Publication 527 - Residential Rental Property (Including Rental of Vacation Homes)

Publication 527

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Reporting Income and Deductions

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If you do not use a dwelling unit for personal purposes, see chapter 3 for how to report your rental income and expenses.

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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.

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If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Since 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 personal use are not deductible as rental expenses.

Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses in chapter 3.

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If you use a dwelling unit as a home and you rent it less than 15 days during the year, its 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 (Form 1040) for more information on deducting these expenses.

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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 income. Since 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 personal use are not 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 do not 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 expenses is limited. To figure your deductible rental expenses and any carryover to next year, use Worksheet 5-1.

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Worksheet 5-1. Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home

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 and qualified mortgage insurance premiums (see instructions)	2a.
b.	Enter the rental portion of real estate taxes	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 and qualified mortgage insurance premiums (see instructions)	b.
c.	Carryover of operating expenses from 2011 worksheet	c.
d.	Add lines 4a–4c	d.
e.	Allowable expenses. Enter the smaller of line 3 or line 4d (see instructions)		4e.
5.	Subtract line 4e 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 losses and depreciation from 2011 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 4e from line 4d		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 5-1 Instructions. Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home

Caution. Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of Part II.
Line 2a.	Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A (as if you were itemizing your deductions) if you had not rented the unit. Do not include interest on a loan that did not benefit the dwelling unit. For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Include the rental portion of this interest in the total you enter on line 2a of the worksheet.
	Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A, if you had not rented the unit. See the Schedule A instructions. However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet.
	Note. Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Instead, figure the personal portion on a separate Schedule A. If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount.

Line 2c.	Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A if you had not rented the dwelling unit. To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet.
	Note. Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Instead, figure the personal portion on a separate Form 4684.

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 on Schedule E even if your rental expenses are more than your rental income. Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E.

Line 4b.	On line 2a, you entered the rental portion of the mortgage interest or qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions).

Line 4e.	You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e.*

Line 6a.	To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet.
	A.	Enter the amount from Form 4684, line 10
	B.	Enter the rental portion of line A
	C.	Enter the amount from line 2c of this worksheet
	D.	Subtract line C from line B. Enter the result here and on line 6a of this worksheet

Line 6e.	You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e.*

*Allocating the limited deduction. If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I.

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Reporting Income and Deductions(p19)

Property not used for personal purposes.(p19)

Property used personal purposes.(p19)