing use after 1986. This includes your resi-

dence that you changed to rental use. See Property

Owned or Used in 1986 in chapter 1 of Pub. 946 for those

situations in which MACRS isn’t allowed.

Improvements made after 1986. Treat an improvement

made after 1986 to property you placed in service before

1987 as separate depreciable property. As a result, you

can depreciate that improvement as separate property un-

der MACRS if it is the type of property that otherwise

qualifies for MACRS depreciation. For more information

about improvements, see Additions or improvements to

property, later in this chapter, under Recovery Periods Un-

der GDS.

This publication discusses MACRS depreciation

only. If you need information about depreciating

property placed in service before 1987, see Pub.

534.

Basis of Depreciable Property

The basis of property used in a rental activity is generally

its adjusted basis when you place it in service in that activ-

ity. This is its cost or other basis when you acquired it, ad-

justed for certain items occurring before you place it in

service in the rental activity.

If you depreciate your property under MACRS, you may

also have to reduce your basis by certain deductions and

credits with respect to the property.

Basis and adjusted basis are explained in the following

discussions.

If you used the property for personal purposes be-

fore changing it to rental use, its basis for depreci-

ation is the lesser of its adjusted basis or its FMV

when you change it to rental use. See Basis of Property

Changed to Rental Use in chapter 4.

Cost Basis

The basis of property you buy is usually its cost. The cost

is the amount you pay for it in cash, in debt obligation, in

CAUTION

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other property, or in services. Your cost also includes

amounts you pay for:

•

Sales tax charged on the purchase (but see Exception

next),

•

Freight charges to obtain the property, and

•

Installation and testing charges.

Exception. If you deducted state and local general

sales taxes as an itemized deduction on Schedule A

(Form 1040), don’t include as part of your cost basis the

sales taxes you deducted. Such taxes were deductible be-

fore 1987 and after 2003.

Loans with low or no interest. If you buy property on

any payment plan that charges little or no interest, the ba-

sis of your property is your stated purchase price, less the

amount considered to be unstated interest. See Unstated

Interest and Original Issue Discount (OID) in Pub. 537, In-

stallment Sales.

Real property. If you buy real property, such as a build-

ing and land, certain fees and other expenses you pay are

part of your cost basis in the property.

Real estate taxes. If you buy real property and agree

to pay real estate taxes on it that were owed by the seller

and the seller doesn’t reimburse you, the taxes you pay

are treated as part of your basis in the property. You can’t

deduct them as taxes paid.

If you reimburse the seller for real estate taxes the

seller paid for you, you can usually deduct that amount.

Don’t include that amount in your basis in the property.

Settlement fees and other costs. The following set-

tlement fees and closing costs for buying the property are

part of your basis in the property.

•

Abstract fees.

•

Charges for installing utility services.

•

Legal fees.

•

Recording fees.

•

Surveys.

•

Transfer taxes.

•

Title insurance.

•

Any amounts the seller owes that you agree to pay,

such as back taxes or interest, recording or mortgage

fees, charges for improvements or repairs, and sales

commissions.

The following are settlement fees and closing costs you

can’t include in your basis in the property.

1. Fire insurance premiums.

2. Rent or other charges relating to occupancy of the

property before closing.

3. Charges connected with getting or refinancing a loan,

such as:

a. Points (discount points, loan origination fees),

b. Loan assumption fees,

c. Cost of a credit report, and

d. Fees for an appraisal required by a lender.

Also, don’t include amounts placed in escrow for the fu-

ture payment of items such as taxes and insurance.

Assumption of a mortgage. If you buy property and

become liable for an existing mortgage on the property,

your basis is the amount you pay for the property plus the

amount remaining to be paid on the mortgage.

Example. You buy a building for $60,000 cash and as-

sume a mortgage of $240,000 on it. Your basis is

$300,000.

Separating cost of land and buildings. If you buy

buildings and your cost includes the cost of the land on

which they stand, you must divide the cost between the

land and the buildings to figure the basis for depreciation

of the buildings. The part of the cost that you allocate to

each asset is the ratio of the FMV of that asset to the FMV

of the whole property at the time you buy it.

If you aren’t certain of the FMVs of the land and the

buildings, you can divide the cost between them based on

their assessed values for real estate tax purposes.

Example. You buy a house and land for $200,000. The

purchase contract doesn’t specify how much of the pur-

chase price is for the house and how much is for the land.

The latest real estate tax assessment on the property

was based on an assessed value of $160,000, of which

$136,000 was for the house and $24,000 was for the land.

You can allocate 85% ($136,000 ÷ $160,000) of the

purchase price to the house and 15% ($24,000 ÷

$160,000) of the purchase price to the land.

Your basis in the house is $170,000 (85% of $200,000)

and your basis in the land is $30,000 (15% of $200,000).

Basis Other Than Cost

You can’t use cost as a basis for property that you re-

ceived:

•

In return for services you performed;

•

In an exchange for other property;

•

As a gift;

•

From your spouse, or from your former spouse as the

result of a divorce; or

•

As an inheritance.

If you received property in one of these ways, see Pub.

551 for information on how to figure your basis.

Adjusted Basis

To figure your property's basis for depreciation, you may

have to make certain adjustments (increases and decrea-

ses) to the basis of the property for events occurring be-

tween the time you acquired the property and the time you

placed it in service for business or the production of in-

come. The result of these adjustments to the basis is the

adjusted basis.

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Increases to basis. You must increase the basis of any

property by the cost of all items properly added to a capi-

tal account. These include the following.

•

The cost of any additions or improvements made be-

fore placing your property into service as a rental that

have a useful life of more than 1 year.

•

Amounts spent after a casualty to restore the dam-

aged property.

•

The cost of extending utility service lines to the prop-

erty.

•

Legal fees, such as the cost of defending and perfect-

ing title, or settling zoning issues.

Additions or improvements. Add to the basis of your

property the amount an addition or improvement actually

costs you, including any amount you borrowed to make

the addition or improvement. This includes all direct costs,

such as material and labor, but doesn’t include your own

labor. It also includes all expenses related to the addition

or improvement.

For example, if you had an architect draw up plans for

remodeling your property, the architect's fee is a part of

the cost of the remodeling. Or, if you had your lot surveyed

to put up a fence, the cost of the survey is a part of the

cost of the fence.

Keep separate accounts for depreciable additions or

improvements made after you place the property in serv-

ice in your rental activity. For information on depreciating

additions or improvements, see Additions or improve-

ments to property, later in this chapter, under Recovery

Periods Under GDS.

The cost of landscaping improvements is usually

treated as an addition to the basis of the land,

which isn’t depreciable. However, see What

Rental Property Can’t Be Depreciated, earlier.

Assessments for local improvements. Assess-

ments for items which tend to increase the value of prop-

erty, such as streets and sidewalks, must be added to the

basis of the property. For example, if your city installs

curbing on the street in front of your house, and assesses

you and your neighbors for its cost, you must add the as-

sessment to the basis of your property. Also, add the cost

of legal fees paid to obtain a decrease in an assessment

levied against property to pay for local improvements. You

can’t deduct these items as taxes or depreciate them.

However, you can deduct assessments for the purpose

of maintenance or repairs or for the purpose of meeting in-

terest charges related to the improvements. Don’t add

them to your basis in the property.

Deducting vs. capitalizing costs. Don’t add to your

basis costs you can deduct as current expenses. How-

ever, there are certain costs you can choose either to de-

duct or to capitalize. If you capitalize these costs, include

them in your basis. If you deduct them, don’t include them

in your basis.

The costs you may choose to deduct or capitalize in-

clude carrying charges, such as interest and taxes, that

you must pay to own property.

CAUTION

For more information about deducting or capitalizing

costs and how to make the election, see Carrying

Charges in sections 263(A) and 266.

Decreases to basis. You must decrease the basis of

your property by any items that represent a return of your

cost. These include the following.

•

Insurance or other payment you receive as the result

of a casualty or theft loss.

•

Casualty loss not covered by insurance for which you

took a deduction.

•

Amount(s) you receive for granting an easement.

•

Residential energy credits you were allowed before

1986 or after 2005 if you added the cost of the energy

items to the basis of your home.

•

Exclusion from income of subsidies for energy conser-

vation measures.

•

Special depreciation allowance or a section 179 de-

duction claimed on qualified property.

•

Depreciation you deducted or could have deducted on

your tax returns under the method of depreciation you

chose. If you didn’t deduct enough or deducted too

much in any year, see Depreciation under Decreases

to Basis in Pub. 551.

If your rental property was previously used as your main

home, you must also decrease the basis by the following.

•

Gain you postponed from the sale of your main home

before May 7, 1997, if the replacement home was con-

verted to your rental property.

•

District of Columbia first-time homebuyer credit al-

lowed on the purchase of your main home after Au-

gust 4, 1997, and before January 1, 2012.

•

Amount of qualified principal residence indebtedness

discharged on or after January 1, 2007.

Special Depreciation

Allowance

For 2023, some properties used in connection with resi-

dential real property activities may qualify for a special de-

preciation allowance. This allowance is figured before you

figure your regular depreciation deduction. See chapter 3

of Pub. 946 for details. Also, see the instructions for Form

4562, line 14.

If you qualify for, but choose not to take, a special de-

preciation allowance, you must attach a statement to your

return. The details of this election are in chapter 3 of Pub.

946 and the instructions for Form 4562, line 14.

MACRS Depreciation

Most business and investment property placed in service

after 1986 is depreciated using MACRS.

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This section explains how to determine which MACRS

depreciation system applies to your property. It also dis-

cusses other information you need to know before you can

figure depreciation under MACRS. This information in-

cludes the property's:

•

Recovery class,

•

Applicable recovery period,

•

Convention,

•

Placed-in-service date,

•

Basis for depreciation, and

•

Depreciation method.

Depreciation Systems

MACRS consists of two systems that determine how you

depreciate your property—the General Depreciation Sys-

tem (GDS) and the Alternative Depreciation System

(ADS). You must use GDS unless you are specifically re-

quired by law to use ADS or you elect to use ADS.

Excluded Property

You can’t use MACRS for certain personal property (such

as furniture or appliances) placed in service in your rental

property in 2023 if it had been previously placed in service

before 1987, when MACRS became effective.

In most cases, personal property is excluded from

MACRS if you (or a person related to you) owned or used

it in 1986 or if your tenant is a person (or someone related

to the person) who owned or used it in 1986. However, the

property isn’t excluded if your 2023 deduction under

MACRS (using a half-year convention) is less than the de-

duction you would have under ACRS. For more informa-

tion, see What Method Can You Use To Depreciate Your

Property? in chapter 1 of Pub. 946.

Electing ADS

If you choose, you can use the ADS method for most

property. Under ADS, you use the straight line method of

depreciation.

The election of ADS for one item in a class of property

generally applies to all property in that class placed in

service during the tax year of the election. However, the

election applies on a property-by-property basis for resi-

dential rental property and nonresidential real property.

If you choose to use ADS for your residential rental

property, the election must be made in the first year the

property is placed in service. Once you make this election,

you can never revoke it.

For property placed in service during 2023, you make

the election to use ADS by entering the depreciation on

Form 4562, Part III, Section C, line 20c.

Property Classes Under GDS

Each item of property that can be depreciated under

MACRS is assigned to a property class, determined by its

class life. The property class generally determines the de-

preciation method, recovery period, and convention.

The property classes under GDS are:

•

3-year property,

•

5-year property,

•

7-year property,

•

10-year property,

•

15-year property,

•

20-year property,

•

Nonresidential real property, and

•

Residential rental property.

Under MACRS, property that you placed in service dur-

ing 2023 in your rental activities generally falls into one of

the following classes.

•

5-year property. This class includes computers and

peripheral equipment, office machinery (typewriters,

calculators, copiers, etc.), automobiles, and light

trucks.

This class also includes appliances, carpeting, and

furniture used in a residential rental real estate activity.

Depreciation is limited on automobiles and other

property used for transportation and property of a type

generally used for entertainment, recreation, or

amusement. See chapter 5 of Pub. 946.

•

7-year property. This class includes office furniture

and equipment (desks, file cabinets, and similar

items). This class also includes any property that

doesn’t have a class life and that hasn’t been designa-

ted by law as being in any other class.

•

15-year property. This class includes roads, fences,

and shrubbery (if depreciable).

•

Residential rental property. This class includes any

real property that is a rental building or structure (in-

cluding a mobile home) for which 80% or more of the

gross rental income for the tax year is from dwelling

units. It doesn’t include a unit in a hotel, motel, inn, or

other establishment where more than half of the units

are used on a transient basis. If you live in any part of

the building or structure, the gross rental income in-

cludes the fair rental value of the part you live in.

The other property classes generally don’t apply

to property used in rental activities. These classes

aren’t discussed in this publication. See Pub. 946

for more information.

Recovery Periods Under GDS

The recovery period of property is the number of years

over which you recover its cost or other basis. The

CAUTION

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recovery periods are generally longer under ADS than

GDS.

The recovery period of property depends on its prop-

erty class. Under GDS, the recovery period of an asset is

generally the same as its property class.

Class lives and recovery periods for most assets are

listed in Appendix B of Pub. 946. See Table 2-1 for recov-

ery periods of property commonly used in residential

rental activities.

Additions or improvements to property. Treat addi-

tions or improvements you make to your depreciable

rental property as separate property items for depreciation

purposes.

The property class and recovery period of the addition

or improvement are the ones that would apply to the origi-

nal property if you had placed it in service at the same

time as the addition or improvement.

The recovery period for an addition or improvement to

property begins on the later of:

•

The date the addition or improvement is placed in

service, or

•

The date the property to which the addition or im-

provement was made is placed in service.

Example. You own a residential rental house that you

have been renting since 1999 and depreciating under

ACRS. You built an addition onto the house and placed it

in service in 2023. You must use MACRS for the addition.

Under GDS, the addition is depreciated as residential

rental property over 27.5 years.

Conventions

A convention is a method established under MACRS to

set the beginning and end of the recovery period. The

convention you use determines the number of months for

which you can claim depreciation in the year you place

MACRS Recovery Periods for Property Used in

Rental Activities

Table 2-1.

Keep for Your Records

MACRS Recovery Period

Type of Property

General

Depreciation

System

Alternative

Depreciation

System

Computers and their peripheral equipment ........................................ 5 years 5 years

Office machinery, such as:

•

Typewriters

•

Calculators

•

Copiers .............................................................. 5 years 6 years

Automobiles .............................................................. 5 years 5 years

Light trucks ............................................................... 5 years 5 years

Appliances, such as:

•

Stoves

•

Refrigerators .......................................................... 5 years 9 years

Carpets .................................................................. 5 years 9 years

Furniture used in rental property ................................................ 5 years 9 years

Office furniture and equipment, such as:

•

Desks

•

Files ................................ ................................ 7 years 10 years

Any property that doesn’t have a class life and that hasn’t been designated by law as being in any

other class ............................................................... 7 years 12 years

Roads ................................................................... 15 years 20 years

Shrubbery ................................................................ 15 years 20 years

Fences .................................................................. 15 years 20 years

Residential rental property (buildings or structures) and structural components such as furnaces,

waterpipes, venting, etc. ...................................................... 27.5 years 30 years

Additions and improvements, such as a new roof .................................... The same recovery period as that of the property

to which the addition or improvement is made,

determined as if the property were placed in

service at the same time as the addition or

improvement.

40 years for property placed in service before January 1, 2018. However, the ADS recovery period for residential rental property placed in service before January 1,

2018, is 30 years if the property is held by an electing real property trade or business (as defined in section 163(j)(7)(B)) and section 168(g)(1)(A), (B), (C), (D), or (E)

did not apply to the property before January 1, 2018.

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property in service and in the year you dispose of the

property.

Mid-month convention. A mid-month convention is

used for all residential rental property and nonresidential

real property. Under this convention, you treat all property

placed in service, or disposed of, during any month as

placed in service, or disposed of, at the midpoint of that

month.

Mid-quarter convention. A mid-quarter convention must

be used if the mid-month convention doesn’t apply and

the total depreciable basis of MACRS property placed in

service in the last 3 months of a tax year (excluding non-

residential real property, residential rental property, and

property placed in service and disposed of in the same

year) is more than 40% of the total basis of all such prop-

erty you place in service during the year.

Under this convention, you treat all property placed in

service, or disposed of, during any quarter of a tax year as

placed in service, or disposed of, at the midpoint of the

quarter.

Example. During the tax year, you purchased the fol-

lowing items to use in your rental property. You elect not to

claim the special depreciation allowance discussed ear-

lier.

•

A dishwasher for $400 that you placed in service in

January.

•

Used furniture for $100 that you placed in service in

September.

•

A refrigerator for $800 that you placed in service in

October.

You use the calendar year as your tax year. The total basis

of all property placed in service that year is $1,300. The

$800 basis of the refrigerator placed in service during the

last 3 months of your tax year exceeds $520 (40% ×

$1,300). You must use the mid-quarter convention instead

of the half-year convention for all three items.

Half-year convention. The half-year convention is used

if neither the mid-quarter convention nor the mid-month

convention applies. Under this convention, you treat all

property placed in service, or disposed of, during a tax

year as placed in service, or disposed of, at the midpoint

of that tax year.

If this convention applies, you deduct a half year of de-

preciation for the first year and the last year that you de-

preciate the property. You deduct a full year of deprecia-

tion for any other year during the recovery period.

Figuring Your Depreciation Deduction

You can figure your MACRS depreciation deduction in one

of two ways. The deduction is substantially the same both

ways. You can figure the deduction using either:

•

The depreciation method and convention that apply

over the recovery period of the property, or

•

The percentage from the MACRS percentage tables.

In this publication, we will use the percentage tables.

For instructions on how to compute the deduction, see

chapter 4 of Pub. 946.

Residential rental property. You must use the straight

line method and a mid-month convention for residential

rental property. In the first year that you claim depreciation

for residential rental property, you can claim depreciation

only for the number of months the property is in use. Use

the mid-month convention (explained under Conventions,

earlier).

5-, 7-, or 15-year property. For property in the 5- or

7-year class, use the 200% declining balance (DB)

method and a half-year convention. However, in limited

cases, you must use the mid-quarter convention, if it ap-

plies. For property in the 15-year class, use the 150% DB

method and a half-year convention, unless the mid-quar-

ter convention applies.

You can also choose to use the 150% DB method for

property in the 5- or 7-year class. The choice to use the

150% method for one item in a class of property applies to

all property in that class that is placed in service during

the tax year of the election. You make this election on

Form 4562. In Part III, column (f), enter “150 DB.” Once

you make this election, you can’t change to another

method.

If you use either the 200% or 150% DB method, figure

your deduction using the straight line method in the first

tax year that the use of the straight line method gives you

an equal or larger deduction than the use of the 200% or

150% DB method.

You can also choose to use the straight line method

with a half-year or mid-quarter convention for 5-, 7-, or

15-year property. The choice to use the straight line

method for one item in a class of property applies to all

property in that class that is placed in service during the

tax year of the election. You elect the straight line method

on Form 4562. In Part III, column (f), enter “S/L.” Once you

make this election, you can’t change to another method.

MACRS Percentage Tables

You can use the percentages in Table 2-2 to compute an-

nual depreciation under MACRS. The tables show the

percentages for the first few years or until the change to

the straight line method is made. See Appendix A of Pub.

946 for complete tables. The percentages in Tables 2-2a,

2-2b, and 2-2c make the change from using the DB

method to the straight line method in the first tax year that

the use of the straight line method gives you an equal or

greater deduction than the use of the DB method.

If you elect to use the straight line method for 5-, 7-, or

15-year property, or the 150% DB method for 5- or 7-year

property, use the tables in Appendix A of Pub. 946.

How to use the percentage tables. You must apply the

table rates to your property's unadjusted basis (defined

later) each year of the recovery period.

Once you begin using a percentage table to figure de-

preciation, you must continue to use it for the entire

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recovery period unless there is an adjustment to the basis

of your property for a reason other than:

1. Depreciation allowed or allowable, or

2. An addition or improvement that is depreciated as a

separate item of property.

If there is an adjustment for any reason other than (1) or

(2), for example, because of a deductible casualty loss,

you can no longer use the table. For the year of the adjust-

ment and for the remaining recovery period, figure depre-

ciation using the property's adjusted basis at the end of

the year and the appropriate depreciation method, as ex-

plained earlier under Figuring Your Depreciation Deduc-

tion. See Figuring the Deduction Without Using the Tables

in chapter 4 of Pub. 946.

Unadjusted basis. This is the same basis you would

use to figure gain on a sale (see Basis of Depreciable

Property, earlier), but without reducing your original basis

by any MACRS depreciation taken in earlier years.

However, you do reduce your original basis by other

amounts claimed on the property, including:

•

Any amortization,

•

Any section 179 deduction, and

•

Any special depreciation allowance.

For more information, see chapter 4 of Pub. 946.

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Tables 2-2a, 2-2b, and 2-2c. The percentages in these

tables take into account the half-year and mid-quarter

conventions. Use Table 2-2a for 5-year property, Ta-

ble 2-2b for 7-year property, and Table 2-2c for 15-year

property. Use the percentage in the second column

(half-year convention) unless you are required to use the

mid-quarter convention (explained earlier). If you must use

the mid-quarter convention, use the column that corre-

sponds to the calendar year quarter in which you placed

the property in service.

Example 1. You purchased a stove and refrigerator

and placed them in service in June. Your basis in the stove

is $600 and your basis in the refrigerator is $1,000. Both

are 5-year property. Using the half-year convention col-

umn in Table 2-2a, the depreciation percentage for Year 1

is 20%. For that year, your depreciation deduction is $120

Table 2-2. Optional MACRS GDS Percentage Tables

a. MACRS 5-Year Property (200% DB)

Half-year convention Mid-quarter convention

Year First

quarter

Second

quarter

Third

quarter

Fourth

quarter

20.00%

32.00

19.20

11.52

5.76

35.00%

26.00

15.60

11.01

1.38

25.00%

30.00

18.00

11.37

4.26

15.00%

34.00

20.40

12.24

11.30

7.06

5.00%

38.00

22.80

13.68

10.94

9.58

b. MACRS 7-Year Property (200% DB)

Half-year convention Mid-quarter convention

Year First

quarter

Second

quarter

Third

quarter

Fourth

quarter

c. MACRS 15-Year Property (150% DB)

Half-year convention Mid-quarter convention

Year First

quarter

Second

quarter

Third

quarter

Fourth

quarter

Residential Rental Property-GDS (27.5-year S/L with mid-month convention)

14.29%

24.49

17.49

12.49

8.93

8.92

25.00%

21.43

15.31

10.93

8.75

8.74

17.85%

23.47

16.76

11.97

8.87

10.71%

25.51

18.22

13.02

9.30

8.85

3.57%

27.55

19.68

14.06

10.04

8.73

5.00%

9.50

8.55

7.70

6.93

6.23

8.75%

9.13

8.21

7.39

6.65

5.99

6.25%

9.38

8.44

7.59

6.83

6.15

3.75%

9.63

8.66

7.80

7.02

6.31

1.25%

9.88

8.89

8.00

7.20

6.48

Use the row for the month of the taxable year placed in service.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Jan.

Feb.

March

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

3.485% 3.636%

3.182

2.879

2.576

2.273

1.970

1.667

1.364

1.061

0.758

0.455

0.152

3.636

3.636%

3.636

3.636%

3.636

3.636%

3.636

3.636%

3.636

7 5.90 5.90 5.91 5.90 5.90

8 5.90 5.91 5.90 5.90 5.90

7 8.93 8.75 8.87 8.86 8.73

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($600 × 20% (0.20)) for the stove and $200 ($1,000 ×

20% (0.20)) for the refrigerator.

For Year 2, the depreciation percentage is 32%. That

year's depreciation deduction will be $192 ($600 × 32%

(0.32)) for the stove and $320 ($1,000 × 32% (0.32)) for

the refrigerator.

Example 2. Assume the same facts as in Example 1,

except you buy the refrigerator in October instead of June.

Because the refrigerator was placed in service in the last 3

months of the tax year, and its basis ($1,000) is more than

40% of the total basis of all property placed in service dur-

ing the year ($1,600 × 40% (0.40) = $640), you are re-

quired to use the mid-quarter convention to figure depreci-

ation on both the stove and refrigerator.

Because you placed the refrigerator in service in Octo-

ber, you use the fourth quarter column of Table 2-2a and

find the depreciation percentage for Year 1 is 5%. Your de-

preciation deduction for the refrigerator is $50 ($1,000 x

5% (0.05)).

Because you placed the stove in service in June, you

use the second quarter column of Table 2-2a and find the

depreciation percentage for Year 1 is 25%. For that year,

your depreciation deduction for the stove is $150 ($600 x

25% (0.25)).

Table 2-2d. Use this table when you are using the GDS

27.5-year option for residential rental property. Find the

row for the month that you placed the property in service.

Use the percentages listed for that month to figure your

depreciation deduction. The mid-month convention is

taken into account in the percentages shown in the table.

Continue to use the same row (month) under the column

for the appropriate year.

Example. You purchased a single family rental house

for $185,000 and placed it in service on February 8. The

sales contract showed that the building cost $160,000 and

the land cost $25,000. Your basis for depreciation is its

original cost, $160,000. This is the first year of service for

your residential rental property and you decide to use

GDS, which has a recovery period of 27.5 years. Using

Table 2-2d, you find that the depreciation percentage for

property placed in service in February of Year 1 is

3.182%. That year's depreciation deduction is $5,091

($160,000 x 3.182% (0.03182)).

Figuring MACRS Depreciation Under

ADS

Table 2-1 shows the ADS recovery periods for property

used in rental activities.

See Appendix B of Pub. 946 for other property. If your

property isn’t listed in Appendix B, it is considered to have

no class life. Under ADS, personal property with no class

life is depreciated using a recovery period of 12 years.

Use the mid-month convention for residential rental

property and nonresidential real property. For all other

property, use the half-year or mid-quarter convention, as

appropriate.

See Pub. 946 for ADS depreciation tables.

Claiming the Correct Amount

of Depreciation

You should claim the correct amount of depreciation each

tax year. If you didn’t claim all the depreciation you were

entitled to deduct, you must still reduce your basis in the

property by the full amount of depreciation that you could

have deducted. For more information, see Depreciation

under Decreases to Basis in Pub. 551.

If you deducted an incorrect amount of depreciation for

property in any year, you may be able to make a correction

by filing Form 1040-X, Amended U.S. Individual Income

Tax Return. If you aren’t allowed to make the correction on

an amended return, you may be able to change your ac-

counting method to claim the correct amount of deprecia-

tion. See How Do You Correct Depreciation Deductions?

in Pub. 946 for more information.

Reporting Rental Income,

Expenses, and Losses

Figuring the net income or loss for a residential rental ac-

tivity may involve more than just listing the income and de-

ductions on Schedule E (Form 1040). There are activities

that don’t qualify to use Schedule E, such as when the ac-

tivity isn’t engaged in to make a profit or when you provide

substantial services in conjunction with the property.

There are also the limitations that may need to be applied

if you have a net loss on Schedule E. There are two: (1)

the limitation based on the amount of investment you have

at risk in your rental activity, and (2) the special limits im-

posed on passive activities.

You may also have a gain or loss related to your rental

property from a casualty or theft. This is considered sepa-

rately from the income and expense information you report

on Schedule E.

Which Forms To Use

The basic form for reporting residential rental income and

expenses is Schedule E (Form 1040). However, don’t use

that schedule to report a not-for-profit activity. See Not

Rented for Profit, later, in chapter 4. There are also other

rental situations in which forms other than Schedule E

would be used.

18 Chapter 3 Reporting Rental Income, Expenses, and

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Schedule E (Form 1040)

If you rent buildings, rooms, or apartments, and provide

basic services such as heat and light, trash collection,

etc., you normally report your rental income and expenses

on Schedule E, Part I.

List your total income, expenses, and depreciation for

each rental property. Be sure to enter the number of fair

rental and personal-use days on line 2.

If you have more than three rental or royalty properties,

complete and attach as many Schedules E as are needed

to separately list all of the properties. However, fill in lines

23a through 26 on only one Schedule E. The figures on

lines 23a through 26 on that Schedule E should be the

combined totals for all properties reported on your Sched-

ules E.

On Schedule E, page 1, line 18, enter the depreciation

you are claiming for each property. You may also need to

attach Form 4562 to claim some or all of your deprecia-

tion. See Form 4562, later, for more information.

If you have a loss from your rental real estate activity,

you may also need to complete one or both of the follow-

ing forms.

•

Form 6198, At-Risk Limitations. See At-Risk Rules,

later. Also, see Pub. 925.

•

Form 8582, Passive Activity Loss Limitations. See

Passive Activity Limits, later.

Page 2 of Schedule E is used to report income or loss

from partnerships, S corporations, estates, trusts, and real

estate mortgage investment conduits. If you need to use

page 2 of Schedule E and you have more than three rental

or royalty properties, be sure to use page 2 of the same

Schedule E you used to enter the combined totals for your

rental activity on page 1. Also, include the amount from

line 26 (Part I) in the “Total income or (loss)” on line 41

(Part V).

Form 4562. You must complete and attach Form 4562 if

you are claiming the following depreciation in your rental

activity.

•

Depreciation, including the special depreciation allow-

ance, on property placed in service during 2023.

•

Depreciation on listed property (such as a car), re-

gardless of when it was placed in service.

Otherwise, figure your depreciation on your own work-

sheet. You don’t have to attach these computations to

your return, but you should keep them in your records for

future reference.

You may also need to attach Form 4562 if you are

claiming a section 179 deduction, amortizing costs that

began during 2023, or claiming any other deduction for a

vehicle, including the standard mileage rate or lease ex-

penses.

See Pub. 946 for information on preparing Form 4562.

Schedule C (Form 1040), Profit or

Loss From Business

Generally, Schedule C is used when you provide substan-

tial services in conjunction with the property or the rental

is part of a trade or business as a real estate dealer.

Providing substantial services. If you provide substan-

tial services that are primarily for your tenant's conven-

ience, such as regular cleaning, changing linen, or maid

service, you report your rental income and expenses on

Schedule C. Use Form 1065, U.S. Return of Partnership

Income, if your rental activity is a partnership (including a

partnership with your spouse unless it is a qualified joint

venture). Substantial services don’t include the furnishing

of heat and light, cleaning of public areas, trash collection,

etc. For more information, see Pub. 334, Tax Guide for

Small Business. Also, you may have to pay self-employ-

ment tax on your rental income using Schedule SE (Form

1040), Self-Employment Tax. For a discussion of “sub-

stantial services,” see Real Estate Rents in chapter 5 of

Pub. 334.

Qualified Joint Venture (QJV)

If you and your spouse each materially participate (see

Material participation under Passive Activity Limits, later)

as the only members of a jointly owned and operated real

estate business, and you file a joint return for the tax year,

you can make a joint election to be treated as a QJV in-

stead of a partnership. This election, in most cases, won’t

increase the total tax owed on the joint return, but it does

give each of you credit for social security earnings on

which retirement benefits are based and for Medicare cov-

erage if your rental income is subject to self-employment

tax.

If you make this election, you must report rental real es-

tate income on Schedule E (or Schedule C, if you provide

substantial services). You won’t be required to file Form

1065 for any year the election is in effect. Rental real es-

tate income generally isn’t included in net earnings from

self-employment subject to self-employment tax and is

generally subject to the passive activity limits.

If you and your spouse filed a Form 1065 for the year

prior to the election, the partnership terminates at the end

of the tax year immediately preceding the year the election

takes effect.

For more information on QJVs, go to IRS.gov/QJV.

Limits on Rental Losses

If you have a loss from your rental real estate activity, two

sets of rules may limit the amount of loss you can report

on Schedule E. You must consider these rules in the order

shown below. Both are discussed in this section.

1. At-risk rules. These rules are applied first if there is in-

vestment in your rental real estate activity for which

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you aren’t at risk. This applies only if the real property

was placed in service after 1986.

2. Passive activity limits. Generally, rental real estate ac-

tivities are considered passive activities and losses

aren’t deductible unless you have income from other

passive activities to offset them. However, there are

exceptions.

Excess business loss limitation. In addition to at-risk

rules and passive activity limits, excess business loss

rules apply to losses from all noncorporate trades or busi-

nesses. This business loss limitation is figured using Form

461 after you complete your Schedule E. Any limitation to

your loss resulting from these rules will not be reflected on

your Schedule E. Instead, it will be added to your income

on Form 1040 or 1040-SR and treated as a net operating

loss that must be carried forward and deducted in a sub-

sequent year.

At-Risk Rules

You may be subject to the at-risk rules if you have:

•

A loss from an activity carried on as a trade or busi-

ness or for the production of income, and

•

Amounts invested in the activity for which you aren’t

fully at risk.

Losses from holding real property (other than mineral

property) placed in service before 1987 aren’t subject to

the at-risk rules.

In most cases, any loss from an activity subject to the

at-risk rules is allowed only to the extent of the total

amount you have at risk in the activity at the end of the tax

year. You are considered at risk in an activity to the extent

of cash and the adjusted basis of other property you con-

tributed to the activity and certain amounts borrowed for

use in the activity. Any loss that is disallowed because of

the at-risk limits is treated as a deduction from the same

activity in the next tax year. See Pub. 925 for a discussion

of the at-risk rules.

Form 6198. If you are subject to the at-risk rules, file

Form 6198 with your tax return.

Passive Activity Limits

In most cases, all rental real estate activities (except those

of certain real estate professionals, discussed later) are

passive activities. For this purpose, a rental activity is an

activity from which you receive income mainly for the use

of tangible property, rather than for services. For a discus-

sion of activities that aren’t considered rental activities,

see Rental Activities in Pub. 925.

Deductions or losses from passive activities are limited.

You generally can’t offset income, other than passive in-

come, with losses from passive activities. Nor can you off-

set taxes on income, other than passive income, with

credits resulting from passive activities. Any excess loss

or credit is carried forward to the next tax year. Exceptions

to the rules for figuring passive activity limits for personal

use of a dwelling unit and for rental real estate with active

participation are discussed later.

For a detailed discussion of these rules, see Pub. 925.

Real estate professionals. If you are a real estate pro-

fessional, complete line 43 of Schedule E.

You qualify as a real estate professional for the tax year

if you meet both of the following requirements.

•

More than half of the personal services you perform in

all trades or businesses during the tax year are per-

formed in real property trades or businesses in which

you materially participate.

•

You perform more than 750 hours of services during

the tax year in real property trades or businesses in

which you materially participate.

If you qualify as a real estate professional, rental real es-

tate activities in which you materially participated aren’t

passive activities. For purposes of determining whether

you materially participated in your rental real estate activi-

ties, each interest in rental real estate is a separate activity

unless you elect to treat all your interests in rental real es-

tate as one activity.

Don’t count personal services you perform as an em-

ployee in real property trades or businesses unless you

are a 5% owner of your employer. You are a 5% owner if

you own (or are considered to own) more than 5% of your

employer's outstanding stock, or capital or profits interest.

Don’t count your spouse's personal services to deter-

mine whether you met the requirements listed earlier to

qualify as a real estate professional. However, you can

count your spouse's participation in an activity in deter-

mining if you materially participated.

Real property trades or businesses. A real property

trade or business is a trade or business that does any of

the following with real property.

•

Develops or redevelops it.

•

Constructs or reconstructs it.

•

Acquires it.

•

Converts it.

•

Rents or leases it.

•

Operates or manages it.

•

Brokers it.

Choice to treat all interests as one activity. If you

were a real estate professional and had more than one

rental real estate interest during the year, you can choose

to treat all the interests as one activity. You can make this

choice for any year that you qualify as a real estate profes-

sional. If you forgo making the choice for one year, you

can still make it for a later year.

If you make the choice, it is binding for the tax year you

make it and for any later year that you are a real estate

professional. This is true even if you aren’t a real estate

professional in any intervening year. (For that year, the ex-

ception for real estate professionals won’t apply in deter-

mining whether your activity is subject to the passive

activity rules.)

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See the Instructions for Schedule E for information

about making this choice.

Material participation. Generally, you materially partici-

pated in an activity for the tax year if you were involved in

its operations on a regular, continuous, and substantial

basis during the year. For details, see Pub. 925 or the In-

structions for Schedule C.

Participating spouse. If you are married, determine

whether you materially participated in an activity by also

counting any participation in the activity by your spouse

during the year. Do this even if your spouse owns no inter-

est in the activity or files a separate return for the year.

Form 8582. You may have to complete Form 8582 to fig-

ure the amount of any passive activity loss for the current

tax year for all activities and the amount of the passive ac-

tivity loss allowed on your tax return. See Form 8582 not

required, later in this chapter, to determine if you must

complete Form 8582.

If you are required to complete Form 8582 and are also

subject to the at-risk rules, include the amount from Form

6198, line 21 (deductible loss), in column (b) of Form

8582, Worksheet 1 or 2, as required.

Exception for Personal Use of Dwelling Unit

If you used the rental property as a home during the year,

any income, deductions, gain, or loss allocable to such

use is not to be taken into account for purposes of the

passive activity loss limitation. Instead, follow the rules ex-

plained in chapter 5.

Exception for Rental Real Estate With Active

Participation

If you or your spouse actively participated in a passive

rental real estate activity, you may be able to deduct up to

$25,000 of loss from the activity from your nonpassive in-

come. This special allowance is an exception to the gen-

eral rule disallowing losses in excess of income from pas-

sive activities. Similarly, you may be able to offset credits

from the activity against the tax on up to $25,000 of non-

passive income after taking into account any losses al-

lowed under this exception.

Example. You are single and have $40,000 in wages,

$2,000 of passive income from a limited partnership, and

$3,500 of passive loss from a rental real estate activity in

which you actively participated. $2,000 of your $3,500

loss offsets your passive income. The remaining $1,500

loss can be deducted from your $40,000 wages.

The special allowance isn’t available if you were

married, lived with your spouse at any time during

the year, and are filing a separate return.

Active participation. You actively participated in a rental

real estate activity if you (and your spouse) owned at least

10% of the rental property and you made management

decisions or arranged for others to provide services (such

as repairs) in a significant and bona fide sense. Manage-

CAUTION

ment decisions that may count as active participation in-

clude approving new tenants, deciding on rental terms,

approving expenditures, and other similar decisions.

Example. You are single and had the following income

and losses during the tax year.

Salary ............................ $42,300

Dividends .......................... 300

Interest ............................ 1,400

Rental loss ......................... (4,000 )

The rental loss was from the rental of a house you

owned. You had advertised and rented the house to the

current tenant yourself. You also collected the rents, which

usually came by mail. You made or contracted out all re-

pairs.

Although the rental loss is from a passive activity, be-

cause you actively participated in the rental property man-

agement, you can use the entire $4,000 loss to offset your

other income.

Maximum special allowance. The maximum special al-

lowance is:

•

$25,000 for single individuals and married individuals

filing a joint return for the tax year,

•

$12,500 for married individuals who file separate re-

turns for the tax year and lived apart from their spou-

ses at all times during the tax year, and

•

$25,000 for a qualifying estate reduced by the special

allowance for which the surviving spouse qualified.

If your MAGI is $100,000 or less ($50,000 or less if

married filing separately), you can deduct your loss up to

the amount specified above. If your MAGI is more than

$100,000 (more than $50,000 if married filing separately),

your special allowance is limited to 50% of the difference

between $150,000 ($75,000 if married filing separately)

and your MAGI.

Generally, if your MAGI is $150,000 or more ($75,000

or more if you are married filing separately), there is no

special allowance.

Modified adjusted gross income (MAGI). This is

your adjusted gross income from Form 1040, 1040-SR, or

1040-NR, line 11, figured without taking into account:

1. The taxable amount of social security or equivalent

tier 1 railroad retirement benefits,

2. The deductible contributions to traditional individual

retirement accounts (IRAs) and section 501(c)(18)

pension plans,

3. The exclusion from income of interest from series EE

and I U.S. savings bonds used to pay higher educa-

tional expenses,

4. The exclusion of amounts received under an employ-

er's adoption assistance program,

5. Any passive activity income or loss included on Form

8582,

6. Any rental real estate loss allowed to real estate pro-

fessionals,

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7. Any overall loss from a publicly traded partnership

(see Publicly Traded Partnerships (PTPs) in the In-

structions for Form 8582),

8. The deduction allowed for one-half of self-employ-

ment tax,

9. The deduction allowed for interest paid on student

loans, and

10.

The deduction allowed for foreign-derived intangible

income and global intangible low-taxed income.

Form 8582 not required. Don’t complete Form 8582 if

you meet all of the following conditions.

•

Your only passive activities were rental real estate ac-

tivities in which you actively participated.

•

Your overall net loss from these activities is $25,000 or

less ($12,500 or less if married filing separately and

you lived apart from your spouse all year).

•

If married filing separately, you lived apart from your

spouse all year.

•

You have no prior year unallowed losses from these

(or any other passive) activities.

•

You have no current or prior year unallowed credits

from passive activities.

•

Your MAGI is $100,000 or less ($50,000 or less if mar-

ried filing separately and you lived apart from your

spouse all year).

•

You don’t hold any interest in a rental real estate activ-

ity as a limited partner or as a beneficiary of an estate

or a trust.

If you meet all of the conditions listed above, your rental

real estate activities aren’t limited by the passive activity

rules and you don’t have to complete Form 8582. On lines

23a through 23e of your Schedule E, enter the applicable

amounts.

Casualties and Thefts

As a result of a casualty or theft, you may have a loss rela-

ted to your rental property. You may be able to deduct the

loss on your income tax return.

Casualty. This is the damage, destruction, or loss of

property resulting from an identifiable event that is sud-

den, unexpected, or unusual. Such events include a

storm, fire, or earthquake.

Theft. This is defined as the unlawful taking and remov-

ing of your money or property with the intent to deprive

you of it.

Gain from casualty or theft. It is also possible to have a

gain from a casualty or theft if you receive money, includ-

ing insurance, that is more than your adjusted basis in the

property. Generally, you must report this gain. However,

under certain circumstances, you may defer paying tax by

choosing to postpone reporting the gain. To do this, you

must generally buy replacement property within 2 years

after the close of the first tax year in which any part of your

gain is realized. In certain circumstances, the replacement

period can be greater than 2 years; see Replacement Pe-

riod in Pub. 547 for more information. The cost of the re-

placement property must be equal to or more than the net

insurance or other payment you received.

More information. For information on business and non-

business casualty and theft losses, see Pub. 547.

How to report. If you had a casualty or theft that involved

property used in your rental activity, figure the net gain or

loss in Section B of Form 4684, Casualties and Thefts.

Follow the Instructions for Form 4684 for where to carry

your net gain or loss.

Example

In February 2018, you bought a rental house for $135,000

(house $120,000 and land $15,000) and immediately be-

gan renting it out. In 2023, you rented it all 12 months for a

monthly rental fee of $1,125. In addition to your rental in-

come of $13,500 (12 x $1,125), you had the following ex-

penses.

Mortgage interest ......................... $8,000

Fire insurance (1-year policy) ................. 250

Miscellaneous repairs ...................... 400

Real estate taxes imposed and paid ............. 500

Maintenance ............................ 200

You depreciate the residential rental property under

MACRS GDS. This means using the straight line method

over a recovery period of 27.5 years.

You use Table 2-2d to find your depreciation percent-

age. Because you placed the property in service in Febru-

ary 2018, you continue to use that row of Table 2-2d. For

Year 6, the rate is 3.636%.

You figure your net rental income or loss for the house

as follows.

Total rental income received

($1,125 × 12) ........................... $13,500

Minus: Expenses

Mortgage interest ................ $8,000

Fire insurance .................. 250

Miscellaneous repairs ............. 400

Real estate taxes ................ 500

Maintenance ................... 200

Total expenses ......................... 9,350

Balance ............................... $4,150

Minus: Depreciation ($120,000 x 3.636%

(0.03636)) ............................

4,363

Net rental (loss) for house .................. ($213)

You had a net loss for the year. Because you actively

participated in your passive rental real estate activity and

your loss was less than $25,000, you can deduct the loss

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on your return. You also meet all of the requirements for

not having to file Form 8582. You use Schedule E, Part I,

to report your rental income and expenses. You enter your

income, expenses, and depreciation for the house in the

column for Property A and enter your loss on line 22. Form

4562 isn’t required.

Special Situations

This chapter discusses some rental real estate activities

that are subject to additional rules.

Condominiums

A condominium is most often a dwelling unit in a multi-unit

building, but can also take other forms, such as a town-

house or garden apartment.

If you own a condominium, you also own a share of the

common elements, such as land, lobbies, elevators, and

service areas. 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.

Special rules apply if you rent your condominium to oth-

ers. You can deduct as rental expenses all the expenses

discussed in chapters 1 and 2. In addition, you can deduct

any dues or assessments paid for maintenance of the

common elements.

You can’t deduct special assessments you pay to a

condominium management corporation for improvements.

However, you may be able to recover your share of the

cost of any improvement by taking depreciation.

Cooperatives

If you live in a cooperative, you don’t own your apartment.

Instead, a corporation owns the apartments and you are a

tenant-stockholder in the cooperative housing corpora-

tion. If you rent your apartment to others, you can usually

deduct, as a rental expense, all the maintenance fees you

pay to the cooperative housing corporation.

In addition to the maintenance fees paid to the cooper-

ative housing corporation, you can deduct your direct pay-

ments for repairs, upkeep, and other rental expenses, in-

cluding interest paid on a loan used to buy your stock in

the corporation.

Depreciation

You will be depreciating your stock in the corporation

rather than the apartment itself. Figure your depreciation

deduction as follows.

1. Figure the depreciation for all the depreciable real

property owned by the corporation. (Depreciation

methods are discussed in chapter 2 of this publication

and Pub. 946.) If you bought your cooperative stock

after its first offering, figure the depreciable basis of

this property as follows.

a. Multiply your cost per share by the total number of

outstanding shares.

b. Add to the amount figured in (a) any mortgage

debt on the property on the date you bought the

stock.

c. Subtract from the amount figured in (b) any mort-

gage debt that isn’t for the depreciable real prop-

erty, such as the part for the land.

2. Subtract from the amount figured in (1) any deprecia-

tion for space owned by the corporation that can be

rented but can’t be lived in by tenant-stockholders.

3. Divide the number of your shares of stock by the total

number of shares outstanding, including any shares

held by the corporation.

4. Multiply the result of (2) by the percentage you figured

in (3). This is your depreciation on the stock.

Your depreciation deduction for the year can’t 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.

Payments added to capital account. Payments ear-

marked 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. For example,

you can’t deduct a payment used to pave a community

parking lot, install a new roof, or pay the principal of the

corporation's mortgage.

Treat as a capital cost the amount you were assessed

for capital items. This can’t be more than the amount by

which your payments to the corporation exceeded your

share of the corporation's mortgage interest and real es-

tate taxes.

Your share of interest and taxes is the amount the cor-

poration elected to allocate to you, if it reasonably reflects

those expenses for your apartment. Otherwise, figure your

share in the following manner.

1. Divide the number of your shares of stock by the total

number of shares outstanding, including any shares

held by the corporation.

2. Multiply the corporation's deductible interest by the

number you figured in (1). This is your share of the in-

terest.

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3. Multiply the corporation's deductible taxes by the

number you figured in (1). This is your share of the

taxes.

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.

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.

You can’t deduct depreciation or insurance for the part

of the year the property was held for personal use. How-

ever, you can include the home mortgage interest and real

estate tax expenses for the part of the year the property

was held for personal use when figuring the amount you

can deduct on Schedule A.

Example. Your tax year is the calendar year. You

moved from your home in May and started renting it out on

June 1. You can deduct as rental expenses seven-twelfths

of your yearly expenses, such as taxes and insurance.

Starting with June, you can deduct as rental expenses

the amounts you pay for items generally billed monthly,

such as utilities.

When figuring depreciation, treat the property as

placed in service on June 1.

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 the FMV or ad-

justed basis on the date of conversion.

FMV. 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 knowl-

edge of all the relevant facts. Sales of similar property, on

or about the same date, may be helpful in figuring the

FMV of the property.

Figuring the basis. The basis for depreciation is the

lesser of:

•

The FMV 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 casu-

alty or theft losses claimed on earlier years' income

tax returns and other decreases to basis. For other in-

creases and decreases to basis, see Adjusted Basis

in chapter 2.

Example. You originally built a house for $140,000 on

a lot that cost you $14,000, which you used as your home

for many years. 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 deduc-

tion for damage to the house. Part of the improvements

qualified for a $500 residential energy credit, which you

claimed on a prior year tax return. Because land isn’t de-

preciable, you can only include the cost of the house

when figuring the basis for depreciation.

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).

On the date of the change in use, your property had an

FMV of $168,000, of which $21,000 was for the land and

$147,000 was for the house.

The basis for depreciation on the house is the FMV on

the date of the change ($147,000) because it is less than

your adjusted basis ($164,000).

Cooperatives

If you change your cooperative apartment to rental use,

figure your allowable depreciation as explained earlier.

(Depreciation methods are discussed in chapter 2 of this

publication and Pub. 946.) The basis of all the depreciable

real property owned by the cooperative housing corpora-

tion is the smaller of the following amounts.

•

The FMV of the property on the date you change your

apartment to rental use. This is considered to be the

same as the corporation's adjusted basis minus

straight line depreciation, unless this value is unrealis-

tic.

•

The corporation's adjusted basis in the property on

that date. Don’t subtract depreciation when figuring

the corporation's adjusted basis.

If you bought the stock after its first offering, the corpo-

ration's adjusted basis in the property is the amount fig-

ured in (1) under Depreciation, earlier. The FMV of the

property is considered to be the same as the corporation's

adjusted basis figured in this way minus straight line de-

preciation, unless the value is unrealistic.

Figuring the Depreciation Deduction

To figure the deduction, use the depreciation system in ef-

fect when you convert your residence to rental use. Gen-

erally, that will be MACRS for any conversion after 1986.

Treat the property as placed in service on the conversion

date.

Example. Your converted residence (see the previous

example under Figuring the basis, earlier) was available

for rent on August 1. Using Table 2-2d (see chapter 2), the

percentage for Year 1 beginning in August is 1.364% and

the depreciation deduction for Year 1 is $2,005 ($147,000

× 1.364% (0.01364)).

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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.

You can deduct the expenses related to the part of the

property used for rental purposes, such as home mort-

gage interest and real estate taxes, as rental expenses on

Schedule E (Form 1040). You can also deduct as rental

expenses a portion of other expenses that are normally

nondeductible personal expenses, such as expenses for

electricity or painting the outside of the house.

There is no change in the types of expenses deductible

for the personal-use part of your property. Generally, these

expenses may be deducted only if you itemize your de-

ductions on Schedule A (Form 1040).

You can’t deduct any part of the cost of the first phone

line even if your tenants have unlimited use of it.

You don’t have to divide the expenses that belong only

to the rental part of your property. For example, if you paint

a room that you rent or pay premiums for liability insurance

in connection with renting a room in your home, your entire

cost is a rental expense. If you install a second phone line

strictly for your tenant's use, all the cost of the second line

is deductible as a rental expense. You can deduct depreci-

ation on the part of the house used for rental purposes as

well as on the furniture and equipment you use for rental

purposes.

How to divide expenses. 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. You can use any reasonable

method for dividing the expense. It may be reasonable to

divide the cost of some items (for example, water) based

on the number of people using them. The two most com-

mon methods for dividing an expense are (1) the number

of rooms in your home, and (2) the square footage of your

home.

Example. You rent a room in your house. The room is

12 × 15 feet, or 180 square feet. Your entire house has

1,800 square feet of floor space. You can deduct as a

rental expense 10% of any expense that must be divided

between rental use and personal use. If your heating bill

for the year for the entire house was $600, $60 ($600 ×

10% (0.10)) is a rental expense. The balance, $540, is a

personal expense that you can’t deduct.

Duplex. A common situation is the duplex where you live

in one unit and rent out the other. 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.

Example. You own a duplex and live in one half, rent-

ing out the other half. Both units are approximately the

same size. Last year, you paid a total of $10,000 mortgage

interest and $2,000 real estate taxes for the entire prop-

erty. You can deduct $5,000 mortgage interest and $1,000

real estate taxes on Schedule E. If you itemize your de-

ductions, include the other $5,000 mortgage interest and

$1,000 real estate taxes when figuring the amount you can

deduct on Schedule A.

Not Rented for Profit

If you don’t rent your property to make a profit, you can’t

deduct rental expenses in excess of the amount of your

rental income. You can’t deduct a loss or carry forward to

the next year any rental expenses that are more than your

rental income for the year.

Where to report. Report your not-for-profit rental income

on Schedule 1 (Form 1040), line 8j. If you itemize your de-

ductions, include your mortgage interest (if you use the

property as your main home or second home), real estate

taxes, and casualty losses from your not-for-profit rental

activity when figuring the amount you can deduct on

Schedule A.

Presumption of profit. 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.

Postponing decision. If you are starting your rental

activity and don’t 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. You may choose

to postpone the decision of whether the rental is for profit

by filing Form 5213. 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 IRS proposing to disallow deductions at-

tributable to the activity.

More information. For more information about the rules

for an activity not engaged in for profit, see Hobby or

business: here's what to know about that side hustle.

Example—Property Changed

to Rental Use

In January, you bought a condominium apartment to live

in. Instead of selling the house you had been living in, you

decided to change it to rental property. You selected a ten-

ant and started renting the house on February 1. You

charge $750 a month for rent and collect it yourself. You

also received a $750 security deposit from your tenant.

Because you plan to return it to your tenant at the end of

the lease, you don’t include it in your income. Your rental

expenses for the year are as follows.

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Mortgage interest ...................... $1,800

Fire insurance (1-year policy) ............... 100

Miscellaneous repairs (after renting) .......... 297

Real estate taxes imposed and paid ........... 1,200

You must divide the real estate taxes, mortgage inter-

est, and fire insurance between the personal use of the

property and the rental use of the property. You can de-

duct eleven-twelfths of these expenses as rental expen-

ses. You can include the balance of the real estate taxes

and mortgage interest when figuring the amount you can

deduct on Schedule A if you itemize. You can’t deduct the

balance of the fire insurance because it is a personal ex-

pense.

You bought this house in 2008 for $35,000. Your prop-

erty tax was based on assessed values of $10,000 for the

land and $25,000 for the house. Before changing it to

rental property, you added several improvements to the

house. You figure your 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 you changed your house to rental

property, the property had an FMV of $152,000. Of this

amount, $35,000 was for the land and $117,000 was for

the house.

Because your adjusted basis is less than the FMV on

the date of the change, you use $39,000 as your basis for

depreciation.

As specified for residential rental property, you must

use the straight line method of depreciation over the GDS

or ADS recovery period. You choose the GDS recovery

period of 27.5 years.

You use Table 2-2d to find your depreciation percent-

age. Because you placed the property in service in Febru-

ary, the percentage is 3.182%.

On April 1, you 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. You use Table 2-2a to find the de-

preciation percentage for Year 1 under “Half-year conven-

tion” (20%) to figure your depreciation deduction.

On May 1, you paid $4,000 to have a furnace installed

in the house. The furnace is residential rental property. Be-

cause you placed the property in service in May, the de-

preciation percentage from Table 2-2d is 2.273%.

You figured your net rental income or loss for the house

as follows.

Total rental income received

($750 × 11) ............................ $8,250

Minus: Expenses

Mortgage interest ($1,800 ×

/12) ........ $1,650

Fire insurance ($100 ×

/12) ........... 92

Miscellaneous repairs ............... 297

Real estate taxes ($1,200 ×

/12) ........ 1,100

Total expenses .......................... 3,139

Balance ................................ $5,111

Minus: Depreciation

House ($39,000 × 0.03182) ........... $1,241

Dishwasher ($425 × 0.20) ............ 85

Furnace ($4,000 × 0.02273) ........... 91

Total depreciation ......................... 1,417

Net rental income for house ...........

$3,694

You use Schedule E, Part I, to report your rental income

and expenses. You enter your income, expenses, and de-

preciation for the house in the column for Property A. Be-

cause all property was placed in service this year, you

must use Form 4562 to figure the depreciation. See the In-

structions for Form 4562 for more information on preparing

the form.

Personal Use of Dwelling

Unit (Including Vacation

Home)

If you have any personal use of a dwelling unit (including a

vacation home) that you rent, you must divide your expen-

ses between rental use and personal use. In general, your

rental expenses will be no more than your total expenses

multiplied by a fraction, the denominator of which is the to-

tal number of days the dwelling unit is used and the nu-

merator of which is the total number of days actually ren-

ted at a fair rental price. Only your rental expenses may be

deducted on Schedule E (Form 1040). Some of your per-

sonal expenses may be deductible on Schedule A (Form

1040) if you itemize your deductions.

You must also determine if the dwelling unit is considered

a home. The amount of rental expenses that you can de-

duct may be limited if the dwelling unit is considered a

home. Whether a dwelling unit is considered a home de-

pends on how many days during the year are considered

to be days of personal use. 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.

Dwelling unit. A dwelling unit includes a house, apart-

ment, condominium, mobile home, boat, vacation home,

or similar property. It also includes all structures or other

property belonging to the dwelling unit. A dwelling unit has

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basic living accommodations, such as sleeping space, a

toilet, and cooking facilities.

A dwelling unit doesn’t include property (or part of the

property) used solely as a hotel, motel, inn, or similar es-

tablishment. Property is used solely as a hotel, motel, inn,

or similar establishment if it is regularly available for occu-

pancy by paying customers and isn’t used by an owner as

a home during the year.

Example. You rent a room in your home that is always

available for short-term occupancy by paying customers.

You don’t use the room yourself and you allow only paying

customers to use the room. This room is used solely as a

hotel, motel, inn, or similar establishment and isn’t a dwell-

ing unit.

Dividing Expenses

If you use a dwelling unit for both rental and personal pur-

poses, divide your expenses between the rental use and

the personal use based on the number of days used for

each purpose.

When dividing your expenses, follow these rules.

•

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. (This rule doesn’t apply when de-

termining whether you used the unit as a home.)

•

Any day that the unit is available for rent but not ac-

tually rented isn’t a day of rental use.

Fair rental price. A fair rental price for your property is

generally the amount of rent that a person who isn’t rela-

ted to you would be willing to pay. The rent you charge

isn’t 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.

Ask yourself the following questions when comparing

another property with yours.

•

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 aren’t

similar.

Example. Your beach cottage was available for rent

from June 1 through August 31 (92 days). 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. The person who rented the cottage for

July allowed you to use it over the weekend (2 days) with-

out any reduction in or refund of rent. Your family also

used the cottage during the last 2 weeks of May (14 days).

The cottage wasn’t used at all before May 17 or after Au-

gust 31.

You figure the part of the cottage expenses to treat as

rental expenses as follows.

•

The cottage was used for rental a total of 85 days (92

− 7). The days it was available for rent but not rented

(7 days) aren’t days of rental use. The July weekend

(2 days) you used it is rental use because you re-

ceived a fair rental price for the weekend.

•

You used the cottage for personal purposes for 14

days (the last 2 weeks in May).

•

The total use of the cottage was 99 days (14 days per-

sonal use + 85 days rental use).

•

Your rental expenses are 85/99 (86%) of the cottage

expenses.

Note. When determining whether you used the cottage

as a home, the July weekend (2 days) you used it is con-

sidered personal use even though you received a fair

rental price for the weekend. Therefore, you had 16 days

of personal use and 83 days of rental use for this purpose.

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. If you have a

net loss, you may not be able to deduct all of the rental ex-

penses. See Dwelling Unit Used as a Home next.

Dwelling Unit Used as a Home

If you use a dwelling unit for both rental and personal pur-

poses, the tax treatment of the rental expenses you fig-

ured earlier under Dividing Expenses and rental income

depends on whether you are considered to be using the

dwelling unit as a home.

You use a dwelling unit as a home during the tax year if

you use it for personal purposes more than the greater of:

1. 14 days, or

2. 10% of the total days it is rented to others at a fair

rental price.

See What is a day of personal use, later.

If a dwelling unit is used for personal purposes on a day

it is rented at a fair rental price (discussed earlier), don’t

count that day as a day of rental use in applying (2) above.

Instead, count it as a day of personal use in applying both

(1) and (2) above.

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.

1. You or any other person who owns an interest in it, un-

less you rent it to another owner as their main home

under a shared equity financing agreement (defined

later). However, see Days used as a main home be-

fore or after renting, later.

2. 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 their main

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home and pays a fair rental price. Family includes only

your spouse, siblings, half siblings, ancestors (pa-

rents, grandparents, etc.), and lineal descendants

(children, grandchildren, etc.).

3. Anyone under an arrangement that lets you use some

other dwelling unit.

4. Anyone at less than a fair rental price.

Main home. If the other person or member of the fam-

ily in (1) or (2) has more than one home, their main home

are ordinarily the one they lived in most of the time.

Shared equity financing agreement. This is an

agreement under which two or more persons acquire un-

divided interests for more than 50 years in an entire dwell-

ing unit, including the land, and one or more of the

co-owners are entitled to occupy the unit as their main

home upon payment of rent to the other co-owner(s).

Donation of use of the property. You use a dwelling

unit for personal purposes if:

•

You donate the use of the unit to a charitable organiza-

tion,

•

The organization sells the use of the unit at a fundrais-

ing event, and

•

The “purchaser” uses the unit.

Examples. The following examples show how to de-

termine if you have days of personal use.

Example 1. You and your neighbor are co-owners of a

condominium at the beach. Last year, you rented the unit

to vacationers whenever possible. The unit wasn’t used as

a main home by anyone. Your neighbor used the unit for 2

weeks last year; you didn’t use it at all.

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.

Example 2. You and your neighbors are co-owners of

a house under a shared equity financing agreement. Your

neighbors live in the house and pay you a fair rental price.

Even though your neighbors have an interest in the

house, the days your neighbors live there aren’t counted

as days of personal use by you. This is because your

neighbors rent the house as their main home under a

shared equity financing agreement.

Example 3. You own a rental property that you rent to

your son. Your son doesn’t own any interest in this prop-

erty. He uses it as his main home and pays you a fair

rental price.

Your son's use of the property isn’t 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.

Example 4. You rent your beach house to Rosa. Rosa

rents her cabin in the mountains to you. You each pay a

fair rental price.

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.

Example 5. You rent an apartment to your mother at

less than a fair rental price. 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.

Days used for repairs and maintenance. Any day

that you spend working substantially full time repairing

and maintaining (not improving) your property isn’t coun-

ted as a day of personal use. Don’t count such a day as a

day of personal use even if family members use the prop-

erty for recreational purposes on the same day.

Example. Corey owns a cabin in the mountains that he

rents for most of the year. He spends a week at the cabin

with family members. 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. Corey's

family members, however, work substantially full time on

the cabin each day during the week. The main purpose of

being at the cabin that week is to do maintenance work.

Therefore, the use of the cabin during the week by Corey

and his family won’t be considered personal use by Corey.

Days used as a main home before or after renting.

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 rent-

ing it or offering it for rent as days of personal use. Don’t

count them as days of personal use if:

•

You rented or tried to rent the property for 12 or more

consecutive months, or

•

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.

However, this special rule doesn’t apply when dividing ex-

penses between rental and personal use. See Property

Changed to Rental Use in chapter 4.

Example 1. On February 28, 2022, you moved out of

the house you had lived in for 6 years because you accep-

ted a job in another town. You rented your house at a fair

rental price from March 15, 2022, to May 14, 2023 (14

months). On June 1, 2023, you moved back into your old

house.

The days you used the house as your main home from

January 1 to February 28, 2022, and from June 1 to De-

cember 31, 2023, aren’t counted as days of personal use.

Therefore, you would use the rules in chapter 1 when fig-

uring your rental income and expenses.

Example 2. On January 31, you moved out of the con-

dominium where you had lived for 3 years. You offered it

for rent at a fair rental price beginning on February 1. You

were unable to rent it until April. On September 15, you

sold the condominium.

The days you used the condominium as your main

home from January 1 to January 31 aren’t counted as

days of personal use when determining whether you used

it as a home.

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Examples. The following examples show how to deter-

mine whether you used your rental property as a home.

Example 1. You converted the basement of your home

into an apartment with a bedroom, a bathroom, and a

small kitchen. You rented the basement apartment at a fair

rental price to college students during the regular school

year. You rented to them on a 9-month lease (273 days).

You figured 10% of the total days rented to others at a fair

rental price is 27 days.

During June (30 days), your brothers stayed with you

and lived in the basement apartment rent free.

Your basement apartment was used as a home be-

cause you used it for personal purposes for 30 days.

Rent-free use by your brothers is considered personal

use. Your personal use (30 days) is more than the greater

of 14 days or 10% of the total days it was rented (27 days).

Example 2. You rented the guest bedroom in your

home at a fair rental price during the local college's home-

coming, commencement, and football weekends (a total

of 27 days). Your sister-in-law stayed in the room rent free

for the last 3 weeks (21 days) in July. You figured 10% of

the total days rented to others at a fair rental price is 3

days.

The room was used as a home because you used it for

personal purposes for 21 days. That is more than the

greater of 14 days or 10% of the 27 days it was rented (3

days).

Example 3. You own a condominium apartment in a

resort area. You rented it at a fair rental price for a total of

170 days during the year. For 12 of these days, the tenant

wasn’t able to use the apartment and allowed you to use it

even though you didn’t refund any of the rent. Your family

actually used the apartment for 10 of those days. There-

fore, the apartment is treated as having been rented for

160 (170 – 10) days. You figured 10% of the total days ren-

ted to others at a fair rental price is 16 days. Your family

also used the apartment for 7 other days during the year.

You used the apartment as a home because you used it

for personal purposes for 17 days. That is more than the

greater of 14 days or 10% of the 160 days it was rented

(16 days).

Minimal rental use. If you use the dwelling unit as a

home and you rent it less than 15 days during the year,

that period isn’t treated as rental activity. See Used as a

home but rented less than 15 days, later, for more informa-

tion.

Limit on deductions. Renting a dwelling unit that is con-

sidered a home isn’t a passive activity. Instead, if your

rental expenses are more than your rental income, some

or all of the excess expenses can’t be used to offset in-

come from other sources. The excess expenses that can’t

be used to offset income from other sources are carried

forward to the next year and treated as rental expenses for

the same property. Any expenses carried forward to the

next year will be subject to any limits that apply for that

year. This limitation will apply to expenses carried forward

to another year even if you don’t use the property as your

home for that subsequent year.

To figure your deductible rental expenses for this year

and any carryover to next year, use Worksheet 5-1.

Reporting Income and

Deductions

Property not used for personal purposes. If you don’t

use a dwelling unit for personal purposes, see chapter 3

for how to report your rental income and expenses.

Property used for personal purposes. 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.

Not used as a home. If you use a dwelling unit for

personal purposes, but not as a home, report all the rental

income in your income. Because 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. The ex-

penses for personal use aren’t deductible as rental expen-

ses.

Your deductible rental expenses can be more than your

gross rental income; however, see Limits on Rental Los-

ses in chapter 3.

Used as a home but rented less than 15 days. If

you use a dwelling unit as a home and you rent it less than

15 days during the year, its primary function isn’t consid-

ered to be rental and it shouldn’t be reported on Sched-

ule E (Form 1040). You aren’t required to report the rental

income and rental expenses from this activity. Any expen-

ses related to the home, such as mortgage interest, prop-

erty taxes, and any qualified casualty loss, will be reported

as normally allowed on Schedule A (Form 1040). See the

Instructions for Schedule A for more information on de-

ducting these expenses.

Used as a home and rented 15 days or more. 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 in-

come. Because 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. The expenses for per-

sonal use aren’t deductible as rental expenses.

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. You don’t need to use Worksheet

5-1.

However, if you had a net loss from renting the dwelling

unit for the year, your deduction for certain rental expen-

ses is limited. To figure your deductible rental expenses

and any carryover to next year, use Worksheet 5-1.

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Worksheet for Figuring

Rental Deductions for a

Dwelling Unit Used as a

Home

Worksheet 5-1.

Keep for Your Records

Use this worksheet only if you answer “Yes” to all of the following questions.

•

Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home.)

•

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. Rental Use Percentage

A. Total days available for rent at fair rental price ..................................... A.

B. Total days available for rent (line A) but not rented .................................. B.

C. Total days of rental use. Subtract line B from line A ............................... C.

D. Total days of personal use (including days rented at less than fair rental price) .......... D.

E. Total days of rental and personal use. Add lines C and D ......................... E.

F. Percentage of expenses allowed for rental. Divide line C by line E .................................. F. .

PART II. Allowable Rental Expenses

1. Enter rents received ......................................................................... 1.

2a. Enter the rental portion of deductible home mortgage interest. See instructions ...........

2a.

b. Enter the rental portion of deductible real estate taxes. See instructions ................. b.

c. Enter the rental portion of deductible casualty and theft losses. See instructions .......... c.

d. Enter direct rental expenses. See instructions ..................................... d.

e. Fully deductible rental expenses. Add lines 2a–2d. Enter here and

on the appropriate lines on Schedule E. See instructions ............................................ 2e.

3. Subtract line 2e from line 1. If zero or less, enter -0- ................................................ 3.

4a. Enter the rental portion of expenses directly related to operating or maintaining

the dwelling unit (such as repairs, insurance, and utilities) ............................ 4a.

b. Enter the rental portion of excess mortgage interest. See instructions ..................

c. Enter the rental portion of excess real estate taxes. See instructions ...................

d. Carryover of operating expenses from 2022 worksheet ..............................

e. Add lines 4a–4d ............................................................ e.

f. Allowable expenses. Enter the smaller of line 3 or line 4e. See instructions ............................ 4f.

5. Subtract line 4f from line 3. If zero or less, enter -0- ................................................. 5.

6a. Enter the rental portion of excess casualty and theft losses. See instructions ............. 6a.

b. Enter the rental portion of depreciation of the dwelling unit ........................... b.

c. Carryover of excess casualty and theft losses and depreciation from 2022 worksheet ...... c.

d. Add lines 6a–6c ............................................................ d.

e. Allowable excess casualty and theft losses and depreciation. Enter the smaller of

line 5 or line 6d. See instructions ............................................................... 6e.

PART III. Carryover of Unallowed Expenses to Next Year

7a. Operating expenses to be carried over to next year. Subtract line 4f from line 4e ...................... 7a.

b. Excess casualty and theft losses and depreciation to be carried over to next year.

Subtract line 6e from line 6d ................................................................... b.

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Worksheet for Figuring Rental

Deductions for a Dwelling Unit

Used as a Home

Worksheet 5-1 Instructions.

Keep for Your Records

Caution. Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4c, and 6a–6b of Part II.

Line 2a. If you are claiming the standard deduction, do not report an amount on line 2a; instead, report the rental portion of your

mortgage interest on line 4b.

If you are itemizing your deductions on Schedule A, figure the amount of mortgage interest to include on line 2a by using the

following steps.

Step 1. Treat all the mortgage interest you paid for mortgages secured by your home(s) as a personal expense and figure the

amount that would be deductible as an itemized expense on Schedule A. See Pub. 936 for more information about figuring the

home mortgage interest deduction and the limits that may apply.

Step 2. Include on line 2a the rental portion of deductible mortgage interest figured in Step 1 that is attributable to the home you

are renting.

Note. Be sure to claim only the personal portion of your deductible mortgage interest on Schedule A. The personal portion of

mortgage interest on the dwelling unit doesn't include the rental portion you reported on line 2a of this Worksheet 5-1 or any

portion that you deducted on other forms, such as Schedule C or F.

Line 2b. If you are claiming the standard deduction, do not report an amount on line 2b; instead, report the rental portion of your real

estate taxes on line 4c.

If you are itemizing your deductions on Schedule A, figure the amount to report on line 2b by using the following steps.

Step 1. If the total of your state and local income (or, if elected on your Schedule A, general sales) taxes, real estate taxes, and

personal property taxes is not more than $10,000 ($5,000 if married filing separately), enter the rental portion of the real estate

taxes attributable to the dwelling unit you are renting on line 2b.

Step 2. If you do not meet the condition of Step 1, use the following worksheet to figure the amount to include on line 2b.

Line 2b Worksheet

1. Enter your state and local income taxes (or, if you elect on Schedule A, your state and

local general sales taxes) that are personal expenses ...........................

2. Enter all the state and local real estate taxes you paid on the dwelling unit you are

renting ...............................................................

3. Enter any other state and local real estate taxes you paid that are a personal expense

and not included on line 2 ................................................

4. Enter your state and local personal property taxes that are a personal expense .......

5. Add lines 1 through 4 ....................................................

6. Multiply line 2 by the percentage of expenses allowed for rental (Part I, line F) ........

7. Subtract line 6 from line 5 .................................................

8. Subtract line 7 from $10,000 ($5,000 if married filing separately). If zero or less,

enter -0- ..............................................................

9. Real estate taxes reported on line 2b. Enter the smaller of line 6 or line 8 here and

on line 2b .............................................................

10. Excess real estate taxes reported on line 4c. Subtract line 9 from line 6 ..........

Note. Be sure to report only the personal portion of your real estate taxes on line 5b of Schedule A. The personal

portion of real estate taxes on the dwelling unit doesn't include the rental portion you reported on line 2b of this

Worksheet 5-1 or any portion that you deducted on other forms, such as Schedule C or F.

Line 2c. If you are claiming the standard deduction and you are not increasing your standard deduction by a net qualified disaster loss,

do not report an amount on line 2c; instead, report the rental portion of your casualty losses on line 6a.

If you are itemizing your deductions on Schedule A or filing a Schedule A to increase your standard deduction by a net qualified

disaster loss, figure the amount to report on line 2c by using the following steps.

Step 1. Complete a worksheet version of Section A of Form 4684 treating all your casualty losses (and gains) as personal

expenses. If you are itemizing your deductions, when completing line 17 of this worksheet version of Form 4684, enter 10% of

your adjusted gross income figured without your rental income and expenses from the dwelling unit. Don't file this worksheet

version of Form 4684; instead, keep it for your records. You will complete a separate Form 4684 to attach to your return using

only the personal portion of your casualty losses (and gains) for Section A.

Step 2. Include on line 2c the rental portion of the loss amounts from lines 15 and 18 of this worksheet version of Form 4684 that

are the result of a federally declared disaster. If you are claiming an increased standard deduction instead of itemizing your

deductions, only use the rental portion of a net qualified disaster loss on line 15 of the worksheet version of Form 4684 for this

Step 2.

Note. Be sure to use only the personal portion of your casualty losses (and gains) when completing Section A of the separate

Form 4684 you attach to your return. The separate Form 4684 you attach to your return is used to figure the casualty losses you

can include on line 15 of Schedule A and the net qualified disaster losses you can include on line 16 of Schedule A. You will

report casualty and theft losses attributable to your rental activity in Section B of the separate Form 4684 you attach to your

return.

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Vacation Home)

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Worksheet 5-1 Instructions—Continued

Line 2d. Enter the total of your rental expenses that are directly related only to the rental activity. These include interest on loans used for

rental activities other than to buy, build, or improve the dwelling unit. Also, include rental agency fees, advertising, office

supplies, and depreciation on office equipment used in your rental activity.

Line 2e. You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses even if your rental expenses are more than your

rental income. Enter the amounts on lines 2a, 2b, and 2d on the appropriate lines of Schedule E. Include the amount from

line 2c with the casualty loss from line 6e, if any, in Section B of Form 4684, on line 27, and enter “See attached statement”

above line 27. Attach a statement to your tax return showing how you calculated the deductible loss (you can use the worksheet

as your attachment).

Line 4b. If you are claiming the standard deduction, enter the rental portion of all the home mortgage interest paid for loans used to buy,

build, or substantially improve the dwelling unit you are renting on line 4b. Do not include mortgage interest on a loan that did not

benefit the dwelling unit (for example, a home equity loan used to pay off credit card bills, to buy a car, or to pay tuition costs).

If you are itemizing your deductions and the amount you figured in Step 1 under Line 2a was less than the full amount of interest

you paid because of the limits on deducting home mortgage interest as a personal expense, include on line 4b the rental portion

of the excess attributable to the loans used to buy, build, or substantially improve the dwelling unit you rented.

Line 4c. If you are claiming the standard deduction, enter the rental portion of all the real estate taxes paid on the dwelling unit you

rented.

If you are itemizing your deductions and you used the Line 2b Worksheet to figure the amount to include on line 2b, then include

the amount from line 10 of the Line 2b Worksheet on line 4c; otherwise, do not enter an amount on line 4c.

Line 4f. You can deduct the amounts on lines 4a, 4b, 4c, and 4d as rental expenses on Schedule E only to the extent they aren’t more

than the amount on line 4f.*

Line 6a. If you are claiming the standard deduction and not increasing it by a net qualified disaster loss, enter the rental portion of all

casualty losses attributable to the dwelling unit you rented.

If you are itemizing your deductions on Schedule A or filing a Schedule A to increase your standard deduction by a net qualified

disaster loss, enter the rental portion of the casualty losses attributable to the dwelling unit you rented that are in excess of the

amount you figured on lines 15 and 18 of your worksheet version of Form 4684.

Line 6e. You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses only to the extent they aren’t more than the amount on

line 6e.* Include the depreciation from line 6e, if any, on the appropriate line of Schedule E. Include the casualty loss from

line 6e, if any, with the casualty loss from line 2c in Section B of Form 4684, on line 27, and enter “See attached statement”

above line 27. Attach a statement to your tax return showing how you calculated the deductible loss (you can use the worksheet

as your attachment).

* Allocating the limited deduction. If you can’t deduct all of the amount on line 4e or 6d this year, you can allocate the allowable deduction in any way you wish

among the expenses included on line 4e or 6d. Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I, or if a casualty loss, as

instructed earlier on Form 4684, line 27.

32 Chapter 5 Personal Use of Dwelling Unit (Including

Vacation Home)

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How To Get Tax Help

If you have questions about a tax issue; need help prepar-

ing your tax return; or want to download free publications,

forms, or instructions, go to IRS.gov to find resources that

can help you right away.

Preparing and filing your tax return. After receiving all

your wage and earnings statements (Forms W-2, W-2G,

1099-R, 1099-MISC, 1099-NEC, etc.); unemployment

compensation statements (by mail or in a digital format) or

other government payment statements (Form 1099-G);

and interest, dividend, and retirement statements from

banks and investment firms (Forms 1099), you have sev-

eral options to choose from to prepare and file your tax re-

turn. You can prepare the tax return yourself, see if you

qualify for free tax preparation, or hire a tax professional to

prepare your return.

Free options for tax preparation. Your options for pre-

paring and filing your return online or in your local com-

munity, if you qualify, include the following.

•

Free File. This program lets you prepare and file your

federal individual income tax return for free using soft-

ware or Free File Fillable Forms. However, state tax

preparation may not be available through Free File. Go

to IRS.gov/FreeFile to see if you qualify for free online

federal tax preparation, e-filing, and direct deposit or

payment options.

•

VITA. The Volunteer Income Tax Assistance (VITA)

program offers free tax help to people with

low-to-moderate incomes, persons with disabilities,

and limited-English-speaking taxpayers who need

help preparing their own tax returns. Go to IRS.gov/

VITA, download the free IRS2Go app, or call

800-906-9887 for information on free tax return prepa-

ration.

•

TCE. The Tax Counseling for the Elderly (TCE) pro-

gram offers free tax help for all taxpayers, particularly

those who are 60 years of age and older. TCE volun-

teers specialize in answering questions about pen-

sions and retirement-related issues unique to seniors.

Go to IRS.gov/TCE or download the free IRS2Go app

for information on free tax return preparation.

•

MilTax. Members of the U.S. Armed Forces and quali-

fied veterans may use MilTax, a free tax service of-

fered by the Department of Defense through Military

OneSource. For more information, go to

MilitaryOneSource (MilitaryOneSource.mil/MilTax).

Also, the IRS offers Free Fillable Forms, which can

be completed online and then e-filed regardless of in-

come.

Using online tools to help prepare your return. Go to

IRS.gov/Tools for the following.

•

The Earned Income Tax Credit Assistant (IRS.gov/

EITCAssistant) determines if you’re eligible for the

earned income credit (EIC).

•

The Online EIN Application (IRS.gov/EIN) helps you

get an employer identification number (EIN) at no

cost.

•

The Tax Withholding Estimator (IRS.gov/W4App)

makes it easier for you to estimate the federal income

tax you want your employer to withhold from your pay-

check. This is tax withholding. See how your withhold-

ing affects your refund, take-home pay, or tax due.

•

The First-Time Homebuyer Credit Account Look-up

(IRS.gov/HomeBuyer) tool provides information on

your repayments and account balance.

•

The Sales Tax Deduction Calculator (IRS.gov/

SalesTax) figures the amount you can claim if you

itemize deductions on Schedule A (Form 1040).

Getting answers to your tax questions. On

IRS.gov, you can get up-to-date information on

current events and changes in tax law.

•

IRS.gov/Help: A variety of tools to help you get an-

swers to some of the most common tax questions.

•

IRS.gov/ITA: The Interactive Tax Assistant, a tool that

will ask you questions and, based on your input, pro-

vide answers on a number of tax topics.

•

IRS.gov/Forms: Find forms, instructions, and publica-

tions. You will find details on the most recent tax

changes and interactive links to help you find answers

to your questions.

•

You may also be able to access tax information in your

e-filing software.

Need someone to prepare your tax return? There are

various types of tax return preparers, including enrolled

agents, certified public accountants (CPAs), accountants,

and many others who don’t have professional credentials.

If you choose to have someone prepare your tax return,

choose that preparer wisely. A paid tax preparer is:

•

Primarily responsible for the overall substantive accu-

racy of your return,

•

Required to sign the return, and

•

Required to include their preparer tax identification

number (PTIN).

Although the tax preparer always signs the return,

you're ultimately responsible for providing all the

information required for the preparer to accurately

prepare your return and for the accuracy of every item re-

ported on the return. Anyone paid to prepare tax returns

for others should have a thorough understanding of tax

matters. For more information on how to choose a tax pre-

parer, go to Tips for Choosing a Tax Preparer on IRS.gov.

CAUTION

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Employers can register to use Business Services On-

line. The Social Security Administration (SSA) offers on-

line service at SSA.gov/employer for fast, free, and secure

W-2 filing options to CPAs, accountants, enrolled agents,

and individuals who process Form W-2, Wage and Tax

Statement, and Form W-2c, Corrected Wage and Tax

Statement.

IRS social media. Go to IRS.gov/SocialMedia to see the

various social media tools the IRS uses to share the latest

information on tax changes, scam alerts, initiatives, prod-

ucts, and services. At the IRS, privacy and security are our

highest priority. We use these tools to share public infor-

mation with you. Don’t post your social security number

(SSN) or other confidential information on social media

sites. Always protect your identity when using any social

networking site.

The following IRS YouTube channels provide short, in-

formative videos on various tax-related topics in English,

Spanish, and ASL.

•

Youtube.com/irsvideos.

•

Youtube.com/irsvideosmultilingua.

•

Youtube.com/irsvideosASL.

Watching IRS videos. The IRS Video portal

(IRSVideos.gov) contains video and audio presentations

for individuals, small businesses, and tax professionals.

Online tax information in other languages. You can

find information on IRS.gov/MyLanguage if English isn’t

your native language.

Free Over-the-Phone Interpreter (OPI) Service. The

IRS is committed to serving taxpayers with limited-English

proficiency (LEP) by offering OPI services. The OPI Serv-

ice is a federally funded program and is available at Tax-

payer Assistance Centers (TACs), most IRS offices, and

every VITA/TCE tax return site. The OPI Service is acces-

sible in more than 350 languages.

Accessibility Helpline available for taxpayers with

disabilities. Taxpayers who need information about ac-

cessibility services can call 833-690-0598. The Accessi-

bility Helpline can answer questions related to current and

future accessibility products and services available in al-

ternative media formats (for example, braille, large print,

audio, etc.). The Accessibility Helpline does not have ac-

cess to your IRS account. For help with tax law, refunds, or

account-related issues, go to IRS.gov/LetUsHelp.

Note. Form 9000, Alternative Media Preference, or

Form 9000(SP) allows you to elect to receive certain types

of written correspondence in the following formats.

•

Standard Print.

•

Large Print.

•

Braille.

•

Audio (MP3).

•

Plain Text File (TXT).

•

Braille Ready File (BRF).

Disasters. Go to IRS.gov/DisasterRelief to review the

available disaster tax relief.

Getting tax forms and publications. Go to IRS.gov/

Forms to view, download, or print all the forms, instruc-

tions, and publications you may need. Or, you can go to

IRS.gov/OrderForms to place an order.

Getting tax publications and instructions in eBook

format. Download and view most tax publications and in-

structions (including the Instructions for Form 1040) on

mobile devices as eBooks at IRS.gov/eBooks.

IRS eBooks have been tested using Apple's iBooks for

iPad. Our eBooks haven’t been tested on other dedicated

eBook readers, and eBook functionality may not operate

as intended.

Access your online account (individual taxpayers

only). Go to IRS.gov/Account to securely access infor-

mation about your federal tax account.

•

View the amount you owe and a breakdown by tax

year.

•

See payment plan details or apply for a new payment

plan.

•

Make a payment or view 5 years of payment history

and any pending or scheduled payments.

•

Access your tax records, including key data from your

most recent tax return, and transcripts.

•

View digital copies of select notices from the IRS.

•

Approve or reject authorization requests from tax pro-

fessionals.

•

View your address on file or manage your communica-

tion preferences.

Get a transcript of your return. With an online account,

you can access a variety of information to help you during

the filing season. You can get a transcript, review your

most recently filed tax return, and get your adjusted gross

income. Create or access your online account at IRS.gov/

Account.

Tax Pro Account. This tool lets your tax professional

submit an authorization request to access your individual

taxpayer IRS online account. For more information, go to

IRS.gov/TaxProAccount.

Using direct deposit. The safest and easiest way to re-

ceive a tax refund is to e-file and choose direct deposit,

which securely and electronically transfers your refund di-

rectly into your financial account. Direct deposit also

avoids the possibility that your check could be lost, stolen,

destroyed, or returned undeliverable to the IRS. Eight in

10 taxpayers use direct deposit to receive their refunds. If

you don’t have a bank account, go to IRS.gov/

DirectDeposit for more information on where to find a bank

or credit union that can open an account online.

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Reporting and resolving your tax-related identity

theft issues.

•

Tax-related identity theft happens when someone

steals your personal information to commit tax fraud.

Your taxes can be affected if your SSN is used to file a

fraudulent return or to claim a refund or credit.

•

The IRS doesn’t initiate contact with taxpayers by

email, text messages (including shortened links), tele-

phone calls, or social media channels to request or

verify personal or financial information. This includes

requests for personal identification numbers (PINs),

passwords, or similar information for credit cards,

banks, or other financial accounts.

•

Go to IRS.gov/IdentityTheft, the IRS Identity Theft

Central webpage, for information on identity theft and

data security protection for taxpayers, tax professio-

nals, and businesses. If your SSN has been lost or

stolen or you suspect you’re a victim of tax-related

identity theft, you can learn what steps you should

take.

•

Get an Identity Protection PIN (IP PIN). IP PINs are

six-digit numbers assigned to taxpayers to help pre-

vent the misuse of their SSNs on fraudulent federal in-

come tax returns. When you have an IP PIN, it pre-

vents someone else from filing a tax return with your

SSN. To learn more, go to IRS.gov/IPPIN.

Ways to check on the status of your refund.

•

Go to IRS.gov/Refunds.

•

Download the official IRS2Go app to your mobile de-

vice to check your refund status.

•

Call the automated refund hotline at 800-829-1954.

The IRS can’t issue refunds before mid-February

for returns that claimed the EIC or the additional

child tax credit (ACTC). This applies to the entire

refund, not just the portion associated with these credits.

Making a tax payment. Payments of U.S. tax must be

remitted to the IRS in U.S. dollars. Digital assets are not

accepted. Go to IRS.gov/Payments for information on how

to make a payment using any of the following options.

•

IRS Direct Pay: Pay your individual tax bill or estimated

tax payment directly from your checking or savings ac-

count at no cost to you.

•

Debit Card, Credit Card, or Digital Wallet: Choose an

approved payment processor to pay online or by

phone.

•

Electronic Funds Withdrawal: Schedule a payment

when filing your federal taxes using tax return prepara-

tion software or through a tax professional.

•

Electronic Federal Tax Payment System: Best option

for businesses. Enrollment is required.

•

Check or Money Order: Mail your payment to the ad-

dress listed on the notice or instructions.

•

Cash: You may be able to pay your taxes with cash at

a participating retail store.

CAUTION

•

Same-Day Wire: You may be able to do same-day

wire from your financial institution. Contact your finan-

cial institution for availability, cost, and time frames.

Note. The IRS uses the latest encryption technology to

ensure that the electronic payments you make online, by

phone, or from a mobile device using the IRS2Go app are

safe and secure. Paying electronically is quick, easy, and

faster than mailing in a check or money order.

What if I can’t pay now? Go to IRS.gov/Payments for

more information about your options.

•

Apply for an online payment agreement (IRS.gov/

OPA) to meet your tax obligation in monthly install-

ments if you can’t pay your taxes in full today. Once

you complete the online process, you will receive im-

mediate notification of whether your agreement has

been approved.

•

Use the Offer in Compromise Pre-Qualifier to see if

you can settle your tax debt for less than the full

amount you owe. For more information on the Offer in

Compromise program, go to IRS.gov/OIC.

Filing an amended return. Go to IRS.gov/Form1040X

for information and updates.

Checking the status of your amended return. Go to

IRS.gov/WMAR to track the status of Form 1040-X amen-

ded returns.

It can take up to 3 weeks from the date you filed

your amended return for it to show up in our sys-

tem, and processing it can take up to 16 weeks.

Understanding an IRS notice or letter you’ve re-

ceived. Go to IRS.gov/Notices to find additional informa-

tion about responding to an IRS notice or letter.

Responding to an IRS notice or letter. You can now

upload responses to all notices and letters using the

Document Upload Tool. For notices that require additional

action, taxpayers will be redirected appropriately on

IRS.gov to take further action. To learn more about the

tool, go to IRS.gov/Upload.

Note. You can use Schedule LEP (Form 1040), Re-

quest for Change in Language Preference, to state a pref-

erence to receive notices, letters, or other written commu-

nications from the IRS in an alternative language. You may

not immediately receive written communications in the re-

quested language. The IRS’s commitment to LEP taxpay-

ers is part of a multi-year timeline that began providing

translations in 2023. You will continue to receive communi-

cations, including notices and letters, in English until they

are translated to your preferred language.

Contacting your local TAC. Keep in mind, many ques-

tions can be answered on IRS.gov without visiting a TAC.

Go to IRS.gov/LetUsHelp for the topics people ask about

most. If you still need help, TACs provide tax help when a

tax issue can’t be handled online or by phone. All TACs

now provide service by appointment, so you’ll know in

CAUTION

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advance that you can get the service you need without

long wait times. Before you visit, go to IRS.gov/

TACLocator to find the nearest TAC and to check hours,

available services, and appointment options. Or, on the

IRS2Go app, under the Stay Connected tab, choose the

The Taxpayer Advocate

Service (TAS) Is Here To Help

You

What Is TAS?

TAS is an independent organization within the IRS that

helps taxpayers and protects taxpayer rights. Their job is

to ensure that every taxpayer is treated fairly and that you

know and understand your rights under the Taxpayer Bill

of Rights.

How Can You Learn About Your Taxpayer

Rights?

The Taxpayer Bill of Rights describes 10 basic rights that

all taxpayers have when dealing with the IRS. Go to

TaxpayerAdvocate.IRS.gov to help you understand what

these rights mean to you and how they apply. These are

your rights. Know them. Use them.

What Can TAS Do for You?

TAS can help you resolve problems that you can’t resolve

with the IRS. And their service is free. If you qualify for

their assistance, you will be assigned to one advocate

who will work with you throughout the process and will do

everything possible to resolve your issue. TAS can help

you if:

•

Your problem is causing financial difficulty for you,

your family, or your business;

•

You face (or your business is facing) an immediate

threat of adverse action; or

•

You’ve tried repeatedly to contact the IRS but no one

has responded, or the IRS hasn’t responded by the

date promised.

How Can You Reach TAS?

TAS has offices in every state, the District of Columbia,

and Puerto Rico. To find your advocate’s number:

•

Go to TaxpayerAdvocate.IRS.gov/Contact-Us;

•

Download Pub. 1546, The Taxpayer Advocate Service

Is Your Voice at the IRS, available at IRS.gov/pub/irs-

pdf/p1546.pdf;

•

Call the IRS toll free at 800-TAX-FORM

(800-829-3676) to order a copy of Pub. 1546;

•

Check your local directory; or

•

Call TAS toll free at 877-777-4778.

How Else Does TAS Help Taxpayers?

TAS works to resolve large-scale problems that affect

many taxpayers. If you know of one of these broad issues,

report it to TAS at IRS.gov/SAMS. Be sure to not include

any personal taxpayer information.

Low Income Taxpayer Clinics (LITCs)

LITCs are independent from the IRS and TAS. LITCs rep-

resent individuals whose income is below a certain level

and who need to resolve tax problems with the IRS. LITCs

can represent taxpayers in audits, appeals, and tax collec-

tion disputes before the IRS and in court. In addition,

LITCs can provide information about taxpayer rights and

responsibilities in different languages for individuals who

speak English as a second language. Services are offered

for free or a small fee. For more information or to find an

LITC near you, go to the LITC page at

TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134,

Low Income Taxpayer Clinic List, at IRS.gov/pub/irs-pdf/

p4134.pdf.

36 Publication 527 (2023)

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To help us develop a more useful index, please let us know if you have ideas for index entries.

See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Index

Accelerated Cost Recovery System

(ACRS) 12

(See also Modified Accelerated Cost Recovery

System (MACRS))

Effective date 10

Accounting methods:

Accrual method 4

Cash method 4

Constructive receipt of income 4

Accrual method taxpayers 4

ACRS (Accelerated Cost Recovery System):

Effective date 10

Active participation 21

Activities not for profit 25

Additions to property 14

(See also Improvements)

Basis 12

MACRS recovery period 14

Adjusted basis:

MACRS depreciation 11

Adjusted gross income (AGI):

Modified (See Modified adjusted gross

income (MAGI))

Advance rent 4

Security deposits 4

Advertising 5

Allocation of expenses:

Change of property to rental use 24

How to divide expenses 27

Part of property rented 25

Personal use of rental property 5, 26

Alternative Depreciation System (ADS):

Election of 13

MACRS 12, 18

Alternative minimum tax (AMT):

Accelerated depreciation methods 8

Apartments:

Basement apartments 29

Dwelling units 26

Appraisal fees 11

Assessments for maintenance 12

Assessments, local (See Local assessments)

Assistance (See Tax help)

Assumption of mortgage 11

Attorneys' fees 11, 12

Automobiles:

MACRS recovery periods 13

Basis:

Adjusted basis 11

Assessments for local improvements 12

Basis other than cost 11

Cost basis 10

Decreases to 12

Deductions:

Capitalization of costs vs. 12

Not greater than basis 10

Fair market value 24

Increases to 12

MACRS depreciable basis 10

Property changed to rental use 24

Capital expenditures:

Deductions vs. effect on basis 12

Local benefit taxes 5

Mortgages, payments to obtain 5

Cars:

MACRS recovery periods 13

Cash method taxpayers 4

Casualty losses 22

Charitable contributions:

Use of property 28

Cleaning and maintenance 5

Closing costs 11

Commissions 5

Computers:

MACRS recovery periods 13

Condominiums 23, 26

Constructive receipt of income 4

Cooperative housing 9, 23, 26

Cost basis 10

Credit reports 11

Credits:

Residential energy credits 12

Days of personal use 27

Days used for repairs and maintenance 28

Deductions:

Capitalizing costs vs. effect on basis 12

Depreciation (See Depreciation)

Limitations on 19

Passive activity losses (See Passive activity)

Depreciation 8

Alternative Depreciation System (ADS)

(See Modified Accelerated Cost

Recovery System (MACRS))

Basis (See Basis)

Change of property to rental use 24

Claiming correct amount of 18

Declining balance method 10

Duration of property expected to last more

than one year 9

Eligible property 9

First-year expensing 8

MACRS (See Modified Accelerated Cost

Recovery System (MACRS))

Methods 10, 15

Ownership of property 9

Rental expense 5

Rented property 9

Section 179 deduction 8

Special depreciation allowances 12

Straight line method 10

Useful life 9

Vacant rental property 6

Discount, bonds and notes issued at

(See Original issue discount (OID))

Dividing of expenses (See Allocation of

expenses)

Dwelling units:

Definition 26

Fair rental price 27

Personal use of 26, 27

Easements 12

Equipment rental expense 6

Fair market value (FMV) 24

Fair rental price 27

Fees:

Loan origination fees 6, 11

Points (See Points)

Settlement fees and other costs 11

Tax return preparation fees 5

First-year expensing 8

Form 1040 or 1040-SR:

Not rented for profit income 25

Part of property rented 25

Rental income and expenses 18

Schedule E 19

Form 1098:

Mortgage interest 5

Form 4684:

Casualties and thefts 22

Form 4797:

Sales of business property 22

Form 8582:

Passive activity losses 21, 22

Gains and losses:

At-risk rules 20

Casualty and theft losses 22

Limits on rental losses 19

Passive activity losses 20

Rental real estate activities 21

Sale of rental property 3, 22

General depreciation system (GDS)

(See Modified Accelerated Cost Recovery

System (MACRS))

Home:

Main home 28

Use as rental property (See Use of home)

Improvements 8

(See also Repairs)

Assessments for local improvements 12

Basis 12

Depreciation of rented property 9

MACRS recovery period 14

Insurance 5

Casualty or theft loss payments 12

Change of property to rental use 24

Fire insurance premiums, cost basis 11

Part of property rented 25

Premiums paid in advance 5

Title insurance, cost basis 11

Interest payments 5

(See also Mortgages)

Loan origination fees 6

Rental expenses 5

Land:

Cost basis 11

Depreciation 9

Leases:

Cancellation payments 4

Equipment leasing 6

Limits:

Passive activity losses and credits 20

Rental losses 19

Loans:

Assumption fees 11

Charges connected with getting or

refinancing, cost basis 11

Low or no interest 11

Origination fees 6

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Local assessments 12

Losses (See Gains and losses)

Missing children, photographs of 2

Modified Accelerated Cost Recovery System

(MACRS) 12-18

Additions or improvements to property 14

Adjusted basis 11

Alternative Depreciation System (ADS) 12,

Basis other than cost 11

Conventions 14

Cost basis 10

Depreciable basis 10

Effective date 10

Excluded property 13

General Depreciation System (GDS) 12, 13,

Nonresidential rental property 13

Property used in rental activities

(Table 2-1) 14

Recovery periods 14, 15

Residential rental property 13, 15

Special depreciation allowances 12

Modified adjusted gross income (MAGI) 21

Mortgages 5, 11

Assumption of, cost basis 11

Change of property to rental use 24

End of, OID 7

Interest 5, 24, 25

Part of property rented 25

Nonresidential real property 13

Not-for-profit activities 25

Original issue discount (OID) 6, 7

Part interest:

Expenses 5

Income 4

Passive activity:

Maximum special allowance 21

Personal property:

Rental income from 4

Personal use of rental property 24, 26

(See also Property changed to rental use)

Placed-in-service date 9

Points 5, 6, 11

Pre-rental expenses 6

Principal residence (See Home)

Profit, property not rented for 25

Property changed to rental use 24

Basis 24

Publications (See Tax help)

Real estate professionals 20

Real estate taxes 11

Real property trades or businesses 20

Recordkeeping requirements:

Travel and transportation expenses 6

Recovery periods 13

Rent 11

Advance rent 4

Fair price 27

Rental expenses 5

Advertising 5

Allocation between rental and personal

uses 27

Change of property to rental use 24

Cleaning and maintenance 5

Commissions 5

Depreciation 5

Dwelling unit used as home 27

Equipment rental 6

Home, property also used as 4

Improvements 8

Insurance 5

Interest payments 5

Local transportation expenses 5

Part of property rented 25

Points 5, 6

Pre-rental expenses 6

Rental payments 5

Repairs 5, 7

Sale of property 6

Tax return preparation fees 5

Taxes 5

Tenant, paid by 4

Travel expenses 5

Utilities 5

Vacant rental property 6

Rental income:

Advance rent 4

Cancellation of lease payments 4

Dwelling unit used as home 27

Lease with option to buy 4

Not rented for profit 25

Part interest 4

Property received from tenant 4

Reporting 4, 18

Security deposit 4

Services received from tenant 4

Uncollected rent 6

Used as home 4

Rental losses 21

(See also Gains and losses)

(See also Passive activity)

Repairs 5, 7

(See also Improvements)

Assessments for maintenance 12

Personal use of rental property exception for

days used for repairs and

maintenance 28

Sale of property:

Expenses 6

Gain or loss 3, 22

Main home 3

Section 179 deductions 8

Security deposits 4

Settlement fees 11

Shared equity financing agreements 28

Special depreciation allowances 12

Spouse:

Material participation 21

Standard mileage rates 6

Surveys 11

Tables and figures:

Improvements, examples of (Table 1-1) 8

MACRS optional tables (Table 2-2d) 18

MACRS optional tables (Tables 2-2a, 2-2b,

and 2-2c) 17

MACRS recovery periods for property used in

rental activities (Table 2-1) 14

Tax credits:

Residential energy credits, effect on

basis 12

Tax help 33

Tax return preparation fees 5

Taxes:

Deduction of 5

Local benefit taxes 5

Real estate taxes 11

Transfer taxes 11

Theft losses 22

Title insurance 11

Transfer taxes 11

Travel and transportation expenses:

Local transportation expenses 5

Recordkeeping 6

Rental expenses 5

Standard mileage rate 6

Uncollected rent:

Income 6

Use of home:

Before or after renting 28

Change to rental use 24

Days of personal use 27

Fair rental price 27

Passive activity rules exception 21

Personal use as dwelling unit 26

Utilities 5, 12

Vacant rental property 6

Vacation homes:

Dwelling unit 26

Fair rental price 27

Personal use of 26

Valuation:

Fair market value 24

38 Publication 527 (2023)