Residential 
Rental 
Property

For qualified property acquired after September 8, 2010, and placed in service before the end of the year, the additional first year depreciation is 100% of the depreciable basis of the property instead of 50%. See Publication 946, How To Depreciate Property, for more information.

Beginning with payments made after December 31, 2010, if you make payments of $600 or more for certain rental property expenses, the payments are to be reported in box 7 on Form 1099-MISC, Miscellaneous Income. For more information, see Rental property expense payments, later.

You may qualify for a tax-free exchange (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. You must meet the following criteria.

• You own the rental property for at least 24 months before the exchange.
• During the 2 years before the exchange you rent the property to another person at a fair rental price for 14 days or more.
• Your personal use of the rental property during each of the two years before the exchange does not exceed the greater of 14 days or 10% of the number of days the property is rented.

For information on like-kind exchanges, see Publication 544, Sales and Other Dispositions of Assets, chapter 1.

If, prior to September 9, 2010, you placed in service certain longer-lived and transportation property with a recovery period of 20 years or less, you can elect a 50% special depreciation allowance (in addition to your regular MACRS depreciation deduction). For certain longer-lived and transportation property with a recovery period of 20 years or less acquired after September 8, 2010, and placed in service before the end of the year, your special depreciation allowance is 100% unless you choose not to take the special depreciation allowance. See Publication 946 for more information.

You can take a special depreciation allowance for qualified property located in areas damaged by the hurricanes occurring during 2005. To be qualified, the property must be located in specified counties or parishes, acquired after August 27, 2005, and placed in service before January 1, 2012. For more information, see chapter 3 in Publication 946.

You can take a special depreciation allowance for qualified property placed in service in federally declared disaster areas in which the disaster occurred after December 31, 2007, and before January 1, 2010. The qualifying property must be placed in service on or before the last day of the third calendar year following the applicable disaster date (the fourth calendar year in the case of nonresidential real property and residential rental property). A list of the federally declared disaster areas is available at the FEMA website at www.fema.gov. For more information, see chapter 3 in Publication 946.

You can generally deduct, rather than capitalize, qualified disaster expenses paid or incurred after December 31, 2007. See Publication 535, Business Expenses, for more information.

You can deduct, rather than capitalize, 50% of qualified disaster recovery assistance clean-up costs paid or incurred on or after the applicable disaster date, and before January 1, 2011. Refer to Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas, to see if your rental property is in a qualifying area and for details on the deduction.

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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 activities discussed in this publication. Generally, 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.

First, this publication will look at the rental-for-profit activity in which there is no personal use of the property. We will look at types of income and when each is reported, and at types of expenses and which are deductible.

Chapter 2 discusses depreciation as it applies to your rental real estate activity—what property can be depreciated and how to figure it.

Chapter 3 covers the actual reporting of your rental income and deductions, including casualties and thefts, limitations on losses, and claiming the correct amount of depreciation.

Special rental situations are grouped together in chapter 4. These include condominiums and cooperatives, property changed to rental use, renting only part of your property, and a not-for-profit rental activity.

Finally, in chapter 5, we will look at the rules for rental income and expenses when there is also personal use of the dwelling unit, such as a vacation home.

For information on how to figure and report any gain or loss from the sale or other disposition of your rental property, see Publication 544.

For information 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 Publication 523, Selling Your Home.

We welcome your comments about this publication and your suggestions for future editions.

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Internal Revenue Service 
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