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            Publication 527
            Cat. No. 15052W                                                    Contents
                                                                               What’s New        . . . . . . . . . . . . . . . . . . 1
Department 
of the      Residential                                                        Reminders . . . . . . . . . . . . . . . . . . . 2
Treasury
Internal                                                                       Introduction . . . . . . . . . . . . . . . . . . 2
Revenue     Rental
Service                                                                        Chapter  1.  Rental Income and 
                                                                               Expenses (If No Personal Use 
            Property                                                           of Dwelling)            . . . . . . . . . . . . . . . 3
                                                                               Rental Income             . . . . . . . . . . . . . . 3
                                                                               Rental Expenses . . . . . . . . . . . . . 3
            (Including Rental of 
                                                                               Chapter  2.  Depreciation of 
            Vacation Homes)                                                    Rental Property . . . . . . . . . . . . . 6
                                                                               The Basics            . . . . . . . . . . . . . . . . 6
                                                                               Special Depreciation Allowance                . . . . 8
                                                                               MACRS Depreciation                . . . . . . . . . . 8
            For use in preparing                                               Claiming the Correct Amount of 
                                                                                           Depreciation    . . . . . . . . . . . .   12

                        Returns                                                Chapter  3.  Reporting Rental 
            2022                                                               Income, Expenses, and 
                                                                               Losses            . . . . . . . . . . . . . . . . .   12
                                                                               Which Forms To Use                . . . . . . . . .   12
                                                                               Limits on Rental Losses . . . . . . . .               12
                                                                                             At-Risk Rules . . . . . . . . . . .     13
                                                                                             Passive Activity Limits . . . . . .     13
                                                                               Casualties and Thefts             . . . . . . . . .   14
                                                                               Example . . . . . . . . . . . . . . . . .             14
                                                                               Chapter  4.  Special Situations . . . . . .           15
                                                                               Condominiums . . . . . . . . . . . . .                15
                                                                               Cooperatives . . . . . . . . . . . . . .              15
                                                                               Property Changed to Rental Use . . .                  15
                                                                               Renting Part of Property . . . . . . . .              16
                                                                               Not Rented for Profit . . . . . . . . . .             16
                                                                               Example—Property Changed to 
                                                                                           Rental Use    . . . . . . . . . . . . .   16
                                                                               Chapter  5.  Personal Use of 
                                                                               Dwelling Unit (Including 
                                                                               Vacation Home) . . . . . . . . . . . .                17
                                                                               Dividing Expenses . . . . . . . . . . .               17
                                                                               Dwelling Unit Used as a Home                . . . .   18
                                                                               Reporting Income and 
                                                                                           Deductions    . . . . . . . . . . . . .   19
                                                                               Worksheet 5-1. Worksheet for 
                                                                                           Figuring Rental Deductions 
                                                                                           for a Dwelling Unit Used as a 
                                                                                           Home    . . . . . . . . . . . . . . . .   20
                                                                               Chapter  6.  How To Get Tax Help . . . .              23
                                                                               Index       . . . . . . . . . . . . . . . . . . . . . 26

                                                                               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.

              Get forms and other information faster and easier at:            What’s New
              • IRS.gov (English)         • IRS.gov/Korean (한국어)               Standard  mileage  rate.          For  2022,  the  stand-
              • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский)          ard mileage rate for the cost of operating your 
              • IRS.gov/Chinese (中文)      • IRS.gov/Vietnamese (Tiếng Việt)    car, van, pickup, or panel truck between Janu-
                                                                               ary 1, 2022, to June 30, 2022, is 58.5 cents per 

Jan 27, 2023

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mile. The business standard mileage rate from deferred Social Security tax for more informa- 2008-10_IRB#RP-2008-16. For more informa-
July 1, 2022, to December 31, 2022, is 62.5 tion about due dates and payment options. tion on like-kind exchanges, see chapter 1 of
cents per mile. Photographs of missing children. The Inter- Pub. 544.
Excess business loss limitation. If you re- nal Revenue Service is a proud partner with the
port a loss on line 26, 32, 37, or 39 of your National Center for Missing & Exploited Comments and suggestions. We welcome
Schedule E (Form 1040), you may be subject to Children® (NCMEC). Photographs of missing your comments about this publication and sug-
a business loss limitation. The disallowed loss children selected by the Center may appear in gestions for future editions.
resulting from the limitation will not be reflected this publication on pages that would otherwise You can send us comments through
on line 26, 32, 37, or 39 of your Schedule E. In- be blank. You can help bring these children IRS.gov/FormComments. Or, you can write to
stead, use Form 461 to determine the amount home by looking at the photographs and calling the Internal Revenue Service, Tax Forms and
of your excess business loss, which will be in- 1-800-THE-LOST (1-800-843-5678) if you rec- Publications, 1111 Constitution Ave. NW,
cluded as income on Schedule 1 (Form 1040), ognize a child. IR-6526, Washington, DC 20224.
line 8p. Any disallowed loss resulting from this Although we can’t respond individually to
limitation will be treated as a net operating loss each comment received, we do appreciate your
that must be carried forward and deducted in a Introduction feedback and will consider your comments and
subsequent year. Do you own a second house that you rent out suggestions as we revise our tax forms, instruc-
See Form 461 and its instructions for details all the time? Do you own a vacation home that tions, and publications. Don’t send tax ques-
on the excess business loss limitation. you rent out when you or your family isn't using tions, tax returns, or payments to the above ad-
Section 179 deduction dollar limits. For tax it? dress.
years beginning in 2022, the maximum section These are two common types of residential Getting answers to your tax questions.
179 expense deduction is $1,080,000. This limit rental activities discussed in this publication. In If you have a tax question not answered by this
is reduced by the amount by which the cost of most cases, all rental income must be reported publication or the How To Get Tax Help section
section 179 property placed in service during on your tax return, but there are differences in at the end of this publication, go to the IRS In-
the tax year exceeds $2,700,000. the expenses you are allowed to deduct and in teractive Tax Assistant page at IRS.gov/
the way the rental activity is reported on your re- Help/ITA where you can find topics by using the
Form 7205, Energy Efficient Commercial turn. search feature or viewing the categories listed.
Buildings Deduction. This new form and its Chapter 1 discusses rental-for-profit activity
separate instructions are used to claim the IRC in which there is no personal use of the prop- Getting tax forms, instructions, and pub-
179D deduction for qualifying energy efficient erty. It examines some common types of rental lications. Go to IRS.gov/Forms to download
commercial building expense(s). income and when each is reported, as well as current and prior-year forms, instructions, and
Qualified paid sick leave and qualified paid some common types of expenses and which publications.
family leave payroll tax credit. The amount are deductible.
of any payroll tax credit taken by an employer Chapter 2 discusses depreciation as it ap- Ordering tax forms, instructions, and
for qualified paid sick leave and qualified paid plies to your rental real estate activity—what publications. Go to IRS.gov/OrderForms to
family leave under the Families First Coronavi- property can be depreciated and how much it order current forms, instructions, and publica-
rus Response Act (FFCRA) and the American can be depreciated. tions; call 800-829-3676 to order prior-year
Rescue Plan Act (ARP) must be included in in- Chapter 3 covers the reporting of your rental forms and instructions. The IRS will process
come. See Form 941, lines 11b, 11d, 13c, and income and deductions, including casualties your order for forms and publications as soon
13e; and Form 944, lines 8b, 8d, 10d, and 10f. and thefts, limitations on losses, and claiming as possible. Don’t resubmit requests you’ve al-
You must include the full amount (both the re- the correct amount of depreciation. ready sent us. You can get forms and publica-
fundable and nonrefundable portions) of the Chapter 4 discusses special rental situa- tions faster online.
credit for qualified sick and family leave wages tions. These include condominiums, coopera-
in gross income on line 3 or 4, as applicable, for tives, property changed to rental use, renting Useful Items
the tax year that includes the last day of any cal- only part of your property, and a not-for-profit You may want to see:
endar quarter with respect to which a credit is rental activity.
allowed. Chapter 5 discusses the rules for rental in- Publication
come and expenses when there is also per- 463
Note. A credit is available only if the leave sonal use of the dwelling unit, such as a vaca- 463 Travel, Gift, and Car Expenses
was taken after March 31, 2020, and before Oc- tion home. 523 523 Selling Your Home
tober 1, 2021, and only after the qualified leave Finally, chapter 6 explains how to get tax 534 534 Depreciating Property Placed in
wages were paid, which might, under certain help from the IRS.
circumstances, not occur until a quarter after Service Before 1987
September 30, 2021, including quarters during Sale or exchange of rental property. For in- 535 535 Business Expenses
2022. Accordingly, all lines related to qualified formation on how to figure and report any gain
sick and family leave wages remain on the em- or loss from the sale, exchange, or other dispo- 544 544 Sales and Other Dispositions of
ployment tax returns for 2022. sition of your rental property, see Pub. 544. Assets
547
Sale of main home used as rental prop- 547 Casualties, Disasters, and Thefts
erty. For information on how to figure and re- 551 551 Basis of Assets
port any gain or loss from the sale or other dis-
Reminders position of your main home that you also used 925 925 Passive Activity and At-Risk Rules
Net Investment Income Tax (NIIT). You may as rental property, see Pub. 523. 946 946 How To Depreciate Property
be subject to the NIIT. NIIT is a 3.8% tax on the
lesser of net investment income or the excess Tax-free exchange of rental property oc-
of modified adjusted gross income (MAGI) over casionally used for personal purposes. If Form (and Instructions)
the threshold amount. Net investment income you meet certain qualifying use standards, you 461 461 Excess Business Loss Limitation
may include rental income and other income may qualify for a tax-free exchange (a like-kind 4562 4562 Depreciation and Amortization
from passive activities. Use Form 8960 to figure or section 1031 exchange) of one piece of
this tax. For more information on NIIT, go to rental property you own for a similar piece of 5213 5213 Election To Postpone Determination
IRS.gov/NIIT. rental property, even if you have used the rental as To Whether the Presumption
property for personal purposes. Applies That an Activity Is Engaged
Self-employed tax payments deferred from For information on the qualifying use stand- in for Profit
2020. If you elected to defer self-employed tax ards, see Revenue Procedure 2008-16, 7205 7205 Energy Efficient Commercial
payments from 2020, see How self-employed 2008-10 I.R.B. 547, available at IRS.gov/irb/
individuals and household employers repay Buildings Deduction
Page 2 Publication 527 (2022)

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8582 8582 Passive Activity Loss Limitations about when you constructively receive income curity deposit during any year because your
8960 8960 Net Investment Income and accrual methods of accounting. tenant doesn’t live up to the terms of the lease,
Tax—Individuals, Estates, and Trusts include the amount you keep in your income in
that year.
Schedule E (Form 1040) Schedule E (Form 1040) Supplemental Types of Income If an amount called a security deposit is to
Income and Loss be used as a final payment of rent, it is advance
The following are common types of rental in- rent. Include it in your income when you receive
come. it.
Advance rent. Advance rent is any amount
you receive before the period that it covers. In- Other Sources of Rental Income
clude advance rent in your rental income in the
1. year you receive it regardless of the period cov- Lease with option to buy. If the rental agree-
ered or the method of accounting you use. ment gives your tenant the right to buy your
rental property, the payments you receive under
Example. On March 18, 2022, you signed the agreement are generally rental income. If
Rental Income a 10-year lease to rent your property. During your tenant exercises the right to buy the prop-
2022, you received $9,600 for the first year's erty, the payments you receive for the period af-
rent and $9,600 as rent for the last year of the ter the date of sale are considered part of the
and Expenses (If lease. You must include $19,200 in your rental selling price.
income in 2022.
Part interest. If you own a part interest in
No Personal Use Canceling a lease. If your tenant pays you to rental property, you must report your part of the
cancel a lease, the amount you receive is rent. rental income from the property.
of Dwelling) Include the payment in your rental income in the
year you receive it regardless of your method of Rental of property also used as your home.
This chapter discusses the various types of accounting. If you rent property that you also use as your
home and you rent it less than 15 days during
rental income and expenses for a residential the tax year, don’t include the rent you receive
rental activity with no personal use of the dwell- Expenses paid by tenant. If your tenant pays
ing. Generally, each year, you will report all in- any of your expenses, those payments are in your income. Also, expenses from this activ-
come and deduct all out-of-pocket expenses in rental income. Because you must include this ity are not considered rental expenses. For
full. The deduction to recover the cost of your amount in income, you can also deduct the ex- more information, see Used as a home but ren-
rental property—depreciation—is taken over a penses if they are deductible rental expenses. ted less than 15 days under Reporting Income
prescribed number of years, and is discussed in For more information, see Rental Expenses, and Deductions in chapter 5.
chapter 2. later.
If your rental income is from property Example 1. Your tenant pays the water and Rental Expenses
! you also use personally or rent to sewage bill for your rental property and deducts
CAUTION someone at less than a fair rental price, the amount from the normal rent payment. Un- In most cases, the expenses of renting your
first read chapter 5. der the terms of the lease, your tenant doesn’t property, such as maintenance, insurance,
have to pay this bill. Include the utility bill paid taxes, and interest, can be deducted from your
by the tenant and any amount received as a rental income.
rent payment in your rental income. You can de-
Rental Income duct the utility payment made by your tenant as Personal use of rental property. If you
a rental expense. sometimes use your rental property for personal
In most cases, you must include in your gross purposes, you must divide your expenses be-
income all amounts you receive as rent. Rental Example 2. While you are out of town, the tween rental and personal use. Also, your rental
income is any payment you receive for the use furnace in your rental property stops working. expense deductions may be limited. See chap-
or occupation of property. It isn’t limited to Your tenant pays for the necessary repairs and ter 5.
amounts you receive as normal rental pay- deducts the repair bill from the rent payment. In-
ments. clude the repair bill paid by the tenant and any Part interest. If you own a part interest in
amount received as a rent payment in your rental property, you can deduct expenses you
When To Report rental income. You can deduct the repair pay- paid according to your percentage of owner-
ment made by your tenant as a rental expense. ship.
When you report rental income on your tax re-
turn generally depends on whether you are a Property or services. If you receive property Example. Roger owns a one-half undivided
cash or an accrual basis taxpayer. Most individ- or services as rent, instead of money, include interest in a rental house. Last year, he paid
ual taxpayers use the cash method. the fair market value (FMV) of the property or $968 for necessary repairs on the property.
services in your rental income. Roger can deduct $484 (50% (0.50) × $968) as
Cash method. You are a cash basis taxpayer If the services are provided at an agreed a rental expense. He is entitled to reimburse-
if you report income on your return in the year upon or specified price, that price is the FMV ment for the remaining half from the co-owner.
you actually or constructively receive it, regard- unless there is evidence to the contrary.
less of when it was earned. You constructively When To Deduct
receive income when it is made available to Example. Your tenant is a house painter.
you, for example, by being credited to your He offers to paint your rental property instead of You generally deduct your rental expenses in
bank account. paying 2 months rent. You accept his offer. the year you pay them.
Include in your rental income the amount the
Accrual method. If you are an accrual basis tenant would have paid for 2 months rent. You If you use the accrual method, see Pub. 538
taxpayer, you generally report income when can deduct that same amount as a rental ex- for more information.
you earn it, rather than when you receive it. You pense for painting your property.
generally deduct your expenses when you incur
them, rather than when you pay them. Security deposits. Don’t include a security
deposit in your income when you receive it if
More information. See Pub. 538, Accounting you plan to return it to your tenant at the end of
Periods and Methods, for more information the lease. But if you keep part or all of the se-
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Types of Expenses Legal and other professional fees. You can Travel expenses. You can deduct the ordi-
deduct, as a rental expense, legal and other nary and necessary expenses of traveling away
Listed below are the most common rental ex- professional expenses such as tax return prep- from home if the primary purpose of the trip is to
penses. aration fees you paid to prepare Schedule E, collect rental income or to manage, conserve,
• Advertising. Part I. For example, on your 2022 Schedule E, or maintain your rental property. You must prop-
• Auto and travel expenses. you can deduct fees paid in 2022 to prepare erly allocate your expenses between rental and
• Cleaning and maintenance. Part I of your 2021 Schedule E. You can also nonrental activities. You can’t deduct the cost of
• Commissions. deduct, as a rental expense, any expense traveling away from home if the primary pur-
• Depreciation. (other than federal taxes and penalties) you pose of the trip is to improve the property. The
• Insurance. paid to resolve a tax underpayment related to cost of improvements is recovered by taking
• Interest (other). your rental activities. depreciation. For information on travel expen-
• Legal and other professional fees. ses, see chapter 1 of Pub. 463.
• Local transportation expenses. Local benefit taxes. In most cases, you can’t
• Management fees. deduct charges for local benefits that increase To deduct travel expenses, you must
• Mortgage interest paid to banks, etc. the value of your property, such as charges for keep records that follow the rules in
• Points. putting in streets, sidewalks, or water and RECORDS chapter 5 of Pub. 463.
• Rental payments. sewer systems. These charges are nondepreci-
• Repairs. able capital expenditures and must be added to Uncollected rent. If you are a cash basis tax-
• Taxes. the basis of your property. However, you can payer, don’t deduct uncollected rent. Because
• Utilities. deduct local benefit taxes that are for maintain- you haven’t included it in your income, it’s not
ing, repairing, or paying interest charges for the deductible.
Some of these expenses, as well as other less benefits. If you use an accrual method, report income
common ones, are discussed below. when you earn it. If you are unable to collect the
Local transportation expenses. You may be rent, you may be able to deduct it as a business
Depreciation. Depreciation is a capital ex- able to deduct your ordinary and necessary lo- bad debt. See chapter 10 of Pub. 535 for more
pense. It is the mechanism for recovering your cal transportation expenses if you incur them to information about business bad debts.
cost in an income-producing property and must collect rental income or to manage, conserve,
be taken over the expected life of the property. or maintain your rental property. However, Vacant rental property. If you hold property
You can begin to depreciate rental property transportation expenses incurred to travel be- for rental purposes, you may be able to deduct
when it is ready and available for rent. See tween your home and a rental property gener- your ordinary and necessary expenses (includ-
Placed in Service under When Does Deprecia- ally constitute nondeductible commuting costs ing depreciation) for managing, conserving, or
tion Begin and End? in chapter 2. unless you use your home as your principal maintaining the property while the property is
place of business. See Pub. 587, Business Use vacant. However, you can’t deduct any loss of
Insurance premiums paid in advance. If you of Your Home, for information on determining if rental income for the period the property is va-
pay an insurance premium for more than 1 year your home office qualifies as a principal place of cant.
in advance, you can’t deduct the total premium business.
in the year you pay it. For each year of cover- Generally, if you use your personal car, Vacant while listed for sale. If you sell
age, you can deduct only the part of the pre- pickup truck, or light van for rental activities, you property you held for rental purposes, you can
mium payment that applies to that year. See can deduct the expenses using one of two deduct the ordinary and necessary expenses
chapter 6 of Pub. 535 for information on deduc- methods: actual expenses or the standard mile- for managing, conserving, or maintaining the
tible premiums. age rate. For 2022, the standard mileage rate property until it is sold. If the property isn’t held
for business use is 58.5 cents per mile from out and available for rent while listed for sale,
Interest expense. You can deduct mortgage January 1, 2022, to June 30, 2022. From July 1, the expenses aren’t deductible rental expenses.
interest you pay on your rental property. When 2022, to December 31, 2022, the standard mile-
you refinance a rental property for more than age rate for business use is 62.5 cents per mile. Points
the previous outstanding balance, the portion of For more information, see chapter 4 of Pub.
the interest allocable to loan proceeds not rela- 463. The term “points” is often used to describe
ted to rental use generally can’t be deducted as some of the charges paid, or treated as paid, by
a rental expense. Chapter 4 of Pub. 535 ex- To deduct car expenses under either a borrower to take out a loan or a mortgage.
plains mortgage interest in detail. method, you must keep records that These charges are also called loan origination
RECORDS follow the rules in chapter 5 of Pub.
Expenses paid to obtain a mortgage. 463. In addition, you must complete Form 4562, fees, maximum loan charges, or premium
Certain expenses you pay to obtain a mortgage Part V, and attach it to your tax return. charges. Any of these charges (points) that are
on your rental property can’t be deducted as in- solely for the use of money are interest. Be-
terest. These expenses, which include mort- cause points are prepaid interest, you generally
gage commissions, abstract fees, and record- Pre-rental expenses. You can deduct your or- can’t deduct the full amount in the year paid, but
ing fees, are capital expenses that are part of dinary and necessary expenses for managing, must deduct the interest over the term of the
your basis in the property. conserving, or maintaining rental property from loan.
the time you make it available for rent.
Form 1098, Mortgage Interest State- The method used to figure the amount of
ment. If you paid $600 or more of mortgage in- Rental of equipment. You can deduct the rent points you can deduct each year follows the
terest on your rental property to any one per- you pay for equipment that you use for rental original issue discount (OID) rules. In this case,
son, you should receive a Form 1098 or similar purposes. However, in some cases, lease con- points are equivalent to OID, which is the differ-
statement showing the interest you paid for the tracts are actually purchase contracts. If so, you ence between:
year. If you and at least one other person (other can’t deduct these payments. You can recover • Stated redemption price at maturity (gener-
than your spouse if you file a joint return) were the cost of purchased equipment through de- ally the stated principal amount or amount
liable for, and paid interest on, the mortgage, preciation. borrowed) over
and the other person received the Form 1098, • Issue price (generally the proceeds).
report your share of the interest on Schedule E Rental of property. You can deduct the rent
(Form 1040), line 13. Attach a statement to your you pay for property that you use for rental pur- If the difference is equal to or less than zero,
return showing the name and address of the poses. If you buy a leasehold for rental purpo- the amount of OID is zero.
other person. On the dotted line next to line 13, ses, you can deduct an equal part of the cost
enter “See attached.” each year over the term of the lease.
The first step is to determine whether your
total OID (which you may have on bonds or
other investments in addition to the mortgage
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loan),  including  the  OID  resulting  from  the                your  lender.  If  you  don’t  have  this  information,              be  deductible  over  the  term  of  the  new  mort-
points, is insignificant or de minimis. If the OID               consult  your  lender  or  tax  advisor.  In  general,               gage or loan.
isn’t  de  minimis,  you  must  use  the  con-                   the YTM is the discount rate that, when used in 
stant-yield method to figure how much you can                    computing the present value of all principal and                     Points  when  loan  refinance  is  more  than 
deduct.                                                          interest  payments,  produces  an  amount  equal                     the  previous  outstanding  balance.      When 
                                                                 to the principal amount of the loan.                                 you  refinance  a  rental  property  for  more  than 
De minimis OID.           The OID is de minimis if it is                                                                              the previous outstanding balance, the portion of 
less than one-fourth of 1% (0.0025) of the sta-                   Qualified  stated  interest  (QSI).                        In  gen- the points allocable to loan proceeds not rela-
ted  redemption  price  at  maturity  (principal                 eral,  this  is  the  stated  interest  that  is  uncondi-           ted to rental use generally can’t be deducted as 
amount of the loan) multiplied by the number of                  tionally payable in cash or property (other than                     a rental expense.
full years from the date of original issue to ma-                another loan of the issuer) at least annually over 
turity (term of the loan).                                       the term of the loan at a fixed rate.                                    Example.    Charles refinanced a loan with a 
If the OID is de minimis, you can choose one                                                                                          balance  of  $100,000.  The  amount  of  the  new 
of  the  following  ways  to  figure  the  amount  of             Example—Year 1.                    The facts are the same           loan was $120,000. Charles used the additional 
points you can deduct each year.                                 as in the previous example. The YTM on Carol's                       $20,000 to purchase a car. The points allocable 
• On a constant-yield basis over the term of                     loan is 10.2467%, compounded annually.                               to the $20,000 would be treated as nondeducti-
  the loan.                                                       She figured the amount of points (OID) she                          ble personal interest.
• On a straight line basis over the term of the                  could deduct in 2022 as follows.
  loan.                                                                                                                               Repairs and Improvements
• In proportion to stated interest payments.                     Principal amount of the loan . . . . . . . . . .          $100,000
• In its entirety at maturity of the loan.                       Minus: Points (OID) . . . . . . . . . . . . . . . .       – 1,500
                                                                                                                                      Generally, an expense for repairing or maintain-
                                                                 Issue price of the loan . . . . . . . . . . . . . .       $ 98,500
You  make  this  choice  by  deducting  the  OID                 Multiplied by: YTM . . . . . . . . . . . . . . . .        × 0.102467 ing your rental property may be deducted if you 
                                                                                                                                      aren’t required to capitalize the expense.
(points) in a manner consistent with the method                  Total . . . . . . . . . . . . . . . . . . . . . . . . . .   10,093
chosen on your timely filed tax return for the tax               Minus: QSI . . . . . . . . . . . . . . . . . . . . . .    – 10,000   Improvements.    You  must  capitalize  any  ex-
year in which the loan is issued.                                Points (OID) deductible in 2022. . . .                    $     93   pense you pay to improve your rental property. 
                                                                                                                                      An expense is for an improvement if it results in 
Example.          Carol took out a $100,000 mort-                 To figure your deduction in any subsequent                          a  betterment  to  your  property,  restores  your 
gage loan on January 1, 2022, to buy a house                     year, you start with the adjusted issue price. To                    property,  or  adapts  your  property  to  a  new  or 
she will use as a rental during 2022. The loan is                get  the  adjusted  issue  price,  add  to  the  issue               different  use. Table  1-1  shows  examples  of 
to be repaid over 30 years. During 2022, Carol                   price figured in Year 1 any OID previously de-                       many improvements.
paid $10,000 of mortgage interest (stated inter-                 ducted. Then, follow steps (2) and (3), earlier.
est)  to  the  lender.  When  the  loan  was  made,                                                                                       Betterments. Expenses  that  may  result  in 
she  paid  $1,500  in  points  to  the  lender.  The              Example—Year  2.                     Carol  figured  the  de-       a betterment to your property include expenses 
points reduced the principal amount of the loan                  duction for 2023 as follows.                                         for fixing a pre-existing defect or condition, en-
from  $100,000  to  $98,500,  resulting  in  $1,500                                                                                   larging or expanding your property, or increas-
of OID. Carol determines that the points (OID)                   Issue price . . . . . . . . . . . . . . . . . . . . . .     $98,500  ing  the  capacity,  strength,  or  quality  of  your 
she paid are de minimis based on the following                   Plus: Points (OID) deducted                                          property.
computation.                                                      in 2022 . . . . . . . . . . . . . . . . . . . . . . .    +    93
                                                                 Adjusted issue price . . . . . . . . . . . . . . .          $98,593      Restoration. Expenses that may be for re-
Redemption price at maturity (principal                          Multiplied by: YTM . . . . . . . . . . . . . . . .        × 0.102467 storation include expenses for replacing a sub-
amount of the loan) . . . . . . . . . . . . . . .       $100,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . .   10,103   stantial structural part of your property, repairing 
Multiplied by: The term of the                                   Minus: QSI . . . . . . . . . . . . . . . . . . . . . .    – 10,000   damage to your property after you properly ad-
loan in complete years . . . . . . . . . . . .          × 30     Points (OID) deductible in 2023. . . .                    $ 103      justed the basis of your property as a result of a 
Multiplied by . . . . . . . . . . . . . . . . . . . . . × 0.0025                                                                      casualty  loss,  or  rebuilding  your  property  to  a 
De minimis amount. . . . . . . . . . . .                $  7,500                                                                      like-new condition.
                                                                 Loan or mortgage ends.                      If your loan or mort-
The  points  (OID)  she  paid  ($1,500)  are  less               gage ends, you may be able to deduct any re-                             Adaptation. Expenses  that  may  be  for 
than  the  de  minimis  amount  ($7,500).  There-                maining points (OID) in the tax year in which the                    adaptation  include  expenses  for  altering  your 
fore,  Carol  has  de  minimis  OID  and  she  can               loan or mortgage ends. A loan or mortgage may                        property  to  a  use  that  isn’t  consistent  with  the 
choose one of the four ways discussed earlier                    end due to a refinancing, prepayment, foreclo-                       intended  ordinary  use  of  your  property  when 
to figure the amount she can deduct each year.                   sure, or similar event. However, if the refinanc-                    you began renting the property.
Under the straight line method, she can deduct                   ing  is  with  the  same  lender,  the  remaining 
$50 each year for 30 years.                                      points  (OID)  generally  aren’t  deductible  in  the                    De  minimis  safe  harbor  for  tangible 
                                                                 year  in  which  the  refinancing  occurs,  but  may                 property.   If  you  elect  this  de  minimis  safe 
Constant-yield  method.                 If  the  OID  isn’t  de 
minimis,  you  must  use  the  constant-yield                    Table 1-1.            Examples of Improvements
method  to  figure  how  much  you  can  deduct 
each year.                                                       Additions                                       Miscellaneous                           Plumbing
You figure your deduction for the first year in                  Bedroom                                         Storm windows, doors                    Septic system
the following manner.                                            Bathroom                                        New roof                                Water heater
1. Determine the issue price of the loan. If                     Deck                                            Central vacuum                          Soft water system
  you paid points on the loan, the issue price                   Garage                                          Wiring upgrades                         Filtration system
  is generally the difference between the                        Porch                                           Satellite dish                           
  principal and the points.                                      Patio                                           Security system                         Interior Improvements
2. Multiply the result in (1) by the yield to ma-                                                                                                        Built-in appliances
  turity (defined later).                                        Lawn & Grounds                                  Heating & Air Conditioning              Kitchen modernization
                                                                 Landscaping                                     Heating system                          Flooring
3. Subtract any qualified stated interest pay-                   Driveway                                        Central air conditioning                Wall-to-wall carpeting
  ments (defined later) from the result in (2).                  Walkway                                         Furnace                                  
  This is the OID you can deduct in the first                    Fence                                           Duct work                               Insulation
  year.                                                          Retaining wall                                  Central humidifier                      Attic
Yield to maturity (YTM).                      This rate is gen-  Sprinkler system                                Filtration system                       Walls, floor
erally  shown  in  the  literature  you  receive  from           Swimming pool                                                                           Pipes, duct work
                                                                       Chapter 1               Rental Income and Expenses (If No Personal Use of Dwelling)    Page 5

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harbor for your rental activity for the tax year, straight line method (same deduction each depreciated. You may, however, be able to de-
you aren’t required to capitalize the de minimis year). preciate certain land preparation costs if the
costs of acquiring or producing certain real and The prescribed depreciation methods for costs are so closely associated with other de-
tangible personal property and may deduct rental real estate aren’t accelerated, so the de- preciable property that you can determine a life
these amounts as rental expenses on line 19 of preciation deduction isn’t adjusted for the AMT. for them along with the life of the associated
Schedule E. For more information on electing However, accelerated methods are generally property.
and using the de minimis safe harbor for tangi- used for other property connected with rental
ble property, see chapter 1 of Pub. 535. activities (for example, appliances and Example. You built a new house to use as
wall-to-wall carpeting). a rental and paid for grading, clearing, seeding,
Safe harbor for routine maintenance. If and planting bushes and trees. Some of the
you determine that your cost was for an im- To find out if you are subject to the AMT,
provement to a building or equipment, you may see the Instructions for Form 6251. bushes and trees were planted right next to the
house, while others were planted around the
still be able to deduct your cost under the rou- outer border of the lot. If you replace the house,
tine maintenance safe harbor. See Pub. 535 for you would have to destroy the bushes and trees
more information. The Basics right next to it. These bushes and trees are
closely associated with the house, so they have
Separate the costs of repairs and im- The following section discusses the information a determinable useful life. Therefore, you can
RECORDS cords. You will need to know the cost
provements, and keep accurate re- you will need to have about the rental property depreciate them. Add your other land prepara-
and the decisions to be made before figuring tion costs to the basis of your land because
of improvements when you sell or depreciate your depreciation deduction. they have no determinable life and you can’t de-
your property.
preciate them.
The expenses you capitalize for improving What Rental Property Can Be
your property can generally be depreciated as if Depreciated? Excepted property. Even if the property
meets all the requirements listed earlier under
the improvement were separate property. What Rental Property Can Be Depreciated, you
You can depreciate your property if it meets all can’t depreciate the following property.
the following requirements. • Property placed in service and disposed of
• You own the property. (or taken out of business use) in the same
• You use the property in your business or year.
income-producing activity (such as rental • Equipment used to build capital improve-
property). ments. You must add otherwise allowable
2. • The property has a determinable useful depreciation on the equipment during the
life. period of construction to the basis of your
• The property is expected to last more than improvements.
1 year.
Depreciation of For more information, see chapter 1 of Pub.
Property you own. To claim depreciation, you 946.
must usually be the owner of the property. You
Rental Property are considered to be the owner of the property When Does Depreciation
even if it’s subject to a debt.
You recover the cost of income-producing prop- Begin and End?
erty through yearly tax deductions. You do this Rented property. Generally, if you pay rent
by depreciating the property; that is, by deduct- for property, you can’t depreciate that property. You begin to depreciate your rental property
ing some of the cost each year on your tax re- Usually, only the owner can depreciate it. How- when you place it in service for the production
turn. ever, if you make permanent improvements to of income. You stop depreciating it either when
leased property, you may be able to depreciate you have fully recovered your cost or other ba-
Three factors determine how much depreciation the improvements. See Additions or improve- sis, or when you retire it from service, whichever
you can deduct each year: (1) your basis in the ments to property, later in this chapter, under happens first.
property, (2) the recovery period for the prop- Recovery Periods Under GDS.
erty, and (3) the depreciation method used. You Placed in Service
can’t simply deduct your mortgage or principal Cooperative apartments. If you are a ten-
payments, or the cost of furniture, fixtures, and ant-stockholder in a cooperative housing corpo-
equipment, as an expense. ration and rent your cooperative apartment to You place property in service in a rental activity
others, you can depreciate your stock in the when it is ready and available for a specific use
You can deduct depreciation only on the part of corporation. See chapter 4. in that activity. Even if you aren’t using the prop-
your property used for rental purposes. Depre- erty, it is in service when it is ready and availa-
ciation reduces your basis for figuring gain or Property having a determinable useful life. ble for its specific use.
loss on a later sale or exchange. To be depreciable, your property must have a
determinable useful life. This means that it must Example 1. On November 22 of last year,
You may have to use Form 4562 to figure and be something that wears out, decays, gets used you purchased a dishwasher for your rental
report your depreciation. See Which Forms To up, becomes obsolete, or loses its value from property. The appliance was delivered on De-
Use in chapter 3. Also, see Pub. 946. natural causes. cember 7, but wasn’t installed and ready for use
until January 3 of this year. Because the dish-
Section 179 deduction. The section 179 de- washer wasn’t ready for use last year, it isn’t
duction is a means of recovering part or all of What Rental Property Can’t Be considered placed in service until this year.
the cost of certain qualifying property in the year Depreciated? If the appliance had been installed and
you place the property in service. It is separate ready for use when it was delivered in Decem-
from your depreciation deduction. See chap- Certain property can’t be depreciated. This in- ber of last year, it would have been considered
ter 2 of Pub. 946 for more information about cludes land and certain excepted property. placed in service in December, even if it wasn’t
claiming this deduction. actually used until this year.
Land. You can’t depreciate the cost of land be-
Alternative minimum tax (AMT). If you use cause land generally doesn’t wear out, become Example 2. On April 6, you purchased a
accelerated depreciation, you may be subject to obsolete, or get used up. But if it does, the loss house to use as residential rental property. You
the AMT. Accelerated depreciation allows you is accounted for upon disposition. The costs of made extensive repairs to the house and had it
to deduct more depreciation earlier in the recov- clearing, grading, planting, and landscaping are ready for rent on July 5. You began to advertise
ery period than you could deduct using a usually all part of the cost of land and can’t be the house for rent in July and actually rented it
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beginning September 1. The house is consid- If you placed rental property in service be- debt obligation, in other property, or in services.
ered placed in service in July when it was ready fore 1987, you are using one of the following Your cost also includes amounts you pay for:
and available for rent. You can begin to depreci- methods. • Sales tax charged on the purchase (but
ate the house in July. • Accelerated Cost Recovery System see Exception next),
(ACRS) for property placed in service after • Freight charges to obtain the property, and
Example 3. You moved from your home in 1980 but before 1987. • Installation and testing charges.
July. During August and September, you made • Straight line or declining balance method
several repairs to the house. On October 1, you over the useful life of property placed in Exception. If you deducted state and local
listed the property for rent with a real estate service before 1981. general sales taxes as an itemized deduction
on Schedule A (Form 1040), don’t include as
company, which rented it on December 1. The See MACRS Depreciation, later, for more infor- part of your cost basis the sales taxes you de-
property is considered placed in service on Oc- mation. ducted. Such taxes were deductible before
tober 1, the date when it was available for rent.
1987 and after 2003.
Rental property placed in service before
Conversion to business use. If you place 2022. Continue to use the same method of fig- Loans with low or no interest. If you buy
property in service in a personal activity, you uring depreciation that you used in the past. property on any payment plan that charges little
can’t claim depreciation. However, if you
or no interest, the basis of your property is your
change the property's use to business or the Use of real property changed. Generally, stated purchase price, less the amount consid-
production of income, you can begin to depreci- you must use MACRS to depreciate real prop- ered to be unstated interest. See Unstated In-
ate it at the time of the change. You place the erty that you acquired for personal use before terest and Original Issue Discount (OID) in Pub.
property in service for business or income-pro- 1987 and changed to business or income-pro- 537, Installment Sales.
ducing use on the date of the change. ducing use after 1986. This includes your resi-
dence that you changed to rental use. See Real property. If you buy real property, such
Example. You bought a house and used it Property Owned or Used in 1986 in chapter 1 of as a building and land, certain fees and other
as your personal home several years before Pub. 946 for those situations in which MACRS expenses you pay are part of your cost basis in
you converted it to rental property. Although its isn’t allowed. the property.
specific use was personal and no depreciation
was allowable, you placed the home in service Improvements made after 1986. Treat an im- Real estate taxes. If you buy real property
when you began using it as your home. You can provement made after 1986 to property you and agree to pay real estate taxes on it that
begin to claim depreciation in the year you con- placed in service before 1987 as separate de- were owed by the seller and the seller doesn’t
verted it to rental property because at that time preciable property. As a result, you can depreci- reimburse you, the taxes you pay are treated as
its use changed to the production of income. ate that improvement as separate property un- part of your basis in the property. You can’t de-
der MACRS if it is the type of property that duct them as taxes paid.
Idle Property otherwise qualifies for MACRS depreciation. If you reimburse the seller for real estate
For more information about improvements, see taxes the seller paid for you, you can usually
Continue to claim a deduction for depreciation Additions or improvements to property, later in deduct that amount. Don’t include that amount
on property used in your rental activity even if it this chapter, under Recovery Periods Under in your basis in the property.
is temporarily idle (not in use). For example, if GDS.
Settlement fees and other costs. The fol-
you must make repairs after a tenant moves This publication discusses MACRS de- lowing settlement fees and closing costs for
out, you still depreciate the rental property dur- ! preciation only. If you need information buying the property are part of your basis in the
ing the time it isn’t available for rent. CAUTION about depreciating property placed in property.
service before 1987, see Pub. 534. • Abstract fees.
Cost or Other Basis Fully • Charges for installing utility services.
Recovered • Legal fees.
Basis of Depreciable • Recording fees.
You must stop depreciating property when the Property • Surveys.
total of your yearly depreciation deductions • Transfer taxes.
equals your cost or other basis of your property. The basis of property used in a rental activity is • Title insurance.
For this purpose, your yearly depreciation de- generally its adjusted basis when you place it in • Any amounts the seller owes that you
ductions include any depreciation that you were service in that activity. This is its cost or other agree to pay, such as back taxes or inter-
allowed to claim, even if you didn’t claim it. See basis when you acquired it, adjusted for certain est, recording or mortgage fees, charges
Basis of Depreciable Property, later. items occurring before you place it in service in for improvements or repairs, and sales
the rental activity. commissions.
Retired From Service The following are settlement fees and clos-
If you depreciate your property under ing costs you can’t include in your basis in the
You stop depreciating property when you retire MACRS, you may also have to reduce your ba- property.
it from service, even if you haven’t fully recov- sis by certain deductions and credits with re- 1. Fire insurance premiums.
ered its cost or other basis. You retire property spect to the property.
from service when you permanently withdraw it 2. Rent or other charges relating to occu-
from use in a trade or business or from use in Basis and adjusted basis are explained in pancy of the property before closing.
the production of income because of any of the the following discussions.
3. Charges connected with getting or refi-
following events. If you used the property for personal nancing a loan, such as:
• You sell or exchange the property. ! purposes before changing it to rental a. Points (discount points, loan origina-
• You convert the property to personal use. CAUTION use, its basis for depreciation is the
• You abandon the property. lesser of its adjusted basis or its FMV when you tion fees),
• The property is destroyed. change it to rental use. See Basis of Property b. Loan assumption fees,
Changed to Rental Use in chapter 4.
c. Cost of a credit report, and
Depreciation Methods d. Fees for an appraisal required by a
Cost Basis lender.
Generally, you must use the Modified Acceler-
ated Cost Recovery System (MACRS) to de- The basis of property you buy is usually its cost. Also, don’t include amounts placed in es-
preciate residential rental property placed in The cost is the amount you pay for it in cash, in crow for the future payment of items such as
service after 1986. taxes and insurance.
Chapter 2 Depreciation of Rental Property Page 7

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Assumption of a mortgage. If you buy • Amounts spent after a casualty to restore • Casualty loss not covered by insurance for
property and become liable for an existing mort- the damaged property. which you took a deduction.
gage on the property, your basis is the amount • The cost of extending utility service lines to • Amount(s) you receive for granting an
you pay for the property plus the amount re- the property. easement.
maining to be paid on the mortgage. • Legal fees, such as the cost of defending • Residential energy credits you were al-
and perfecting title, or settling zoning is- lowed before 1986 or after 2005 if you
Example. You buy a building for $60,000 sues. added the cost of the energy items to the
cash and assume a mortgage of $240,000 on it. basis of your home.
Your basis is $300,000. Additions or improvements. Add to the • Exclusion from income of subsidies for en-
basis of your property the amount an addition or ergy conservation measures.
Separating cost of land and buildings. If improvement actually costs you, including any • Special depreciation allowance or a sec-
you buy buildings and your cost includes the amount you borrowed to make the addition or tion 179 deduction claimed on qualified
cost of the land on which they stand, you must improvement. This includes all direct costs, property.
divide the cost between the land and the build- such as material and labor, but doesn’t include • Depreciation you deducted or could have
ings to figure the basis for depreciation of the your own labor. It also includes all expenses re- deducted on your tax returns under the
buildings. The part of the cost that you allocate lated to the addition or improvement. method of depreciation you chose. If you
to each asset is the ratio of the FMV of that as- For example, if you had an architect draw up didn’t deduct enough or deducted too
set to the FMV of the whole property at the time plans for remodeling your property, the archi- much in any year, see Depreciation under
you buy it. tect's fee is a part of the cost of the remodeling. Decreases to Basis in Pub. 551.
If you aren’t certain of the FMVs of the land Or, if you had your lot surveyed to put up a
and the buildings, you can divide the cost be- fence, the cost of the survey is a part of the cost If your rental property was previously used
tween them based on their assessed values for of the fence. as your main home, you must also decrease the
real estate tax purposes. Keep separate accounts for depreciable ad- basis by the following.
ditions or improvements made after you place • Gain you postponed from the sale of your
Example. You buy a house and land for the property in service in your rental activity. For main home before May 7, 1997, if the re-
$200,000. The purchase contract doesn’t spec- information on depreciating additions or im- placement home was converted to your
ify how much of the purchase price is for the provements, see Additions or improvements to rental property.
house and how much is for the land. property, later in this chapter, under Recovery • District of Columbia first-time homebuyer
The latest real estate tax assessment on the Periods Under GDS. credit allowed on the purchase of your
property was based on an assessed value of main home after August 4, 1997, and be-
$160,000, of which $136,000 was for the house The cost of landscaping improvements fore January 1, 2012.
and $24,000 was for the land. ! is usually treated as an addition to the • Amount of qualified principal residence in-
You can allocate 85% ($136,000 ÷ CAUTION basis of the land, which isn’t deprecia- debtedness discharged on or after January
$160,000) of the purchase price to the house ble. However, see What Rental Property Can’t 1, 2007.
and 15% ($24,000 ÷ $160,000) of the purchase Be Depreciated, earlier.
price to the land.
Your basis in the house is $170,000 (85% of Assessments for local improvements. Special Depreciation
$200,000) and your basis in the land is $30,000 Assessments for items which tend to increase
(15% of $200,000). the value of property, such as streets and side- Allowance
walks, must be added to the basis of the prop-
erty. For example, if your city installs curbing on For 2022, some properties used in connection
Basis Other Than Cost the street in front of your house, and assesses with residential real property activities may
you and your neighbors for its cost, you must qualify for a special depreciation allowance.
You can’t use cost as a basis for property that add the assessment to the basis of your prop- This allowance is figured before you figure your
you received: erty. Also, add the cost of legal fees paid to ob- regular depreciation deduction. See chapter 3
• In return for services you performed; tain a decrease in an assessment levied against of Pub. 946 for details. Also, see the instruc-
• In an exchange for other property; property to pay for local improvements. You tions for Form 4562, line 14.
• As a gift; can’t deduct these items as taxes or depreciate
• From your spouse, or from your former them. If you qualify for, but choose not to take, a
spouse as the result of a divorce; or However, you can deduct assessments for special depreciation allowance, you must attach
• As an inheritance. the purpose of maintenance or repairs or for the a statement to your return. The details of this
purpose of meeting interest charges related to election are in chapter 3 of Pub. 946 and the in-
If you received property in one of these the improvements. Don’t add them to your basis structions for Form 4562, line 14.
ways, see Pub. 551 for information on how to in the property.
figure your basis.
Deducting vs. capitalizing costs. Don’t MACRS Depreciation
add to your basis costs you can deduct as cur-
Adjusted Basis rent expenses. However, there are certain costs Most business and investment property placed
you can choose either to deduct or to capitalize. in service after 1986 is depreciated using
To figure your property's basis for depreciation, If you capitalize these costs, include them in MACRS.
you may have to make certain adjustments (in- your basis. If you deduct them, don’t include
creases and decreases) to the basis of the them in your basis. This section explains how to determine
property for events occurring between the time The costs you may choose to deduct or cap- which MACRS depreciation system applies to
you acquired the property and the time you italize include carrying charges, such as interest your property. It also discusses other informa-
placed it in service for business or the produc- and taxes, that you must pay to own property. tion you need to know before you can figure de-
tion of income. The result of these adjustments For more information about deducting or preciation under MACRS. This information in-
to the basis is the adjusted basis. capitalizing costs and how to make the election, cludes the property's:
see Carrying Charges in chapter 7 of Pub. 535.
Increases to basis. You must increase the • Recovery class,
• Applicable recovery period,
basis of any property by the cost of all items Decreases to basis. You must decrease the • Convention,
properly added to a capital account. These in- basis of your property by any items that repre- • Placed-in-service date,
clude the following. sent a return of your cost. These include the fol- • Basis for depreciation, and
• The cost of any additions or improvements lowing. • Depreciation method.
made before placing your property into • Insurance or other payment you receive as
service as a rental that have a useful life of the result of a casualty or theft loss.
more than 1 year.
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Depreciation Systems                                     Under MACRS, property that you placed in                • 15-year property. This class includes 
                                                        service during 2022 in your rental activities gen-         roads, fences, and shrubbery (if deprecia-
                                                        erally falls into one of the following classes.            ble).
MACRS consists of two systems that determine              5-year property. This class includes com-              • Residential rental property. This class 
how you depreciate your property—the General            •
                                                          puters and peripheral equipment, office                  includes any real property that is a rental 
Depreciation System (GDS) and the Alternative             machinery (typewriters, calculators, cop-                building or structure (including a mobile 
Depreciation  System  (ADS).  You  must  use              iers, etc.), automobiles, and light trucks.              home) for which 80% or more of the gross 
GDS unless you are specifically required by law            This  class  also  includes  appliances,                rental income for the tax year is from dwell-
to use ADS or you elect to use ADS.                       carpeting, and furniture used in a residen-              ing units. It doesn’t include a unit in a hotel, 
                                                           tial rental real estate activity.                       motel, inn, or other establishment where 
Excluded Property                                          Depreciation is limited on automobiles                  more than half of the units are used on a 
                                                          and other property used for transportation               transient basis. If you live in any part of the 
You  can’t  use  MACRS  for  certain  personal            and  property  of  a  type  generally  used  for         building or structure, the gross rental in-
property  (such  as  furniture  or  appliances)            entertainment,  recreation,  or  amusement.             come includes the fair rental value of the 
placed in service in your rental property in 2022         See chapter 5 of Pub. 946.                               part you live in. 
if  it  had  been  previously  placed  in  service  be-                                                                   The  other  property  classes  generally 
fore 1987, when MACRS became effective.                 • 7-year property. This class includes of-
                                                          fice furniture and equipment (desks, file                       don’t  apply  to  property  used  in  rental 
In  most  cases,  personal  property  is  exclu-          cabinets, and similar items). This class               CAUTION! activities.  These  classes  aren’t  dis-
ded from MACRS if you (or a person related to             also includes any property that doesn’t                cussed  in  this  publication.  See  Pub.  946  for 
you) owned or used it in 1986 or if your tenant is        have a class life and that hasn’t been des-            more information.
a  person  (or  someone  related  to  the  person)        ignated by law as being in any other class.
who  owned  or  used  it  in  1986.  However,  the 
property  isn’t  excluded  if  your  2022  deduction 
under MACRS (using a half-year convention) is 
less than the deduction you would have under            Table 2-1. MACRS Recovery Periods for 
ACRS. For more information, see  What Method                       Property Used in
Can You Use To Depreciate Your Property? in                        Rental Activities                                                         Keep for Your Records
chapter 1 of Pub. 946.                                                                                                                             MACRS Recovery Period 
Electing ADS                                                                                                                                       General        Alternative
                                                                                                                                                   Depreciation   Depreciation
                                                        Type of Property                                                                           System         System 
If you choose, you can use the ADS method for 
most property. Under ADS, you use the straight          Computers and their peripheral equipment . . . . . . . . . . . . . .                       5 years        5 years
line method of depreciation.                            Office machinery, such as:
                                                         • Typewriters
The election of ADS for one item in a class              • Calculators
of  property  generally  applies  to  all  property  in  • Copiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         5 years        6 years
that class placed in service during the tax year        Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        5 years        5 years
of the election. However, the election applies on       Light trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     5 years        5 years
a  property-by-property  basis  for  residential 
rental property and nonresidential real property.       Appliances, such as:
                                                         • Stoves
If you choose to use ADS for your residential            • Refrigerators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           5 years        9 years
rental  property,  the  election  must  be  made  in    Carpets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    5 years        9 years
the first year the property is placed in service.       Furniture used in rental property . . . . . . . . . . . . . . . . . . . . . .              5 years        9 years
Once you make this election, you can never re-          Office furniture and equipment, such as:
voke it.                                                 • Desks
                                                         • Files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       7 years        10 years
For property placed in service during 2022,             Any property that doesn’t have a class life and that hasn’t been 
you make the election to use ADS by entering            designated by law as being in any other class . . . . . . . . . . . .                      7 years        12 years
the  depreciation  on  Form  4562,  Part  III,  Sec-
tion C, line 20c.                                       Roads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    15 years       20 years
                                                        Shrubbery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      15 years       20 years
Property Classes Under GDS                              Fences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     15 years       20 years
                                                        Residential rental property (buildings or structures) and 
Each item of property that can be depreciated           structural components such as furnaces, waterpipes, venting, 
under MACRS is assigned to a property class,            etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.5 years     30 years1
determined by its class life. The property class 
generally determines the depreciation method,           Additions and improvements, such as a new roof           . . . . . . . . .                 The same recovery period as 
recovery period, and convention.                                                                                                                   that of the property to which the 
                                                                                                                                                   addition or improvement is 
The property classes under GDS are:                                                                                                                made, determined as if the 
• 3-year property,                                                                                                                                 property were placed in service 
• 5-year property,                                                                                                                                 at the same time as the addition 
• 7-year property,                                                                                                                                 or improvement.
• 10-year property,
• 15-year property,                                     1 40 years for property placed in service before January 1, 2018. However, the ADS recovery period for 
• 20-year property,
• Nonresidential real property, and                     residential rental property placed in service before January 1, 2018, is 30 years if the property is held by an 
• Residential rental property.                          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. 
                                                                                                       Chapter 2 Depreciation of Rental Property    Page 9

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Recovery Periods Under quarter of a tax year as placed in service, or dis- in that class that is placed in service during the
posed of, at the midpoint of the quarter. tax year of the election. You make this election
GDS on Form 4562. In Part III, column (f), enter “150
Example. During the tax year, Tom pur- DB.” Once you make this election, you can’t
The recovery period of property is the number chased the following items to use in his rental change to another method.
of years over which you recover its cost or other property. He elects not to claim the special de- If you use either the 200% or 150% DB
basis. The recovery periods are generally lon- preciation allowance discussed earlier. method, figure your deduction using the straight
ger under ADS than GDS. • A dishwasher for $400 that he placed in line method in the first tax year that the use of
service in January. the straight line method gives you an equal or
The recovery period of property depends on • Used furniture for $100 that he placed in larger deduction than the use of the 200% or
its property class. Under GDS, the recovery pe- service in September. 150% DB method.
riod of an asset is generally the same as its • A refrigerator for $800 that he placed in You can also choose to use the straight line
property class. service in October. method with a half-year or mid-quarter conven-
Class lives and recovery periods for most Tom uses the calendar year as his tax year. tion for 5-, 7-, or 15-year property. The choice to
assets are listed in Appendix B of Pub. 946. The total basis of all property placed in service use the straight line method for one item in a
See Table 2-1 for recovery periods of property that year is $1,300. The $800 basis of the refrig- class of property applies to all property in that
commonly used in residential rental activities. erator placed in service during the last 3 months class that is placed in service during the tax
of his tax year exceeds $520 (40% × $1,300). year of the election. You elect the straight line
Additions or improvements to property. Tom must use the mid-quarter convention in- method on Form 4562. In Part III, column (f),
Treat additions or improvements you make to stead of the half-year convention for all three enter “S/L.” Once you make this election, you
your depreciable rental property as separate items. can’t change to another method.
property items for depreciation purposes.
The property class and recovery period of Half-year convention. The half-year conven- MACRS Percentage Tables
the addition or improvement are the ones that tion is used if neither the mid-quarter conven-
would apply to the original property if you had tion nor the mid-month convention applies. Un- You can use the percentages in Table 2-2 to
placed it in service at the same time as the ad- der this convention, you treat all property compute annual depreciation under MACRS.
dition or improvement. placed in service, or disposed of, during a tax The tables show the percentages for the first
The recovery period for an addition or im- year as placed in service, or disposed of, at the few years or until the change to the straight line
provement to property begins on the later of: midpoint of that tax year. method is made. See Appendix A of Pub. 946
• The date the addition or improvement is If this convention applies, you deduct a half for complete tables. The percentages in Tables
placed in service, or year of depreciation for the first year and the 2-2a, 2-2b, and 2-2c make the change from us-
• The date the property to which the addition last year that you depreciate the property. You ing the DB method to the straight line method in
or improvement was made is placed in deduct a full year of depreciation for any other the first tax year that the use of the straight line
service. year during the recovery period. method gives you an equal or greater deduction
than the use of the DB method.
Example. You own a residential rental Figuring Your Depreciation If you elect to use the straight line method
house that you have been renting since 1999
and depreciating under ACRS. You built an ad- Deduction for 5-, 7-, or 15-year property, or the 150% DB
dition onto the house and placed it in service in method for 5- or 7-year property, use the tables
2022. You must use MACRS for the addition. You can figure your MACRS depreciation de- in Appendix A of Pub. 946.
Under GDS, the addition is depreciated as resi- duction in one of two ways. The deduction is
dential rental property over 27.5 years. substantially the same both ways. You can fig- How to use the percentage tables. You must
ure the deduction using either: apply the table rates to your property's unadjus-
• The depreciation method and convention ted basis (defined later) each year of the recov-
Conventions that apply over the recovery period of the ery period.
property, or Once you begin using a percentage table to
A convention is a method established under • The percentage from the MACRS percent- figure depreciation, you must continue to use it
MACRS to set the beginning and end of the re- age tables. for the entire recovery period unless there is an
covery period. The convention you use deter- adjustment to the basis of your property for a
mines the number of months for which you can In this publication, we will use the percent- reason other than:
claim depreciation in the year you place prop- age tables. For instructions on how to compute
erty in service and in the year you dispose of the deduction, see chapter 4 of Pub. 946. 1. Depreciation allowed or allowable, or
the property. 2. An addition or improvement that is depre-
Residential rental property. You must use ciated as a separate item of property.
Mid-month convention. A mid-month conven- the straight line method and a mid-month con-
tion is used for all residential rental property and vention for residential rental property. In the first If there is an adjustment for any reason
nonresidential real property. Under this conven- year that you claim depreciation for residential other than (1) or (2), for example, because of a
tion, you treat all property placed in service, or rental property, you can claim depreciation only deductible casualty loss, you can no longer use
disposed of, during any month as placed in for the number of months the property is in use. the table. For the year of the adjustment and for
service, or disposed of, at the midpoint of that Use the mid-month convention (explained un- the remaining recovery period, figure deprecia-
month. der Conventions, earlier). tion using the property's adjusted basis at the
end of the year and the appropriate deprecia-
Mid-quarter convention. A mid-quarter con- 5-, 7-, or 15-year property. For property in the tion method, as explained earlier under Figuring
vention must be used if the mid-month conven- 5- or 7-year class, use the 200% declining bal- Your Depreciation Deduction. See Figuring the
tion doesn’t apply and the total depreciable ba- ance (DB) method and a half-year convention. Deduction Without Using the Tables in chap-
sis of MACRS property placed in service in the However, in limited cases, you must use the ter 4 of Pub. 946.
last 3 months of a tax year (excluding nonresi- mid-quarter convention, if it applies. For prop- Unadjusted basis. This is the same basis
dential real property, residential rental property, erty in the 15-year class, use the 150% DB you would use to figure gain on a sale (see Ba-
and property placed in service and disposed of method and a half-year convention, unless the sis of Depreciable Property, earlier), but without
in the same year) is more than 40% of the total mid-quarter convention applies. reducing your original basis by any MACRS de-
basis of all such property you place in service You can also choose to use the 150% DB preciation taken in earlier years.
during the year. method for property in the 5- or 7-year class.
Under this convention, you treat all property The choice to use the 150% method for one
placed in service, or disposed of, during any item in a class of property applies to all property
Page 10 Chapter 2 Depreciation of Rental Property

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However, you do reduce your original basis           ble  2-2a  for  5-year  property,  Table  2-2b  for   in  the  refrigerator  is  $1,000.  Both  are  5-year 
by  other  amounts  claimed  on  the  property,  in- 7-year  property,  and  Table  2-2c  for  15-year     property.  Using  the  half-year  convention  col-
cluding:                                             property. Use the percentage in the second col-       umn in Table 2-2a, the depreciation percentage 
•  Any amortization,                                 umn  (half-year  convention)  unless  you  are  re-   for Year 1 is 20%. For that year, your deprecia-
•  Any section 179 deduction, and                    quired  to  use  the mid-quarter  convention  (ex-    tion deduction is $120 ($600 × 20% (0.20)) for 
•  Any special depreciation allowance.               plained earlier). If you must use the mid-quarter     the  stove  and  $200  ($1,000  ×  20%  (0.20))  for 
For  more  information,  see  chapter  4  of  Pub.   convention, use the column that corresponds to        the refrigerator.
946.                                                 the  calendar  year  quarter  in  which  you  placed  For  Year  2,  the  depreciation  percentage  is 
                                                     the property in service.                              32%. That year's depreciation deduction will be 
Tables  2-2a,  2-2b,  and  2-2c. The  percen-                                                              $192  ($600  ×  32%  (0.32))  for  the  stove  and 
tages  in  these  tables  take  into  account  the   Example 1. You purchased a stove and re-              $320 ($1,000 × 32% (0.32)) for the refrigerator.
half-year and mid-quarter conventions. Use Ta-       frigerator  and  placed  them  in  service  in  June. 
                                                     Your basis in the stove is $600 and your basis        Example  2.      Assume  the  same  facts  as  in 
                                                                                                           Example  1,  except  you  buy  the  refrigerator  in 
Table 2-2. Optional MACRS GDS Percentage Tables                                                            October instead of June. Because the refrigera-
                                                                                                           tor was placed in service in the last 3 months of 
a. MACRS 5-Year Property (200% DB)                                                                         the tax year, and its basis ($1,000) is more than 
           Half-year convention                      Mid-quarter convention                                40% of the total basis of all property placed in 
                                                                                                           service during the year ($1,600 × 40% (0.40) = 
Year                                   First         Second               Third   Fourth                   $640), you are required to use the mid-quarter 
                                       quarter       quarter              quarter quarter                  convention  to  figure  depreciation  on  both  the 
                                                                                                           stove and refrigerator.
     1     20.00%                      35.00%        25.00%               15.00%  5.00%                    Because you placed the refrigerator in serv-
     2     32.00                       26.00         30.00                34.00   38.00                    ice  in  October,  you  use  the  fourth  quarter  col-
     3     19.20                       15.60         18.00                20.40   22.80                    umn  of  Table  2-2a  and  find  the  depreciation 
     4     11.52                       11.01         11.37                12.24   13.68                    percentage for Year 1 is 5%. Your depreciation 
     5     11.52                       11.01         11.37                11.30   10.94                    deduction  for  the  refrigerator  is  $50  ($1,000  x 
     6               5.76              1.38          4.26                 7.06    9.58                     5% (0.05)).
b. MACRS 7-Year Property (200% DB)                                                                         Because you placed the stove in service in 
                                                                                                           June, you use the second quarter column of Ta-
           Half-year convention                      Mid-quarter convention                                ble  2-2a  and  find  the  depreciation  percentage 
                                                                                                           for Year 1 is 25%. For that year, your deprecia-
Year                                   First         Second               Third   Fourth                   tion  deduction  for  the  stove  is  $150  ($600  x 
                                       quarter       quarter              quarter quarter                  25% (0.25)).
     1     14.29%                      25.00%        17.85%               10.71%  3.57%                    Table 2-2d. Use this table when you are using 
     2     24.49                       21.43         23.47                25.51   27.55                    the GDS 27.5-year option for residential rental 
     3     17.49                       15.31         16.76                18.22   19.68                    property.  Find  the  row  for  the  month  that  you 
     4     12.49                       10.93         11.97                13.02   14.06                    placed the property in service. Use the percen-
     5               8.93              8.75          8.87                 9.30    10.04                    tages listed for that month to figure your depre-
     6               8.92              8.74          8.87                 8.85    8.73                     ciation deduction. The mid-month convention is 
     7               8.93              8.75          8.87                 8.86    8.73                     taken into account in the percentages shown in 
c. MACRS 15-Year Property (150% DB)                                                                        the  table.  Continue  to  use  the  same  row 
           Half-year convention                      Mid-quarter convention                                (month)  under  the  column  for  the  appropriate 
                                                                                                           year.
Year                                   First         Second               Third   Fourth
                                       quarter       quarter              quarter quarter                  Example.    You  purchased  a  single  family 
                                                                                                           rental house for $185,000 and placed it in serv-
     1               5.00%             8.75%         6.25%                3.75%   1.25%                    ice on February 8. The sales contract showed 
     2               9.50              9.13          9.38                 9.63    9.88                     that  the  building  cost  $160,000  and  the  land 
     3               8.55              8.21          8.44                 8.66    8.89                     cost $25,000. Your basis for depreciation is its 
     4               7.70              7.39          7.59                 7.80    8.00                     original cost, $160,000. This is the first year of 
     5               6.93              6.65          6.83                 7.02    7.20                     service  for  your  residential  rental  property  and 
     6               6.23              5.99          6.15                 6.31    6.48                     you decide to use GDS, which has a recovery 
     7               5.90              5.90          5.91                 5.90    5.90                     period of 27.5 years. Using Table 2-2d, you find 
     8               5.90              5.91          5.90                 5.90    5.90                     that  the  depreciation  percentage  for  property 
d. Residential Rental Property-GDS  (27.5-year S/L with mid-month convention)                              placed  in  service  in  February  of  Year  1  is 
                                                                                                           3.182%.  That  year's  depreciation  deduction  is 
           Use the row for the month of the taxable year placed in service.                                $5,091 ($160,000 x 3.182% (0.03182)).
           Year 1          Year 2      Year 3        Year 4               Year 5  Year 6
     Jan.  3.485%          3.636%      3.636%        3.636%               3.636%  3.636%                   Figuring MACRS 
     Feb.  3.182           3.636       3.636         3.636                3.636   3.636                    Depreciation Under ADS
     March 2.879           3.636       3.636         3.636                3.636   3.636
     Apr.  2.576           3.636       3.636         3.636                3.636   3.636
     May   2.273           3.636       3.636         3.636                3.636   3.636                    Table 2-1 shows the ADS recovery periods for 
                                                                                                           property used in rental activities.
     June  1.970           3.636       3.636         3.636                3.636   3.636
     July  1.667           3.636       3.636         3.636                3.636   3.636                    See Appendix B of Pub. 946 for other prop-
     Aug.  1.364           3.636       3.636         3.636                3.636   3.636                    erty. If your property isn’t listed in Appendix B, it 
     Sept. 1.061           3.636       3.636         3.636                3.636   3.636                    is considered to have no class life. Under ADS, 
     Oct.  0.758           3.636       3.636         3.636                3.636   3.636                    personal property with no class life is depreci-
                                                                                                           ated using a recovery period of 12 years.
     Nov.  0.455           3.636       3.636         3.636                3.636   3.636
     Dec.  0.152           3.636       3.636         3.636                3.636   3.636                    Use  the  mid-month  convention  for  residen-
                                                                                                           tial  rental  property  and  nonresidential  real 
                                                                                  Chapter 2                Depreciation of Rental Property    Page 11

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property. For all other property, use the 1040). However, don’t use that schedule to re- Schedule C (Form 1040),
half-year or mid-quarter convention, as appro- port a not-for-profit activity. See Not Rented for
priate. Profit, later, in chapter 4. There are also other Profit or Loss From Business
See Pub. 946 for ADS depreciation tables. rental situations in which forms other than
Schedule E would be used. Generally, Schedule C is used when you pro-
vide substantial services in conjunction with the
property or the rental is part of a trade or busi-
Claiming the Correct Schedule E (Form 1040) ness as a real estate dealer.
Amount of Depreciation If you rent buildings, rooms, or apartments, and Providing substantial services. If you pro-
provide basic services such as heat and light, vide substantial services that are primarily for
You should claim the correct amount of depreci- trash collection, etc., you normally report your your tenant's convenience, such as regular
ation each tax year. If you didn’t claim all the rental income and expenses on Schedule E, cleaning, changing linen, or maid service, you
depreciation you were entitled to deduct, you Part I. report your rental income and expenses on
must still reduce your basis in the property by Schedule C. Use Form 1065, U.S. Return of
the full amount of depreciation that you could List your total income, expenses, and depre- Partnership Income, if your rental activity is a
have deducted. For more information, see De- ciation for each rental property. Be sure to enter partnership (including a partnership with your
preciation under Decreases to Basis in Pub. the number of fair rental and personal-use days spouse unless it is a qualified joint venture).
551. on line 2. Substantial services don’t include the furnishing
of heat and light, cleaning of public areas, trash
If you deducted an incorrect amount of de- If you have more than three rental or royalty collection, etc. For more information, see Pub.
preciation for property in any year, you may be properties, complete and attach as many 334, Tax Guide for Small Business. Also, you
able to make a correction by filing Form 1040-X, Schedules E as are needed to separately list all may have to pay self-employment tax on your
Amended U.S. Individual Income Tax Return. If of the properties. However, fill in lines 23a rental income using Schedule SE (Form 1040),
you aren’t allowed to make the correction on an through 26 on only one Schedule E. The figures Self-Employment Tax. For a discussion of “sub-
amended return, you may be able to change on lines 23a through 26 on that Schedule E stantial services,” see Real Estate Rents in
your accounting method to claim the correct should be the combined totals for all properties chapter 5 of Pub. 334.
amount of depreciation. See How Do You Cor- reported on your Schedules E.
rect Depreciation Deductions? in Pub. 946 for
more information. On Schedule E, page 1, line 18, enter the Qualified Joint Venture
depreciation you are claiming for each property.
You may also need to attach Form 4562 to If you and your spouse each materially partici-
claim some or all of your depreciation. See pate (see Material participation under Passive
Form 4562, later, for more information. Activity Limits, later) as the only members of a
jointly owned and operated real estate busi-
If you have a loss from your rental real es- ness, and you file a joint return for the tax year,
3. tate activity, you may also need to complete you can make a joint election to be treated as a
one or both of the following forms. qualified joint venture instead of a partnership.
• Form 6198, At-Risk Limitations. See This election, in most cases, won’t increase the
At-Risk Rules, later. Also, see Pub. 925. total tax owed on the joint return, but it does
Reporting • Form 8582, Passive Activity Loss Limita- give each of you credit for social security earn-
tions. See Passive Activity Limits, later. ings on which retirement benefits are based
and for Medicare coverage if your rental income
Rental Income, Page 2 of Schedule E is used to report in- is subject to self-employment tax.
come or loss from partnerships, S corporations,
estates, trusts, and real estate mortgage invest- If you make this election, you must report
Expenses, and ment conduits. If you need to use page 2 of rental real estate income on Schedule E (or
Schedule E and you have more than three Schedule C, if you provide substantial serv-
Losses rental or royalty properties, be sure to use ices). You won’t be required to file Form 1065
page 2 of the same Schedule E you used to en- for any year the election is in effect. Rental real
Figuring the net income or loss for a residential ter the combined totals for your rental activity on estate income generally isn’t included in net
rental activity may involve more than just listing page 1. Also, include the amount from line 26 earnings from self-employment subject to
the income and deductions on Schedule E (Part I) in the “Total income or (loss)” on line 41 self-employment tax and is generally subject to
(Form 1040). There are activities that don’t (Part V). the passive activity limits.
qualify to use Schedule E, such as when the ac-
tivity isn’t engaged in to make a profit or when Form 4562. You must complete and attach If you and your spouse filed a Form 1065 for
you provide substantial services in conjunction Form 4562 if you are claiming the following de- the year prior to the election, the partnership
with the property. preciation in your rental activity. terminates at the end of the tax year immedi-
• Depreciation, including the special depre- ately preceding the year the election takes ef-
There are also the limitations that may need to ciation allowance, on property placed in fect.
be applied if you have a net loss on Schedule E. service during 2022.
There are two: (1) the limitation based on the • Depreciation on listed property (such as a For more information on qualified joint ven-
amount of investment you have at risk in your car), regardless of when it was placed in tures, go to IRS.gov/QJV.
rental activity, and (2) the special limits imposed service.
on passive activities.
Otherwise, figure your depreciation on your own
You may also have a gain or loss related to your worksheet. You don’t have to attach these com- Limits on Rental Losses
rental property from a casualty or theft. This is putations to your return, but you should keep
considered separately from the income and ex- them in your records for future reference. If you have a loss from your rental real estate
pense information you report on Schedule E. You may also need to attach Form 4562 if activity, two sets of rules may limit the amount
you are claiming a section 179 deduction, am- of loss you can report on Schedule E. You must
ortizing costs that began during 2022, or claim- consider these rules in the order shown below.
Which Forms To Use ing any other deduction for a vehicle, including Both are discussed in this section.
the standard mileage rate or lease expenses. 1. At-risk rules. These rules are applied first if
The basic form for reporting residential rental in- See Pub. 946 for information on preparing there is investment in your rental real es-
come and expenses is Schedule E (Form Form 4562. tate activity for which you aren’t at risk.
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This applies only if the real property was and for rental real estate with active participa- Material participation. Generally, you materi-
placed in service after 1986. tion are discussed later. ally participated in an activity for the tax year if
you were involved in its operations on a regular,
2. Passive activity limits. Generally, rental For a detailed discussion of these rules, see continuous, and substantial basis during the
real estate activities are considered pas- Pub. 925. year. For details, see Pub. 925 or the Instruc-
sive activities and losses aren’t deductible tions for Schedule C.
unless you have income from other pas- Real estate professionals. If you are a real
sive activities to offset them. However, estate professional, complete line 43 of Sched- Participating spouse. If you are married,
there are exceptions. ule E. determine whether you materially participated in
You qualify as a real estate professional for an activity by also counting any participation in
Excess business loss limitation. In addition the tax year if you meet both of the following re- the activity by your spouse during the year. Do
to at-risk rules and passive activity limits, ex- quirements. this even if your spouse owns no interest in the
cess business loss rules apply to losses from all • More than half of the personal services you activity or files a separate return for the year.
noncorporate trades or businesses. This busi- perform in all trades or businesses during
ness loss limitation is figured using Form 461 the tax year are performed in real property Form 8582. You may have to complete Form
after you complete your Schedule E. Any limita- trades or businesses in which you materi- 8582 to figure the amount of any passive activ-
tion to your loss resulting from these rules will ally participate. ity loss for the current tax year for all activities
not be reflected on your Schedule E. Instead, it • You perform more than 750 hours of serv- and the amount of the passive activity loss al-
will be added to your income on Form 1040 or ices during the tax year in real property lowed on your tax return. See Form 8582 not re-
1040-SR and treated as a net operating loss trades or businesses in which you materi- quired, later in this chapter, to determine if you
that must be carried forward and deducted in a ally participate. must complete Form 8582.
subsequent year. If you are required to complete Form 8582
If you qualify as a real estate professional, and are also subject to the at-risk rules, include
rental real estate activities in which you materi- the amount from Form 6198, line 21 (deductible
At-Risk Rules ally participated aren’t passive activities. For loss), in column (b) of Form 8582, Worksheet 1
purposes of determining whether you materially or 2, as required.
You may be subject to the at-risk rules if you participated in your rental real estate activities,
have: each interest in rental real estate is a separate
• A loss from an activity carried on as a trade activity unless you elect to treat all your inter- Exception for Personal Use of
or business or for the production of in- ests in rental real estate as one activity. Dwelling Unit
come, and Don’t count personal services you perform
• Amounts invested in the activity for which as an employee in real property trades or busi- If you used the rental property as a home during
you aren’t fully at risk. nesses unless you are a 5% owner of your em- the year, any income, deductions, gain, or loss
ployer. You are a 5% owner if you own (or are allocable to such use is not to be taken into ac-
Losses from holding real property (other considered to own) more than 5% of your em- count for purposes of the passive activity loss
than mineral property) placed in service before ployer's outstanding stock, or capital or profits limitation. Instead, follow the rules explained in
1987 aren’t subject to the at-risk rules. interest. chapter 5.
In most cases, any loss from an activity sub- Don’t count your spouse's personal services
ject to the at-risk rules is allowed only to the ex- to determine whether you met the requirements Exception for Rental Real Estate
tent of the total amount you have at risk in the listed earlier to qualify as a real estate profes- With Active Participation
activity at the end of the tax year. You are con- sional. However, you can count your spouse's
sidered at risk in an activity to the extent of cash participation in an activity in determining if you If you or your spouse actively participated in a
and the adjusted basis of other property you materially participated. passive rental real estate activity, you may be
contributed to the activity and certain amounts Real property trades or businesses. A able to deduct up to $25,000 of loss from the
borrowed for use in the activity. Any loss that is real property trade or business is a trade or activity from your nonpassive income. This spe-
disallowed because of the at-risk limits is trea- business that does any of the following with real cial allowance is an exception to the general
ted as a deduction from the same activity in the property. rule disallowing losses in excess of income
next tax year. See Pub. 925 for a discussion of • Develops or redevelops it. from passive activities. Similarly, you may be
the at-risk rules. • Constructs or reconstructs it. able to offset credits from the activity against
• Acquires it. the tax on up to $25,000 of nonpassive income
Form 6198. If you are subject to the at-risk • Converts it. after taking into account any losses allowed un-
rules, file Form 6198 with your tax return. • Rents or leases it. der this exception.
• Operates or manages it. Example. Jane is single and has $40,000
Passive Activity Limits • Brokers it. in wages, $2,000 of passive income from a limi-
Choice to treat all interests as one activity. ted partnership, and $3,500 of passive loss
In most cases, all rental real estate activities If you were a real estate professional and had from a rental real estate activity in which she ac-
(except those of certain real estate professio- more than one rental real estate interest during tively participated. $2,000 of Jane's $3,500 loss
nals, discussed later) are passive activities. For the year, you can choose to treat all the inter- offsets her passive income. The remaining
this purpose, a rental activity is an activity from ests as one activity. You can make this choice $1,500 loss can be deducted from her $40,000
which you receive income mainly for the use of for any year that you qualify as a real estate wages.
tangible property, rather than for services. For a professional. If you forgo making the choice for The special allowance isn’t available if
discussion of activities that aren’t considered one year, you can still make it for a later year. ! you were married, lived with your
rental activities, see Rental Activities in Pub. CAUTION spouse at any time during the year,
925. If you make the choice, it is binding for the
tax year you make it and for any later year that and are filing a separate return.
Deductions or losses from passive activities you are a real estate professional. This is true
are limited. You generally can’t offset income, even if you aren’t a real estate professional in Active participation. You actively participated
other than passive income, with losses from any intervening year. (For that year, the excep- in a rental real estate activity if you (and your
passive activities. Nor can you offset taxes on tion for real estate professionals won’t apply in spouse) owned at least 10% of the rental prop-
income, other than passive income, with credits determining whether your activity is subject to erty and you made management decisions or
resulting from passive activities. Any excess the passive activity rules.) arranged for others to provide services (such as
loss or credit is carried forward to the next tax See the Instructions for Schedule E for infor- repairs) in a significant and bona fide sense.
year. Exceptions to the rules for figuring passive mation about making this choice. Management decisions that may count as ac-
activity limits for personal use of a dwelling unit tive participation include approving new
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tenants, deciding on rental terms, approving ex- 8. The deduction allowed for one-half of More information. For information on busi-
penditures, and other similar decisions. self-employment tax, ness and nonbusiness casualty and theft los-
Example. Mike is single and had the follow- 9. The deduction allowed for interest paid on ses, see Pub. 547.
ing income and losses during the tax year. student loans, and How to report. If you had a casualty or theft
10. The deduction allowed for foreign-derived that involved property used in your rental activ-
Salary . . . . . . . . . . . . . . . . . . . . . . . $42,300 intangible income and global intangible ity, figure the net gain or loss in Section B of
Dividends . . . . . . . . . . . . . . . . . . . . . 300 low-taxed income. Form 4684, Casualties and Thefts. Follow the
Interest . . . . . . . . . . . . . . . . . . . . . . 1,400 Instructions for Form 4684 for where to carry
Rental loss . . . . . . . . . . . . . . . . . . . . (4,000 )
Form 8582 not required. Don’t complete your net gain or loss.
The rental loss was from the rental of a Form 8582 if you meet all of the following condi-
house Mike owned. Mike had advertised and tions.
rented the house to the current tenant himself. • Your only passive activities were rental real Example
He also collected the rents, which usually came estate activities in which you actively par-
by mail. All repairs were either made or contrac- ticipated. In February 2017, Marie bought a rental house
ted out by Mike. • Your overall net loss from these activities is for $135,000 (house $120,000 and land
Although the rental loss is from a passive $25,000 or less ($12,500 or less if married $15,000) and immediately began renting it out.
activity, because Mike actively participated in filing separately and you lived apart from In 2022, she rented it all 12 months for a
the rental property management, he can use your spouse all year). monthly rental fee of $1,125. In addition to her
the entire $4,000 loss to offset his other income. • If married filing separately, you lived apart rental income of $13,500 (12 x $1,125), Marie
from your spouse all year. had the following expenses.
Maximum special allowance. The maximum • You have no prior year unallowed losses
special allowance is: from these (or any other passive) activities. Mortgage interest . . . . . . . . . . . . . . . . . . . $8,000
• $25,000 for single individuals and married • You have no current or prior year unal- Fire insurance (1-year policy) . . . . . . . . . . . 250
individuals filing a joint return for the tax lowed credits from passive activities. Miscellaneous repairs . . . . . . . . . . . . . . . . 400
year, • Your MAGI is $100,000 or less ($50,000 or Real estate taxes imposed and paid . . . . . . 500
• $12,500 for married individuals who file less if married filing separately and you Maintenance . . . . . . . . . . . . . . . . . . . . . . 200
separate returns for the tax year and lived lived apart from your spouse all year).
apart from their spouses at all times during • You don’t hold any interest in a rental real Marie depreciates the residential rental
the tax year, and estate activity as a limited partner or as a property under MACRS GDS. This means using
• $25,000 for a qualifying estate reduced by beneficiary of an estate or a trust. the straight line method over a recovery period
of 27.5 years.
the special allowance for which the surviv- If you meet all of the conditions listed above,
ing spouse qualified. your rental real estate activities aren’t limited by She uses Table 2-2d to find her depreciation
If your MAGI is $100,000 or less ($50,000 or the passive activity rules and you don’t have to percentage. Because she placed the property
less if married filing separately), you can deduct complete Form 8582. On lines 23a through 23e in service in February 2017, she continues to
your loss up to the amount specified above. If of your Schedule E, enter the applicable use that row of Table 2-2d. For year 6, the rate
your MAGI is more than $100,000 (more than amounts. is 3.636%.
$50,000 if married filing separately), your spe- Marie figures her net rental income or loss
cial allowance is limited to 50% of the difference for the house as follows.
between $150,000 ($75,000 if married filing
separately) and your MAGI. Total rental income received
Generally, if your MAGI is $150,000 or more Casualties and Thefts ($1,125 × 12) . . . . . . . . . . . . . . . . . . . . . . $13,500
($75,000 or more if you are married filing sepa- Minus: Expenses
rately), there is no special allowance. As a result of a casualty or theft, you may have Mortgage interest . . . . . . . . . . $8,000
a loss related to your rental property. You may Fire insurance . . . . . . . . . . . . . 250
Modified adjusted gross income (MAGI). be able to deduct the loss on your income tax Miscellaneous repairs . . . . . . . . 400
Real estate taxes . . . . . . . . . . 500
This is your adjusted gross income from Form return. Maintenance . . . . . . . . . . . . . . 200
1040, 1040-SR, or 1040-NR, line 11, figured
without taking into account: Casualty. This is the damage, destruction, or Total expenses . . . . . . . . . . . . . . . . . . . 9,350
1. The taxable amount of social security or loss of property resulting from an identifiable Balance . . . . . . . . . . . . . . . . . . . . . . . . . . $4,150
Minus: Depreciation ($120,000 x 3.636%
equivalent tier 1 railroad retirement bene- event that is sudden, unexpected, or unusual. (0.03636)) . . . . . . . . . . . . . . . . . . . . . . 4,363
fits, Such events include a storm, fire, or earth-
quake. Net rental (loss) for house. . . . . . . . . ($213)
2. The deductible contributions to traditional
individual retirement accounts (IRAs) and Theft. This is defined as the unlawful taking Marie had a net loss for the year. Because
section 501(c)(18) pension plans, and removing of your money or property with she actively participated in her passive rental
3. The exclusion from income of interest from the intent to deprive you of it. real estate activity and her loss was less than
series EE and I U.S. savings bonds used $25,000, she can deduct the loss on her return.
to pay higher educational expenses, Gain from casualty or theft. It is also possi- Marie also meets all of the requirements for not
ble to have a gain from a casualty or theft if you
4. The exclusion of amounts received under receive money, including insurance, that is having to file Form 8582. She uses Schedule E,
an employer's adoption assistance pro- more than your adjusted basis in the property. Part I, to report her rental income and expen-
gram, Generally, you must report this gain. However, ses. She enters her income, expenses, and de-
5. Any passive activity income or loss inclu- under certain circumstances, you may defer preciation for the house in the column for Prop-
ded on Form 8582, paying tax by choosing to postpone reporting erty A and enters her loss on line 22. Form 4562
the gain. To do this, you must generally buy re- isn’t required.
6. Any rental real estate loss allowed to real placement property within 2 years after the
estate professionals, close of the first tax year in which any part of
7. Any overall loss from a publicly traded your gain is realized. In certain circumstances,
partnership (see Publicly Traded Partner- the replacement period can be greater than 2
ships (PTPs) in the Instructions for Form years; see Replacement Period in Pub. 547 for
8582), more information. The cost of the replacement
property must be equal to or more than the net
insurance or other payment you received.
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a. Multiply your cost per share by the to- You can’t deduct depreciation or insurance
tal number of outstanding shares. for the part of the year the property was held for
4. b. Add to the amount figured in (a) any personal use. However, you can include the
mortgage debt on the property on the home mortgage interest and real estate tax ex-
date you bought the stock. penses for the part of the year the property was
held for personal use when figuring the amount
c. Subtract from the amount figured in you can deduct on Schedule A.
Special (b) any mortgage debt that isn’t for the
depreciable real property, such as the Example. Your tax year is the calendar
Situations part for the land. year. You moved from your home in May and
2. Subtract from the amount figured in (1) started renting it out on June 1. You can deduct
This chapter discusses some rental real estate any depreciation for space owned by the as rental expenses seven-twelfths of your
activities that are subject to additional rules. corporation that can be rented but can’t be yearly expenses, such as taxes and insurance.
lived in by tenant-stockholders. Starting with June, you can deduct as rental
expenses the amounts you pay for items gener-
3. Divide the number of your shares of stock ally billed monthly, such as utilities.
Condominiums by the total number of shares outstanding, When figuring depreciation, treat the prop-
including any shares held by the corpora- erty as placed in service on June 1.
A condominium is most often a dwelling unit in tion.
a multi-unit building, but can also take other
forms, such as a townhouse or garden apart- 4. Multiply the result of (2) by the percentage Basis of Property Changed
ment. you figured in (3). This is your depreciation to Rental Use
on the stock.
If you own a condominium, you also own a When you change property you held for per-
share of the common elements, such as land, Your depreciation deduction for the year
lobbies, elevators, and service areas. You and can’t be more than the part of your adjusted ba- sonal use to rental use (for example, you rent
the other condominium owners may pay dues sis (defined in chapter 2) in the stock of the cor- your former home), the basis for depreciation
or assessments to a special corporation that is poration that is allocable to your rental property. will be the lesser of the FMV or adjusted basis
on the date of conversion.
organized to take care of the common ele-
ments. Payments added to capital account. Pay-
ments earmarked for a capital asset or improve- FMV. This is the price at which the property
Special rules apply if you rent your condo- ment, or otherwise charged to the corporation's would change hands between a willing buyer
minium to others. You can deduct as rental ex- capital account, are added to the basis of your and a willing seller, neither having to buy or sell,
penses all the expenses discussed in chapters stock in the corporation. For example, you can’t and both having reasonable knowledge of all
1 and 2. In addition, you can deduct any dues deduct a payment used to pave a community the relevant facts. Sales of similar property, on
or assessments paid for maintenance of the parking lot, install a new roof, or pay the princi- or about the same date, may be helpful in figur-
common elements. pal of the corporation's mortgage. ing the FMV of the property.
You can’t deduct special assessments you Treat as a capital cost the amount you were
pay to a condominium management corporation assessed for capital items. This can’t be more Figuring the basis. The basis for depreciation
for improvements. However, you may be able to than the amount by which your payments to the is the lesser of:
recover your share of the cost of any improve- corporation exceeded your share of the corpo- • The FMV of the property on the date you
ment by taking depreciation. ration's mortgage interest and real estate taxes. changed it to rental use; or
Your share of interest and taxes is the • Your adjusted basis on the date of the
amount the corporation elected to allocate to change—that is, your original cost or other
you, if it reasonably reflects those expenses for basis of the property, plus the cost of per-
Cooperatives your apartment. Otherwise, figure your share in manent additions or improvements since
the following manner. you acquired it, minus deductions for any
If you live in a cooperative, you don’t own your casualty or theft losses claimed on earlier
apartment. Instead, a corporation owns the 1. Divide the number of your shares of stock years' income tax returns and other de-
apartments and you are a tenant-stockholder in by the total number of shares outstanding, creases to basis. For other increases and
the cooperative housing corporation. If you rent including any shares held by the corpora- decreases to basis, see Adjusted Basis in
your apartment to others, you can usually de- tion. chapter 2.
duct, as a rental expense, all the maintenance 2. Multiply the corporation's deductible inter- Example. You originally built a house for
fees you pay to the cooperative housing corpo- est by the number you figured in (1). This $140,000 on a lot that cost you $14,000, which
ration. is your share of the interest. you used as your home for many years. Before
In addition to the maintenance fees paid to 3. Multiply the corporation's deductible taxes changing the property to rental use this year,
the cooperative housing corporation, you can by the number you figured in (1). This is you added $28,000 of permanent improve-
deduct your direct payments for repairs, up- your share of the taxes. ments to the house and claimed a $3,500 casu-
keep, and other rental expenses, including in- alty loss deduction for damage to the house.
terest paid on a loan used to buy your stock in Part of the improvements qualified for a $500
the corporation. residential energy credit, which you claimed on
a prior year tax return. Because land isn’t de-
Property Changed to
Depreciation preciable, you can only include the cost of the
house when figuring the basis for depreciation.
Rental Use
You will be depreciating your stock in the corpo- The adjusted basis of the house at the time
of the change in its use was $164,000
ration rather than the apartment itself. Figure If you change your home or other property (or a ($140,000 + $28,000 − $3,500 − $500).
your depreciation deduction as follows. part of it) to rental use at any time other than the On the date of the change in use, your prop-
1. Figure the depreciation for all the depreci- beginning of your tax year, you must divide erty had a FMV of $168,000, of which $21,000
able real property owned by the corpora- yearly expenses, such as taxes and insurance, was for the land and $147,000 was for the
tion. (Depreciation methods are discussed between rental use and personal use. house.
in chapter 2 of this publication and Pub. You can deduct as rental expenses only the The basis for depreciation on the house is
946.) If you bought your cooperative stock part of the expense that is for the part of the the FMV on the date of the change ($147,000)
after its first offering, figure the deprecia- year the property was used or held for rental
ble basis of this property as follows. purposes.
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because it is less than your adjusted basis You can’t deduct any part of the cost of the tate taxes, and casualty losses from your
($164,000). first phone line even if your tenants have unlimi- not-for-profit rental activity when figuring the
ted use of it. amount you can deduct on Schedule A.
Cooperatives You don’t have to divide the expenses that
belong only to the rental part of your property. Presumption of profit. If your rental income is
If you change your cooperative apartment to For example, if you paint a room that you rent or more than your rental expenses for at least 3
rental use, figure your allowable depreciation as pay premiums for liability insurance in connec- years out of a period of 5 consecutive years,
explained earlier. (Depreciation methods are tion with renting a room in your home, your en- you are presumed to be renting your property to
discussed in chapter 2 of this publication and tire cost is a rental expense. If you install a sec- make a profit.
Pub. 946.) The basis of all the depreciable real ond phone line strictly for your tenant's use, all Postponing decision. If you are starting
property owned by the cooperative housing cor- the cost of the second line is deductible as a your rental activity and don’t have 3 years
poration is the smaller of the following amounts. rental expense. You can deduct depreciation on showing a profit, you can elect to have the pre-
• The FMV of the property on the date you the part of the house used for rental purposes sumption made after you have the 5 years of
change your apartment to rental use. This as well as on the furniture and equipment you experience required by the test. You may
is considered to be the same as the corpo- use for rental purposes. choose to postpone the decision of whether the
ration's adjusted basis minus straight line rental is for profit by filing Form 5213. You must
depreciation, unless this value is unrealis- How to divide expenses. If an expense is for file Form 5213 within 3 years after the due date
tic. both rental use and personal use, such as mort- of your return (determined without extensions)
• The corporation's adjusted basis in the gage interest or heat for the entire house, you for the year in which you first carried on the ac-
property on that date. Don’t subtract de- must divide the expense between rental use tivity or, if earlier, within 60 days after receiving
preciation when figuring the corporation's and personal use. You can use any reasonable written notice from the IRS proposing to disal-
adjusted basis. method for dividing the expense. It may be rea- low deductions attributable to the activity.
sonable to divide the cost of some items (for ex-
If you bought the stock after its first offering, ample, water) based on the number of people More information. For more information about
the corporation's adjusted basis in the property using them. The two most common methods for the rules for an activity not engaged in for profit,
is the amount figured in (1) under Depreciation, dividing an expense are (1) the number of see Not-for-Profit Activities in chapter 1 of Pub.
earlier. The FMV of the property is considered rooms in your home, and (2) the square footage 535.
to be the same as the corporation's adjusted of your home.
basis figured in this way minus straight line de-
preciation, unless the value is unrealistic. Example. You rent a room in your house. Example—Property
The room is 12 × 15 feet, or 180 square feet.
Figuring the Depreciation Your entire house has 1,800 square feet of floor Changed to Rental Use
space. You can deduct as a rental expense
Deduction 10% of any expense that must be divided be- In January, Eileen bought a condominium apart-
tween rental use and personal use. If your heat- ment to live in. Instead of selling the house she
To figure the deduction, use the depreciation ing bill for the year for the entire house was had been living in, she decided to change it to
system in effect when you convert your resi- $600, $60 ($600 × 10% (0.10)) is a rental ex- rental property. Eileen selected a tenant and
dence to rental use. Generally, that will be pense. The balance, $540, is a personal ex- started renting the house on February 1. Eileen
MACRS for any conversion after 1986. Treat pense that you can’t deduct. charges $750 a month for rent and collects it
the property as placed in service on the conver-
herself. Eileen also received a $750 security
sion date. Duplex. A common situation is the duplex deposit from her tenant. Because she plans to
where you live in one unit and rent out the other. return it to her tenant at the end of the lease,
Example. Your converted residence (see Certain expenses apply to the entire property, she doesn’t include it in her income. Her rental
the previous example under Figuring the basis, such as mortgage interest and real estate expenses for the year are as follows.
earlier) was available for rent on August 1. Us- taxes, and must be split to determine rental and
ing Table 2-2d (see chapter 2), the percentage personal expenses. Mortgage interest . . . . . . . . . . . . . . . . $1,800
for Year 1 beginning in August is 1.364% and Fire insurance (1-year policy) . . . . . . . . 100
the depreciation deduction for Year 1 is $2,005 Example. You own a duplex and live in one Miscellaneous repairs (after renting) . . . 297
($147,000 × 0.01364). half, renting out the other half. Both units are Real estate taxes imposed and paid . . . 1,200
approximately the same size. Last year, you
paid a total of $10,000 mortgage interest and Eileen must divide the real estate taxes,
Renting Part of Property $2,000 real estate taxes for the entire property. mortgage interest, and fire insurance between
You can deduct $5,000 mortgage interest and the personal use of the property and the rental
If you rent part of your property, you must divide $1,000 real estate taxes on Schedule E. If you use of the property. She can deduct
certain expenses between the part of the prop- itemize your deductions, include the other eleven-twelfths of these expenses as rental ex-
erty used for rental purposes and the part of the $5,000 mortgage interest and $1,000 real es- penses. She can include the balance of the real
property used for personal purposes, as though tate taxes when figuring the amount you can estate taxes and mortgage interest when figur-
you actually had two separate pieces of prop- deduct on Schedule A. ing the amount she can deduct on Schedule A if
erty. she itemizes. She can’t deduct the balance of
the fire insurance because it is a personal ex-
You can deduct the expenses related to the pense.
part of the property used for rental purposes, Not Rented for Profit
such as home mortgage interest and real estate Eileen bought this house in 1987 for
taxes, as rental expenses on Schedule E (Form If you don’t rent your property to make a profit, $35,000. Her property tax was based on as-
1040). You can also deduct as rental expenses you can’t deduct rental expenses in excess of sessed values of $10,000 for the land and
a portion of other expenses that are normally the amount of your rental income. You can’t de- $25,000 for the house. Before changing it to
nondeductible personal expenses, such as ex- duct a loss or carry forward to the next year any rental property, Eileen added several improve-
penses for electricity or painting the outside of rental expenses that are more than your rental ments to the house. She figures her adjusted
the house. income for the year. basis as follows.
There is no change in the types of expenses Where to report. Report your not-for-profit
deductible for the personal-use part of your rental income on Schedule 1 (Form 1040),
property. Generally, these expenses may be line 8j. If you itemize your deductions, include
deducted only if you itemize your deductions on your mortgage interest (if you use the property
Schedule A (Form 1040). as your main home or second home), real es-
Page 16 Chapter 4 Special Situations

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Improvements                                              Cost   must use Form 4562 to figure the depreciation. 
House . . . . . . . . . . . . . . . . . . . . . . .     $25,000  See the Instructions for Form 4562 for more in-
Remodeled kitchen . . . . . . . . . . . . . .             4,200  formation on preparing the form.                          Dividing Expenses
Recreation room . . . . . . . . . . . . . . .             5,800
New roof . . . . . . . . . . . . . . . . . . . . .        1,600                                                            If you use a dwelling unit for both rental and per-
Patio and deck . . . . . . . . . . . . . . . . .          2,400                                                            sonal purposes, divide your expenses between 
Adjusted basis. . . . . . . . . . . .                   $39,000                                                            the  rental  use  and  the  personal  use  based  on 
                                                                                                                           the number of days used for each purpose.
On  February  1,  when  Eileen  changed  her                                                                               When  dividing  your  expenses,  follow  these 
house  to  rental  property,  the  property  had  an             5.                                                        rules.
FMV of $152,000. Of this amount, $35,000 was                                                                               • Any day that the unit is rented at a fair 
for the land and $117,000 was for the house.                                                                                 rental price is a day of rental use even if 
                                                                                                                             you used the unit for personal purposes 
Because Eileen's adjusted basis is less than                     Personal Use of                                             that day. (This rule doesn’t apply when de-
the FMV on the date of the change, Eileen uses                                                                               termining whether you used the unit as a 
$39,000 as her basis for depreciation.                                                                                       home.)
                                                                 Dwelling Unit 
As  specified  for  residential  rental  property,                                                                         • Any day that the unit is available for rent 
                                                                                                                             but not actually rented isn’t a day of rental 
Eileen must use the straight line method of de-                  (Including                                                  use.
preciation  over  the  GDS  or  ADS  recovery  pe-
riod. She chooses the GDS recovery period of                                                                               Fair  rental  price. A  fair  rental  price  for  your 
27.5 years.                                                      Vacation Home)                                            property is generally the amount of rent that a 
                                                                                                                           person who isn’t related to you would be willing 
She uses Table 2-2d to find her depreciation                     If you have any personal use of a dwelling unit           to  pay.  The  rent  you  charge  isn’t  a  fair  rental 
percentage.  Because  she  placed  the  property                 (including  a  vacation  home)  that  you  rent,  you     price  if  it  is  substantially  less  than  the  rents 
in  service  in  February,  the  percentage  is                  must divide your expenses between rental use              charged for other properties that are similar to 
3.182%.                                                          and personal use. In general, your rental expen-          your property in your area.
On April 1, Eileen bought a new dishwasher                       ses  will  be  no  more  than  your  total  expenses      Ask  yourself  the  following  questions  when 
for  the  rental  property  at  a  cost  of  $425.  The          multiplied  by  a  fraction,  the  denominator  of        comparing another property with yours.
dishwasher is personal property used in a rental                 which is the total number of days the dwelling            • Is it used for the same purpose?
real estate activity, which has a 5-year recovery                unit is used and the numerator of which is the            • Is it approximately the same size?
period. She uses Table 2-2a to find the depreci-                 total  number  of  days  actually  rented  at  a  fair    • Is it in approximately the same condition?
ation  percentage  for  Year  1  under  “Half-year               rental price. Only your rental expenses may be            • Does it have similar furnishings?
convention” (20%) to figure her depreciation de-                 deducted on Schedule E (Form 1040). Some of               • Is it in a similar location?
duction.                                                         your personal expenses may be deductible on 
                                                                 Schedule A (Form 1040) if you itemize your de-            If  any  of  the  answers  are  no,  the  properties 
On May 1, Eileen paid $4,000 to have a fur-                      ductions.                                                 probably aren’t similar.
nace installed in the house. The furnace is resi-
dential rental property. Because she placed the                  You must also determine if the dwelling unit is           Example.      Your  beach  cottage  was  availa-
property in service in May, the depreciation per-                considered  a  home.  The  amount  of  rental  ex-        ble for rent from June 1 through August 31 (92 
centage from Table 2-2d is 2.273%.                               penses  that  you  can  deduct  may  be  limited  if      days).  Except  for  the  first  week  in  August  (7 
                                                                 the  dwelling  unit  is  considered  a  home.             days),  when  you  were  unable  to  find  a  renter, 
Eileen figures her net rental income or loss                     Whether  a  dwelling  unit  is  considered  a  home       you rented the cottage at a fair rental price dur-
for the house as follows.                                        depends on how many days during the year are              ing  that  time.  The  person  who  rented  the  cot-
                                                                 considered to be days of personal use. There is           tage  for  July  allowed  you  to  use  it  over  the 
Total rental income received                                     a special rule if you used the dwelling unit as a         weekend  (2  days)  without  any  reduction  in  or 
($750 × 11) . . . . . . . . . . . . . . . . . . . . .     $8,250 home  and  you  rented  it  for  less  than  15  days     refund of rent. Your family also used the cottage 
Minus: Expenses                                                  during the year.                                          during the last 2 weeks of May (14 days). The 
Mortgage interest ($1,800 ×                                                                                                cottage wasn’t used at all before May 17 or af-
11 12/ ) . . . . . . . . . . . . . . . . . . . $1,650            Dwelling  unit.  A  dwelling  unit  includes  a           ter August 31.
Fire insurance ($100 ×                                           house, apartment, condominium, mobile home, 
11 12/ ) . . . . . . . . . . . . . . . . . . .        92         boat, vacation home, or similar property. It also         You figure the part of the cottage expenses 
Miscellaneous repairs . . . . . .                   297          includes all structures or other property belong-         to treat as rental expenses as follows.
Real estate taxes ($1,200 ×                                      ing to the dwelling unit. A dwelling unit has ba-         • The cottage was used for rental a total of 
11 12/ ) . . . . . . . . . . . . . . . . . . .  1,100            sic  living  accommodations,  such  as  sleeping            85 days (92 − 7). The days it was available 
Total expenses . . . . . . . . . . . . . . . . . .        3,139  space, a toilet, and cooking facilities.                    for rent but not rented (7 days) aren’t days 
Balance . . . . . . . . . . . . . . . . . . . . . . . . . $5,111 A dwelling unit doesn’t include property (or                of rental use. The July weekend (2 days) 
                                                                 part of the property) used solely as a hotel, mo-           you used it is rental use because you re-
Minus: Depreciation                                              tel,  inn,  or  similar  establishment.  Property  is       ceived a fair rental price for the weekend.
House ($39,000 ×                                                 used solely as a hotel, motel, inn, or similar es-        • You used the cottage for personal purpo-
0.03182) . . . . . . . . . . . . . . . .       $1,241            tablishment  if  it  is  regularly  available  for  occu-   ses for 14 days (the last 2 weeks in May).
Dishwasher ($425 ×                                               pancy  by  paying  customers  and  isn’t  used  by        • The total use of the cottage was 99 days 
0.20) . . . . . . . . . . . . . . . . . . .           85         an owner as a home during the year.                         (14 days personal use + 85 days rental 
Furnace ($4,000 ×                                                                                                            use).
0.02273) . . . . . . . . . . . . . . . .              91         Example.  You  rent  a  room  in  your  home              • Your rental expenses are 85/99 (86%) of 
Total depreciation . . . . . . . . . . . . . . . .        1,417  that  is  always  available  for  short-term  occu-         the cottage expenses.
Net rental income for                                            pancy by paying customers. You don’t use the 
house . . . . . . . . . . . . . .                         $3,694 room  yourself  and  you  allow  only  paying  cus-       Note.  When determining whether you used 
                                                                 tomers  to  use  the  room.  This  room  is  used         the  cottage  as  a  home,  the  July  weekend  (2 
                                                                 solely as a hotel, motel, inn, or similar establish-      days)  you  used  it  is  considered  personal  use 
Eileen uses Schedule E, Part I, to report her                    ment and isn’t a dwelling unit.                           even though you received a fair rental price for 
rental income and expenses. She enters her in-                                                                             the  weekend.  Therefore,  you  had  16  days  of 
come,  expenses,  and  depreciation  for  the                                                                              personal use and 83 days of rental use for this 
house in the column for Property A. Because all 
property was placed in service this year, Eileen 
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purpose. Because you used the cottage for per- Donation of use of the property. You use day during the week. The main purpose of be-
sonal purposes more than 14 days and more a dwelling unit for personal purposes if: ing at the cabin that week is to do maintenance
than 10% of the days of rental use (8 days), you • You donate the use of the unit to a charita- work. Therefore, the use of the cabin during the
used it as a home. If you have a net loss, you ble organization, week by Corey and his family won’t be consid-
may not be able to deduct all of the rental ex- • The organization sells the use of the unit at ered personal use by Corey.
penses. See Dwelling Unit Used as a Home a fundraising event, and
next. • The “purchaser” uses the unit. Days used as a main home before or af-
ter renting. For purposes of determining
Examples. The following examples show whether a dwelling unit was used as a home,
how to determine if you have days of personal you may not have to count days you used the
Dwelling Unit Used as a use. property as your main home before or after rent-
Home ing it or offering it for rent as days of personal
Example 1. You and your neighbor are use. Don’t count them as days of personal use
If you use a dwelling unit for both rental and per- co-owners of a condominium at the beach. Last if:
sonal purposes, the tax treatment of the rental year, you rented the unit to vacationers when- • You rented or tried to rent the property for
expenses you figured earlier under Dividing Ex- ever possible. The unit wasn’t used as a main 12 or more consecutive months, or
penses and rental income depends on whether home by anyone. Your neighbor used the unit • You rented or tried to rent the property for
you are considered to be using the dwelling unit for 2 weeks last year; you didn’t use it at all. a period of less than 12 consecutive
as a home. Because your neighbor has an interest in months and the period ended because you
the unit, both of you are considered to have sold or exchanged the property.
You use a dwelling unit as a home during used the unit for personal purposes during However, this special rule doesn’t apply when
the tax year if you use it for personal purposes those 2 weeks. dividing expenses between rental and personal
more than the greater of: use. See Property Changed to Rental Use in
Example 2. You and your neighbors are
1. 14 days, or co-owners of a house under a shared equity fi- chapter 4.
2. 10% of the total days it is rented to others nancing agreement. Your neighbors live in the Example 1. On February 28, 2021, you
at a fair rental price. house and pay you a fair rental price. moved out of the house you had lived in for 6
Even though your neighbors have an inter- years because you accepted a job in another
See What is a day of personal use, later. est in the house, the days your neighbors live town. You rented your house at a fair rental
If a dwelling unit is used for personal purpo- there aren’t counted as days of personal use by price from March 15, 2021, to May 14, 2022 (14
ses on a day it is rented at a fair rental price you. This is because your neighbors rent the months). On June 1, 2022, you moved back
(discussed earlier), don’t count that day as a house as their main home under a shared into your old house.
day of rental use in applying (2) above. Instead, equity financing agreement. The days you used the house as your main
count it as a day of personal use in applying home from January 1 to February 28, 2021, and
both (1) and (2) above. Example 3. You own a rental property that
you rent to your son. Your son doesn’t own any from June 1 to December 31, 2022, aren’t coun-
What is a day of personal use? A day of per- interest in this property. He uses it as his main ted as days of personal use. Therefore, you
sonal use of a dwelling unit is any day that the home and pays you a fair rental price. would use the rules in chapter 1 when figuring
unit is used by any of the following persons. Your son's use of the property isn’t personal your rental income and expenses.
use by you because your son is using it as his Example 2. On January 31, you moved out
1. You or any other person who owns an in- main home, he owns no interest in the property, of the condominium where you had lived for 3
terest in it, unless you rent it to another and he is paying you a fair rental price. years. You offered it for rent at a fair rental price
owner as their main home under a shared
equity financing agreement (defined later). Example 4. You rent your beach house to beginning on February 1. You were unable to
However, see Days used as a main home Rosa. Rosa rents her cabin in the mountains to rent it until April. On September 15, you sold the
before or after renting, later. you. You each pay a fair rental price. condominium.
2. A member of your family or a member of You are using your beach house for per- The days you used the condominium as
the family of any other person who owns sonal purposes on the days that Rosa uses it your main home from January 1 to January 31
an interest in it, unless the family member because your house is used by Rosa under an aren’t counted as days of personal use when
uses the dwelling unit as their main home arrangement that allows you to use her cabin. determining whether you used it as a home.
and pays a fair rental price. Family in- Examples. The following examples show how
cludes only your spouse, siblings, half sib- Example 5. You rent an apartment to your
lings, ancestors (parents, grandparents, mother at less than a fair rental price. You are to determine whether you used your rental
etc.), and lineal descendants (children, using the apartment for personal purposes on property as a home.
grandchildren, etc.). the days that your mother rents it because you Example 1. You converted the basement
rent it for less than a fair rental price.
3. Anyone under an arrangement that lets of your home into an apartment with a bedroom,
you use some other dwelling unit. Days used for repairs and maintenance. a bathroom, and a small kitchen. You rented the
Any day that you spend working substantially basement apartment at a fair rental price to col-
4. Anyone at less than a fair rental price. full time repairing and maintaining (not improv- lege students during the regular school year.
Main home. If the other person or member ing) your property isn’t counted as a day of per- You rented to them on a 9-month lease (273
of the family in (1) or (2) has more than one sonal use. Don’t count such a day as a day of days). You figured 10% of the total days rented
home, their main home is ordinarily the one they personal use even if family members use the to others at a fair rental price is 27 days.
lived in most of the time. property for recreational purposes on the same During June (30 days), your brothers stayed
day. with you and lived in the basement apartment
Shared equity financing agreement. This rent free.
is an agreement under which two or more per- Example. Corey owns a cabin in the moun- Your basement apartment was used as a
sons acquire undivided interests for more than tains that he rents for most of the year. He home because you used it for personal purpo-
50 years in an entire dwelling unit, including the spends a week at the cabin with family mem- ses for 30 days. Rent-free use by your brothers
land, and one or more of the co-owners is enti- bers. Corey works on maintenance of the cabin is considered personal use. Your personal use
tled to occupy the unit as their main home upon 3 or 4 hours each day during the week and (30 days) is more than the greater of 14 days or
payment of rent to the other co-owner(s). spends the rest of the time fishing, hiking, and 10% of the total days it was rented (27 days).
relaxing. Corey's family members, however,
work substantially full time on the cabin each

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Example 2. You rented the guest bedroom than your rental income, some or all of the ex- Expenses. The expenses for personal use
in your home at a fair rental price during the lo- cess expenses can’t be used to offset income aren’t deductible as rental expenses.
cal college's homecoming, commencement, from other sources. The excess expenses that Your deductible rental expenses can be
and football weekends (a total of 27 days). Your can’t be used to offset income from other sour- more than your gross rental income; however,
sister-in-law stayed in the room rent free for the ces are carried forward to the next year and see Limits on Rental Losses in chapter 3.
last 3 weeks (21 days) in July. You figured 10% treated as rental expenses for the same prop-
of the total days rented to others at a fair rental erty. Any expenses carried forward to the next Used as a home but rented less than 15
price is 3 days. year will be subject to any limits that apply for days. If you use a dwelling unit as a home and
The room was used as a home because you that year. This limitation will apply to expenses you rent it less than 15 days during the year, its
used it for personal purposes for 21 days. That carried forward to another year even if you don’t primary function isn’t considered to be rental
is more than the greater of 14 days or 10% of use the property as your home for that subse- and it shouldn’t be reported on Schedule E
the 27 days it was rented (3 days). quent year. (Form 1040). You aren’t required to report the
To figure your deductible rental expenses rental income and rental expenses from this ac-
Example 3. You own a condominium apart- for this year and any carryover to next year, use tivity. Any expenses related to the home, such
ment in a resort area. You rented it at a fair Worksheet 5-1. as mortgage interest, property taxes, and any
rental price for a total of 170 days during the qualified casualty loss, will be reported as nor-
year. For 12 of these days, the tenant wasn’t mally allowed on Schedule A (Form 1040). See
the Instructions for Schedule A for more infor-
able to use the apartment and allowed you to Reporting Income and mation on deducting these expenses.
use it even though you didn’t refund any of the
rent. Your family actually used the apartment for Deductions Used as a home and rented 15 days or
10 of those days. Therefore, the apartment is more. If you use a dwelling unit as a home and
treated as having been rented for 160 (170 – Property not used for personal purposes. If rent it 15 days or more during the year, include
10) days. You figured 10% of the total days ren- you don’t use a dwelling unit for personal purpo- all your rental income in your income. Because
ted to others at a fair rental price is 16 days. ses, see chapter 3 for how to report your rental you used the dwelling unit for personal purpo-
Your family also used the apartment for 7 other income and expenses. ses, you must divide your expenses between
days during the year. the rental use and the personal use as descri-
You used the apartment as a home because Property used for personal purposes. If you bed earlier in this chapter under Dividing Ex-
you used it for personal purposes for 17 days. do use a dwelling unit for personal purposes, penses. The expenses for personal use aren’t
That is more than the greater of 14 days or 10% then how you report your rental income and ex- deductible as rental expenses.
of the 160 days it was rented (16 days). penses depends on whether you used the If you had a net profit from renting the dwell-
dwelling unit as a home. ing unit for the year (that is, if your rental income
Minimal rental use. If you use the dwelling is more than the total of your rental expenses,
unit as a home and you rent it less than 15 days Not used as a home. If you use a dwelling
during the year, that period isn’t treated as unit for personal purposes, but not as a home, including depreciation), deduct all of your rental
rental activity. See Used as a home but rented report all the rental income in your income. Be- expenses. You don’t need to use Worksheet
less than 15 days, later, for more information. cause you used the dwelling unit for personal 5-1.
purposes, you must divide your expenses be- However, if you had a net loss from renting
Limit on deductions. Renting a dwelling unit tween the rental use and the personal use as the dwelling unit for the year, your deduction for
that is considered a home isn’t a passive activ- described earlier in this chapter under Dividing certain rental expenses is limited. To figure your
deductible rental expenses and any carryover
ity. Instead, if your rental expenses are more 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                                                                                                                      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 . . . . . . . . . . . . . . . . . .                              b.   
c.  Enter the rental portion of excess real estate taxes. See instructions . . . . . . . . . . . . . . . . . . .                            c.   
 d. Carryover of operating expenses from 2021 worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         d.   
 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 2021 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 5-1 Instructions. Worksheet for Figuring Rental Deductions for a 
                            Dwelling Unit Used as a Home                                             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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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.

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Using online tools to help prepare your re- Employers can register to use Business
turn. Go to IRS.gov/Tools for the following. Services Online. The Social Security Adminis-
• The Earned Income Tax Credit Assistant tration (SSA) offers online service at SSA.gov/
6. (IRS.gov/EITCAssistant) determines if employer for fast, free, and secure online W-2
you’re eligible for the earned income credit filing options to CPAs, accountants, enrolled
(EIC). agents, and individuals who process Form W-2,
• The Online EIN Application IRS.gov/EIN ( ) Wage and Tax Statement, and Form W-2c,
How To Get Tax helps you get an employer identification Corrected Wage and Tax Statement.
number (EIN) at no cost.
Help • The Tax Withholding Estimator IRS.gov/ ( IRS social media. Go to IRS.gov/SocialMedia
W4app) makes it easier for you to estimate to see the various social media tools the IRS
If you have questions about a tax issue; need the federal income tax you want your em- uses to share the latest information on tax
help preparing your tax return; or want to down- ployer to withhold from your paycheck. changes, scam alerts, initiatives, products, and
load free publications, forms, or instructions, go This is tax withholding. See how your with- services. At the IRS, privacy and security are
to IRS.gov to find resources that can help you holding affects your refund, take-home our highest priority. We use these tools to share
right away. pay, or tax due. public information with you. Don’t post your so-
• The First-Time Homebuyer Credit Account cial security number (SSN) or other confidential
Preparing and filing your tax return. After Look-up IRS.gov/HomeBuyer ( ) tool pro- information on social media sites. Always pro-
receiving all your wage and earnings state- vides information on your repayments and tect your identity when using any social net-
ments (Forms W-2, W-2G, 1099-R, 1099-MISC, account balance. working site.
1099-NEC, etc.); unemployment compensation • The Sales Tax Deduction Calculator The following IRS YouTube channels pro-
statements (by mail or in a digital format) or (IRS.gov/SalesTax) figures the amount you vide short, informative videos on various tax-re-
other government payment statements (Form can claim if you itemize deductions on lated topics in English, Spanish, and ASL.
1099-G); and interest, dividend, and retirement Schedule A (Form 1040). • Youtube.com/irsvideos.
statements from banks and investment firms • Youtube.com/irsvideosmultilingua.
(Forms 1099), you have several options to Getting answers to your tax ques- • Youtube.com/irsvideosASL.
choose from to prepare and file your tax return. tions. On IRS.gov, you can get
You can prepare the tax return yourself, see if up-to-date information on current Watching IRS videos. The IRS Video portal
you qualify for free tax preparation, or hire a tax events and changes in tax law. (IRSVideos.gov) contains video and audio pre-
professional to prepare your return. • IRS.gov/Help: A variety of tools to help you sentations for individuals, small businesses,
get answers to some of the most common and tax professionals.
Free options for tax preparation. Go to tax questions. Online tax information in other languages.
IRS.gov to see your options for preparing and • IRS.gov/ITA: The Interactive Tax Assistant, You can find information on IRS.gov/
filing your return online or in your local commun- a tool that will ask you questions and, MyLanguage if English isn’t your native lan-
ity, if you qualify, which include the following. based on your input, provide answers on a guage.
• Free File. This program lets you prepare number of tax law topics.
and file your federal individual income tax • IRS.gov/Forms: Find forms, instructions, Free Over-the-Phone Interpreter (OPI) Serv-
return for free using brand-name tax-prep- and publications. You will find details on ice. The IRS is committed to serving our multi-
aration-and-filing software or Free File filla- the most recent tax changes and interac- lingual customers by offering OPI services. The
ble forms. However, state tax preparation tive links to help you find answers to your OPI Service is a federally funded program and
may not be available through Free File. Go questions. is available at Taxpayer Assistance Centers
to IRS.gov/FreeFile to see if you qualify for • You may also be able to access tax law in- (TACs), other IRS offices, and every VITA/TCE
free online federal tax preparation, e-filing, formation in your electronic filing software. return site. The OPI Service is accessible in
and direct deposit or payment options.
• VITA. The Volunteer Income Tax Assis- more than 350 languages.
tance (VITA) program offers free tax help Need someone to prepare your tax return?
to people with low-to-moderate incomes, There are various types of tax return preparers, Accessibility Helpline available for taxpay-
persons with disabilities, and limited-Eng- including enrolled agents, certified public ac- ers with disabilities. Taxpayers who need in-
lish-speaking taxpayers who need help countants (CPAs), accountants, and many oth- formation about accessibility services can call
preparing their own tax returns. Go to ers who don’t have professional credentials. If 833-690-0598. The Accessibility Helpline can
IRS.gov/VITA, download the free IRS2Go you choose to have someone prepare your tax answer questions related to current and future
app, or call 800-906-9887 for information return, choose that preparer wisely. A paid tax accessibility products and services available in
on free tax return preparation. preparer is: alternative media formats (for example, braille,
• TCE. The Tax Counseling for the Elderly • Primarily responsible for the overall sub- large print, audio, etc.). The Accessibility Help-
(TCE) program offers free tax help for all stantive accuracy of your return, line does not have access to your IRS account.
taxpayers, particularly those who are 60 • Required to sign the return, and For help with tax law, refunds, or account-rela-
years of age and older. TCE volunteers • Required to include their preparer tax iden- ted issues, go to IRS.gov/LetUsHelp.
specialize in answering questions about tification number (PTIN).
Note. Form 9000, Alternative Media Prefer-
pensions and retirement-related issues ence, or Form 9000(SP) allows you to elect to
unique to seniors. Go to IRS.gov/TCE, Although the tax preparer always signs the re-
download the free IRS2Go app, or call turn, you're ultimately responsible for providing receive certain types of written correspondence
888-227-7669 for information on free tax all the information required for the preparer to in the following formats.
return preparation. accurately prepare your return. Anyone paid to • Standard Print.
• MilTax. Members of the U.S. Armed prepare tax returns for others should have a • Large Print.
Forces and qualified veterans may use Mil- thorough understanding of tax matters. For • Braille.
Tax, a free tax service offered by the De- more information on how to choose a tax pre-
partment of Defense through Military One- parer, go to Tips for Choosing a Tax Preparer • Audio (MP3).
Source. For more information, go to on IRS.gov. • Plain Text File (TXT).
MilitaryOneSource MilitaryOneSource.mil/ (
MilTax). Coronavirus. Go to IRS.gov/Coronavirus for • Braille Ready File (BRF).
Also, the IRS offers Free Fillable links to information on the impact of the corona-
Forms, which can be completed online and virus, as well as tax relief available for individu- Disasters. Go to Disaster Assistance and
then filed electronically regardless of in- als and families, small and large businesses, Emergency Relief for Individuals and
come. and tax-exempt organizations.

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Businesses to review the available disaster tax fected if your SSN is used to file a fraudu- and faster than mailing in a check or money or-
relief. lent return or to claim a refund or credit. der.
Getting tax forms and publications. Go to • The IRS doesn’t initiate contact with tax-
payers by email, text messages (including What if I can’t pay now? Go to IRS.gov/
IRS.gov/Forms to view, download, or print all shortened links), telephone calls, or social Payments for more information about your op-
the forms, instructions, and publications you media channels to request or verify per- tions.
may need. Or, you can go to IRS.gov/ sonal or financial information. This in- • Apply for an online payment agreement
OrderForms to place an order. cludes requests for personal identification (IRS.gov/OPA) to meet your tax obligation
Getting tax publications and instructions in numbers (PINs), passwords, or similar in- in monthly installments if you can’t pay
eBook format. You can also download and formation for credit cards, banks, or other your taxes in full today. Once you complete
view popular tax publications and instructions financial accounts. the online process, you will receive imme-
(including the Instructions for Form 1040) on • Go to IRS.gov/IdentityTheft, the IRS Iden- diate notification of whether your agree-
mobile devices as eBooks at IRS.gov/eBooks. tity Theft Central webpage, for information ment has been approved.
on identity theft and data security protec- • Use the Offer in Compromise Pre-Qualifier
Note. IRS eBooks have been tested using tion for taxpayers, tax professionals, and to see if you can settle your tax debt for
Apple's iBooks for iPad. Our eBooks haven’t businesses. If your SSN has been lost or less than the full amount you owe. For
been tested on other dedicated eBook readers, stolen or you suspect you’re a victim of more information on the Offer in Compro-
and eBook functionality may not operate as in- tax-related identity theft, you can learn mise program, go to IRS.gov/OIC.
tended. what steps you should take. Filing an amended return. Go to IRS.gov/
• Get an Identity Protection PIN (IP PIN). IP Form1040X for information and updates.
Access your online account (individual tax- PINs are six-digit numbers assigned to tax-
payers only). Go to IRS.gov/Account to se- payers to help prevent the misuse of their Checking the status of your amended re-
curely access information about your federal tax SSNs on fraudulent federal income tax re- turn. Go to IRS.gov/WMAR to track the status
account. turns. When you have an IP PIN, it pre- of Form 1040-X amended returns.
• View the amount you owe and a break- vents someone else from filing a tax return
down by tax year. with your SSN. To learn more, go to Note. It can take up to 3 weeks from the
• See payment plan details or apply for a IRS.gov/IPPIN. date you filed your amended return for it to
new payment plan. show up in our system, and processing it can
• Make a payment or view 5 years of pay- Ways to check on the status of your refund. take up to 16 weeks.
ment history and any pending or sched- • Go to IRS.gov/Refunds.
uled payments. • Download the official IRS2Go app to your Understanding an IRS notice or letter
• Access your tax records, including key mobile device to check your refund status. you’ve received. Go to IRS.gov/Notices to
data from your most recent tax return, and • Call the automated refund hotline at find additional information about responding to
transcripts. 800-829-1954. an IRS notice or letter.
• View digital copies of select notices from
the IRS. Note. The IRS can’t issue refunds before Note. You can use Schedule LEP (Form
• Approve or reject authorization requests mid-February for returns that claimed the EIC or 1040), Request for Change in Language Prefer-
from tax professionals. the additional child tax credit (ACTC). This ap- ence, to state a preference to receive notices,
• View your address on file or manage your plies to the entire refund, not just the portion as- letters, or other written communications from
communication preferences. sociated with these credits. the IRS in an alternative language. You may not
immediately receive written communications in
Tax Pro Account. This tool lets your tax pro- Making a tax payment. Go to IRS.gov/ the requested language. The IRS’s commitment
fessional submit an authorization request to ac- Payments for information on how to make a to LEP taxpayers is part of a multi-year timeline
cess your individual taxpayer IRS online payment using any of the following options. that is scheduled to begin providing translations
account. For more information, go to IRS.gov/ • IRS Direct Pay: Pay your individual tax bill in 2023. You will continue to receive communi-
TaxProAccount. or estimated tax payment directly from cations, including notices and letters, in English
your checking or savings account at no until they are translated to your preferred lan-
Using direct deposit. The fastest way to re- cost to you. guage.
ceive a tax refund is to file electronically and • Debit or Credit Card: Choose an approved
choose direct deposit, which securely and elec- payment processor to pay online or by Contacting your local IRS office. Keep in
tronically transfers your refund directly into your phone. mind, many questions can be answered on
financial account. Direct deposit also avoids the • Electronic Funds Withdrawal: Schedule a IRS.gov without visiting an IRS TAC. Go to
possibility that your check could be lost, stolen, payment when filing your federal taxes us- IRS.gov/LetUsHelp for the topics people ask
destroyed, or returned undeliverable to the IRS. ing tax return preparation software or about most. If you still need help, IRS TACs
Eight in 10 taxpayers use direct deposit to re- through a tax professional. provide tax help when a tax issue can’t be han-
ceive their refunds. If you don’t have a bank ac- • Electronic Federal Tax Payment System: dled online or by phone. All TACs now provide
count, go to IRS.gov/DirectDeposit for more in- Best option for businesses. Enrollment is service by appointment, so you’ll know in ad-
formation on where to find a bank or credit required. vance that you can get the service you need
union that can open an account online. • Check or Money Order: Mail your payment without long wait times. Before you visit, go to
to the address listed on the notice or in- IRS.gov/TACLocator to find the nearest TAC
Getting a transcript of your return. The structions. and to check hours, available services, and ap-
quickest way to get a copy of your tax transcript • Cash: You may be able to pay your taxes pointment options. Or, on the IRS2Go app, un-
is to go to IRS.gov/Transcripts. Click on either with cash at a participating retail store. der the Stay Connected tab, choose the Con-
“Get Transcript Online” or “Get Transcript by • Same-Day Wire: You may be able to do tact Us option and click on “Local Offices.”
Mail” to order a free copy of your transcript. If same-day wire from your financial institu-
you prefer, you can order your transcript by call- tion. Contact your financial institution for
ing 800-908-9946. availability, cost, and time frames.
Reporting and resolving your tax-related Note. The IRS uses the latest encryption
identity theft issues. technology to ensure that the electronic pay-
• Tax-related identity theft happens when ments you make online, by phone, or from a
someone steals your personal information mobile device using the IRS2Go app are safe
to commit tax fraud. Your taxes can be af- and secure. Paying electronically is quick, easy,

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free. If you qualify for their assistance, you will TAS for Tax Professionals
be assigned to one advocate who will work with
The Taxpayer Advocate you throughout the process and will do every- TAS can provide a variety of information for tax
thing possible to resolve your issue. TAS can professionals, including tax law updates and
Service (TAS) Is Here To help you if: guidance, TAS programs, and ways to let TAS
Help You • Your problem is causing financial difficulty know about systemic problems you’ve seen in
for you, your family, or your business; your practice.
• You face (or your business is facing) an
What Is TAS? immediate threat of adverse action; or
• You’ve tried repeatedly to contact the IRS Low Income Taxpayer
TAS is an independent organization within the but no one has responded, or the IRS Clinics (LITCs)
IRS that helps taxpayers and protects taxpayer hasn’t responded by the date promised.
rights. Their job is to ensure that every taxpayer LITCs are independent from the IRS. LITCs
is treated fairly and that you know and under- represent individuals whose income is below a
stand your rights under the Taxpayer Bill of How Can You Reach TAS? certain level and need to resolve tax problems
Rights. with the IRS, such as audits, appeals, and tax
TAS has offices in every state, the District of collection disputes. In addition, LITCs can pro-
Columbia, and Puerto Rico. Your local advo- vide information about taxpayer rights and re-
How Can You Learn About Your cate’s number is in your local directory and at sponsibilities in different languages for individu-
Taxpayer Rights? TaxpayerAdvocate.IRS.gov/Contact-Us. You als who speak English as a second language.
can also call them at 877-777-4778.
The Taxpayer Bill of Rights describes 10 basic Services are offered for free or a small fee for
rights that all taxpayers have when dealing with eligible taxpayers. To find an LITC near you, go
the IRS. Go to TaxpayerAdvocate.IRS.gov to How Else Does TAS Help to TaxpayerAdvocate.IRS.gov/about-us/Low-
help you understand what these rights mean to Taxpayers? Income-Taxpayer-Clinics-LITC or see IRS Pub.
you and how they apply. These are your rights. 4134, Low Income Taxpayer Clinic List.
Know them. Use them. TAS works to resolve large-scale problems that
affect many taxpayers. If you know of one of
these broad issues, report it to them at IRS.gov/
What Can TAS Do for You? SAMS.
TAS can help you resolve problems that you
can’t resolve with the IRS. And their service is

Publication 527 (2022) Page 25

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                        To help us develop a more useful index, please let us know if you have ideas for index entries.
Index                   See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
 
                                     Property changed to rental         Dwelling units:                       Title insurance, cost basis 7
A                                      use  15                            Definition 17                      Interest payments    4
                                                                          Fair rental price 17               (See also Mortgages)
Accelerated Cost Recovery          C                                      Personal use of   17 18,            Loan origination fees    4
  System (ACRS)     8
 (See also Modified Accelerated    Capital expenditures:                                                      Rental expenses     4
  Cost Recovery System               Deductions vs. effect on basis   8 E
  (MACRS))                           Local benefit taxes 4              Easements    8                       L
  Effective date 7                   Mortgages, payments to             Equipment rental expense      4      Land:
Accounting methods:                    obtain    4                                                            Cost basis  8
  Accrual method   3               Cars:                                F                                     Depreciation  6
  Cash method    3                   MACRS recovery periods     9                                            Leases:
  Constructive receipt of income 3 Cash method taxpayers     3          Fair market value (FMV)    15         Cancellation payments     3
Accrual method taxpayers     3     Casualty losses   14                 Fair rental price 17                  Equipment leasing    4
ACRS (Accelerated Cost             Charitable contributions:            Fees:                                Limits:
  Recovery System):                  Use of property 18                   Loan origination fees  4 7,         Passive activity losses and 
  Effective date 7                 Cleaning and maintenance      4        Points (See Points)                     credits 13
Active participation  13           Closing costs   7                      Settlement fees and other           Rental losses  12
Activities not for profit 16       Commissions     4                        costs  7                         Loans:
Additions to property   10         Computers:                             Tax return preparation fees    4    Assumption fees     7
 (See also Improvements)                                                First-year expensing   6              Charges connected with getting 
  Basis 8                            MACRS recovery periods     9
  MACRS recovery period     10     Condominiums     15 17,              Form 1040 or 1040-SR:                     or refinancing, cost basis 7
Adjusted basis:                    Constructive receipt of income     3   Not rented for profit income   16   Low or no interest   7
  MACRS depreciation      8        Cooperative housing    6 15 17, ,      Part of property rented  16         Origination fees   4
Adjusted gross income (AGI):       Cost basis 7                           Rental income and expenses      12 Local assessments     8
  Modified (See Modified adjusted  Credit reports  7                      Schedule E    12                   Losses (See Gains and losses)
     gross income (MAGI))          Credits:                             Form 1098:
Advance rent  3                      Residential energy credits  8        Mortgage interest  4               M
                                                                        Form 4684:
  Security deposits   3                                                   Casualties and thefts  14          Missing children, photographs 
Advertising 4                      D                                    Form 4797:                            of   2
Allocation of expenses:            Days of personal use    18             Sales of business property    14   Modified Accelerated Cost 
                                                                                                              Recovery System 
  Change of property to rental     Days used for repairs and            Form 8582:                            (MACRS)     8 12-
     use   15                        maintenance     18                   Passive activity losses  13 14,     Additions or improvements to 
  How to divide expenses    17     Deductions:                                                                    property 10
  Part of property rented 16         Capitalizing costs vs. effect on   G                                     Adjusted basis    8
  Personal use of rental               basis  8
     property 3 17,                  Depreciation (See Depreciation)    Gains and losses:                     Alternative Depreciation System 
                                                                                                                  (ADS)   8 11, 
Alternative Depreciation System      Limitations on  12                   At-risk rules 13                    Basis other than cost    8
  (ADS):                             Passive activity losses              Casualty and theft losses   14      Conventions   10
  Election of 9                        (See Passive activity)             Limits on rental losses  12         Cost basis  7
  MACRS    8 11,                   Depreciation  6                        Passive activity losses  13         Depreciable basis    7
Alternative minimum tax (AMT):       Alternative Depreciation System      Rental real estate activities 13    Effective date  7
  Accelerated depreciation             (ADS) (See Modified                Sale of rental property  2 14,      Excluded property    9
     methods   6                       Accelerated Cost Recovery        General depreciation system           General Depreciation System 
Apartments:                            System (MACRS))                    (GDS) (See Modified                     (GDS)   8 10-
  Basement apartments     18         Basis (See Basis)                    Accelerated Cost Recovery 
  Dwelling units 17                  Change of property to rental         System (MACRS))                     Nonresidential rental property  9
Appraisal fees 7                       use  15                                                                Property used in rental activities 
                                                                                                                  (Table 2-1)  9
Assessments for maintenance      8   Claiming correct amount of  12     H                                     Recovery periods    9 10, 
Assessments, local (See Local        Declining balance method    7
  assessments)                       Duration of property expected to   Home:                                 Residential rental property 9 10, 
Assistance (See Tax help)              last more than one year   6        Main home    18                     Special depreciation 
Assumption of mortgage      8        Eligible property 6                  Use as rental property (See Use         allowances    8
Attorneys' fees  7 8,                First-year expensing  6                of home)                         Modified adjusted gross income 
Automobiles:                         MACRS (See Modified                                                      (MAGI)   14
  MACRS recovery periods     9         Accelerated Cost Recovery        I                                    Mortgages 4 7, 
                                       System (MACRS))                                                        Assumption of, cost basis   8
                                     Methods  7 10,                     Improvements    5                     Change of property to rental 
                                                                        (See also Repairs)                        use  15
B                                    Ownership of property   6            Assessments for local               End of, OID  5
Basis:                               Rental expense    4                    improvements     8
  Adjusted basis 8                   Rented property   6                  Basis 8                             Interest 4 15 16, , 
  Assessments for local              Section 179 deduction   6            Depreciation of rented              Part of property rented   16
     improvements     8              Special depreciation                   property    6
  Basis other than cost   8            allowances    8                    MACRS recovery period    10        N
  Cost basis  7                      Straight line method  7            Insurance 4                          Nonresidential real property  9
  Decreases to   8                   Useful life 6                        Casualty or theft loss             Not-for-profit activities 16
  Deductions:                        Vacant rental property  4              payments     8
     Capitalization of costs vs. 8 Discount, bonds and notes              Change of property to rental 
     Not greater than basis  7       issued at (See Original issue          use   15                         O
  Fair market value   15             discount (OID))                      Fire insurance premiums, cost      Original issue discount (OID)   4, 
  Increases to 8                   Dividing of expenses                     basis  7                          5
  MACRS depreciable basis     7      (See Allocation of expenses)         Part of property rented  16
                                                                          Premiums paid in advance      4
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                                   Change of property to rental    Rental losses  13                    Tax help  23
P                                  use       15                    (See also Gains and losses)          Tax return preparation fees 4
                                   Cleaning and maintenance    4   (See also Passive activity)          Taxes:
Part interest:                     Commissions    4                Repairs 4 5,                          Deduction of    4
  Expenses   3                     Depreciation   4                (See also Improvements)               Local benefit taxes 4
  Income  3                        Dwelling unit used as home   18   Assessments for maintenance     8   Real estate taxes  7
Passive activity:                  Equipment rental   4              Personal use of rental property     Transfer taxes   7
  Maximum special allowance    14  Home, property also used as  3    exception for days used for 
                                                                     repairs and maintenance      18    Theft losses   14
Personal property:                 Improvements     5                                                   Title insurance  7
  Rental income from  3            Insurance   4                   S                                    Transfer taxes  7
Personal use of rental             Interest payments   4                                                Travel and transportation 
(See also Property changed to      Local transportation expenses 4
  property   15 17,                                                Sale of property:                     expenses:
  rental use)                      Part of property rented 16        Expenses   4                        Local transportation expenses 4
Placed-in-service date  6          Points 4                          Gain or loss 2 14,                  Recordkeeping     4
Points 4 7,                        Pre-rental expenses   4           Main home   2                       Rental expenses    4
Pre-rental expenses   4            Rental payments    4            Section 179 deductions   6            Standard mileage rate   4
Principal residence (See Home)     Repairs   4 5,                  Security deposits 3
Profit, property not rented for 16 Sale of property  4             Settlement fees 7                    U
Property changed to rental         Tax return preparation fees 4   Shared equity financing 
  use  15                          Taxes  4                          agreements    18                   Uncollected rent:
  Basis 15                         Tenant, paid by   3             Special depreciation                  Income   4
Publications (See Tax help)        Travel expenses    4              allowances   8                     Use of home:
                                   Utilities 4                     Spouse:                               Before or after renting 18
R                                  Vacant rental property  4         Material participation 13           Change to rental use   15
Real estate professionals   13     Rental income:                  Standard mileage rates   4            Days of personal use   18
Real estate taxes 7                Advance rent   3                Surveys 7                             Fair rental price 17
                                                                                                         Passive activity rules 
Real property trades or            Cancellation of lease                                                 exception       13
  businesses    13                 payments       3                T
                                                                                                         Personal use as dwelling unit 17
Recordkeeping requirements:        Dwelling unit used as home   18 Tables and figures:                  Utilities 4 8, 
  Travel and transportation        Lease with option to buy 3        Improvements, examples of 
     expenses   4                  Not rented for profit 16          (Table 1-1)   5
Recovery periods    9              Part interest  3                  MACRS optional tables              V
Rent 7                             Property received from tenant 3   (Table 2-2d)    11                 Vacant rental property  4
  Advance rent  3                  Reporting   3 12,                 MACRS optional tables (Tables      Vacation homes:
  Fair price 17                    Security deposit  3               2-2a, 2-2b, and 2-2c)     11        Dwelling unit   17
Rental expenses   3                Services received from tenant 3   MACRS recovery periods for          Fair rental price 17
  Advertising  4                   Uncollected rent  4               property used in rental             Personal use of   17
                                                                     activities (Table 2-1)    9
  Allocation between rental and    Used as home     3              Tax credits:                         Valuation:
     personal uses  17                                               Residential energy credits, effect  Fair market value  15
                                                                     on basis     8

Publication 527 (2022)                                                                                                           Page 27

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