Reporting Income and Deductions(p23)

When you use a dwelling unit both as a home and a rental unit, you must first determine if the property qualifies as rental property. If it is rental property, how much it is used as a rental compared to how much it is used as personal will determine where the rental property's income and expenses should be reported on your return.

If a property is rented less than 15 days, it's primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). You are not required to report the rental income and rental expenses from this activity. The expenses, including qualified mortgage interest, property 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 deducting these expenses.

If your personal use of your property is more than the greater of:

• 14 days, or
• 10% of total days rented to others at fair rental price.

Your property is rental property, but your expenses this year will be limited to the amount of your rental income for this property. You will report your income on Schedule E (Form 1040).

You will allocate your expenses based on the number of personal days as compared to the number of rental days.

The personal portion of expenses, including qualified mortgage interest, property taxes, and qualified casualty loss (if any), will be reported as normally allowed on Schedule A (Form 1040).

The rental portion of the expenses will be reported on Schedule E (Form 1040) in the following order.

1. Advertising and other fees directly related to obtaining tenants for this rental property.
2. The rental portion of qualified home mortgage interest, property taxes, and qualified casualty loss (if any).
3. Rental operating expenses for this property up to the amount of the rental income for this property (minus 1 and 2).
4. Depreciation for this property up to the amount of the rental income for this property (minus 1, 2, and 3).

See Worksheet 5-1, later.

Deductions not allowed due to the limitations of the rental income for the property are carried over to subsequent years and may be used when the property has sufficient income to cover the expenses.

If your personal use of your property is less than the greater of:

• 14 days, or
• 10% of total days rented to others at fair rental price.

Your property is rental property and your rental expenses, which are proportional to the portion of rental use, will be reported on Schedule E (Form 1040). Your rental losses for this property this year are subject to passive loss limitations. See Passive Activity Limits, earlier.

The personal portion of expenses, including qualified mortgage interest, property taxes, and qualified casualty loss (if any), will be reported as normally allowed on Schedule A (Form 1040). The personal portion of the remaining rental expenses are not deductible because they are personal expenses.

See Worksheet 5-1, later.