US Internal Revenue Service: p527

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Publication 527
Cat. No. 15052W Contents
What’s New . . . . . . . . . . . . . . . . . . . . . 1
Department
of the
Treasury Residential Reminder . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . .
1
2
Internal
Revenue
Service
Rental Rental Income . . . . . . . . . . . . . . . . . . .
Rental Expenses . . . . . . . . . . . . . . . . .
2
2
Property Repairs and Improvements . . . .

Other Expenses . . . . . . . . . . . .
Condominiums and Cooperatives
.
.
.
.
.
.
.
.
.
.
.
.
3
3
4
Not Rented for Profit . . . . . . . . . . . . . . 5
(Including
Property Changed to Rental Use . . . . . . 5
Rental of Renting Part of Property . . . . . . . . . . . . 5
Vacation Homes) Personal Use of Dwelling Unit
(Including Vacation Home) . . . . . . . 5
Dwelling Unit Used as Home . . . . . . . 6
For use in preparing Figuring Days of Personal Use . . . . . . 6
2006 Returns How To Divide Expenses . . . .

How To Figure Rental Income
and Deductions . . . . . . .
. .
......
. . . . 8
8
Depreciation . . . . . . . . . . . . . . . . . . . . 8
Special Depreciation Allowance . . . . . 9
MACRS . . . . . . . . . . . . . . . . . . . . . 10
MACRS Depreciation Under GDS . . . . 13
Optional Tables . . . . . . . . . . . . . . . . 14
MACRS Depreciation Under ADS . . . . 15
Casualties and Thefts . . . . . . . . . . . . . . 15
Limits on Rental Losses . . . . . . . . . . . . 15
At-Risk Rules . . . . . . . . . . . . . . . . . 15
Passive Activity Limits . . . . . . . . . . . . 15
How To Report Rental Income and
Expenses . . . . . . . . . . . . . . . . . . . 16
Schedule E (Form 1040) . . . . . . . . . . 17
How To Get Tax Help . . . . . . . . . . . . . . 19
Index . . . . . . . . . . . . . . . . . . . . . . . . . . 20
What’s New
Special depreciation allowance. You can
take a special depreciation allowance (in addi-
tion to your regular MACRS depreciation deduc-
tion) for qualified Gulf Opportunity Zone (GO
Zone) property. See Special Depreciation Allow-
ance, under Depreciation, later, for more infor-
mation.
Reminder
Photographs of missing children. The Inter-
nal Revenue Service is a proud partner with the
National Center for Missing and Exploited Chil-
Get forms and other information dren. Photographs of missing children selected
by the Center may appear in this publication on
faster and easier by: pages that would otherwise be blank. You can
Internet • www.irs.gov
help bring these children home by looking at the
photographs and calling 1-800-THE-LOST
(1-800-843-5678) if you recognize a child.
❏ 946 How To Depreciate Property receive is rent. Include the payment in your
Introduction Form (and Instructions)
income in the year you receive it regardless of
your method of accounting.
This publication discusses rental income and
expenses, including depreciation, and explains ❏ 4562 Depreciation and Amortization Expenses paid by tenant. If your tenant pays
how to report them on your return. It also covers ❏ 5213 Election To Postpone any of your expenses, the payments are rental
casualty losses on rental property and the pas- Determination as To Whether the income. You must include them in your income.
sive activity and at-risk rules. Presumption Applies That an You can deduct the expenses if they are deduct-
Activity Is Engaged in for Profit ible rental expenses. See Rental Expenses,
Sale of rental property. For information on later, for more information.
how to figure and report any gain or loss from ❏ 8582 Passive Activity Loss Limitations
the sale or other disposition of your rental prop- Example 1. Your tenant pays the water and
❏ Schedule E (Form 1040) Supplemental
erty, get Publication 544, Sales and Other Dis- sewage bill for your rental property and deducts
Income and Loss
positions of Assets. it from the normal rent payment. Under the terms
See How To Get Tax Help at the end of this
Sale of main home used as rental property. publication for information about getting these of the lease, your tenant does not have to pay
For information on how to figure and report any publications and forms. this bill. Include the utility bill paid by the tenant
gain or loss from the sale or other disposition of and any amount received as a rent payment in
your main home that you also used as rental your rental income. You can deduct the utility
property, get Publication 523, Selling Your payment made by your tenant as a rental ex-
pense.
Home. Rental Income
Comments and suggestions. We welcome Example 2. While you are out of town, the
You generally must include in your gross income furnace in your rental property stops working.
your comments about this publication and your all amounts you receive as rent. Rental income
suggestions for future editions. Your tenant pays for the necessary repairs and
is any payment you receive for the use or occu- deducts the repair bill from the rent payment.
You can write to us at the following address: pation of property. In addition to amounts you Include the repair bill paid by the tenant and any
receive as normal rent payments, there are amount received as a rent payment in your
Internal Revenue Service other amounts, discussed later, that may be rental income. You can deduct the repair pay-
Individual Forms and Publications Branch rental income. ment made by your tenant as a rental expense.
SE:W:CAR:MP:T:I When to report. When you report rental in-
1111 Constitution Ave. NW, IR-6406 Property or services. If you receive property
come on your return depends on whether you
Washington, DC 20224 or services, instead of money, as rent, include
are a cash basis taxpayer or use an accrual
the fair market value of the property or services
method.
We respond to many letters by telephone. in your rental income.
If you are a cash basis taxpayer, you report
Therefore, it would be helpful if you would in- If the services are provided at an agreed
rental income on your return for the year you
clude your daytime phone number, including the upon or specified price, that price is the fair
actually or constructively receive it. You are a
area code, in your correspondence. market value unless there is evidence to the
cash basis taxpayer if you report income in the
You can email us at *taxforms@irs.gov. (The contrary.
year you receive it, regardless of when it was
asterisk must be included in the address.) earned. You constructively receive income
Please put “Publications Comment” on the sub- Example. Your tenant is a painter. He offers
when it is made available to you, for example, by
ject line. Although we cannot respond individu- to paint your rental property instead of paying 2
being credited to your bank account.
ally to each email, we do appreciate your months’ rent. You accept his offer.
If you use an accrual method, you generally
feedback and will consider your comments as Include in your rental income the amount the
report income when you earn it, rather than
we revise our tax products. tenant would have paid for 2 months’ rent. You
when you receive it. You generally deduct your
can deduct that same amount as a rental ex-
Ordering forms and publications. Visit expenses when you incur them, rather than
pense for painting your property.
www.irs.gov/formspubs to download forms and when you pay them.
publications, call 1-800-829-3676, or write to the For more information about when you con- Lease with option to buy. If the rental agree-
address below and receive a response within 10 structively receive income and accrual methods ment gives your tenant the right to buy your
business days after your request is received. of accounting, see Publication 538, Accounting rental property, the payments you receive under
Periods and Methods. the agreement are generally rental income. If
Advance rent. Advance rent is any amount your tenant exercises the right to buy the prop-
National Distribution Center erty, the payments you receive for the period
P.O. Box 8903 you receive before the period that it covers.
Include advance rent in your rental income in the after the date of sale are considered part of the
Bloomington, IL 61702-8903 selling price.
year you receive it regardless of the period cov-
ered or the method of accounting you use. Rental of property also used as a home. If
Tax questions. If you have a tax question, you rent property that you also use as your
visit www.irs.gov or call 1-800-829-1040. We Example. You sign a 10-year lease to rent home and you rent it fewer than 15 days during
cannot answer tax questions sent to either of the your property. In the first year, you receive the tax year, do not include the rent you receive
above addresses. $5,000 for the first year’s rent and $5,000 as rent in your income and do not deduct rental ex-
for the last year of the lease. You must include penses. However, you can deduct on Schedule
Useful Items $10,000 in your income in the first year. A (Form 1040) the interest, taxes, and casualty
You may want to see: and theft losses that are allowed for nonrental
Security deposits. Do not include a security
deposit in your income when you receive it if you property. See Personal Use of Dwelling Unit
Publication (Including Vacation Home), later.
plan to return it to your tenant at the end of the
❏ 463 Travel, Entertainment, Gift, and Car lease. But if you keep part or all of the security Part interest. If you own a part interest in
Expenses deposit during any year because your tenant rental property, you must report your part of the
does not live up to the terms of the lease, include rental income from the property.
❏ 534 Depreciating Property Placed in
the amount you keep in your income in that year.
Service Before 1987
If an amount called a security deposit is to be
❏ 535 Business Expenses used as a final payment of rent, it is advance
❏ 547 Casualties, Disasters, and Thefts
rent. Include it in your income when you receive
it.
Rental Expenses
❏ 551 Basis of Assets
Payment for canceling a lease. If your tenant This section discusses expenses of renting
❏ 925 Passive Activity and At-Risk Rules pays you to cancel a lease, the amount you property that you ordinarily can deduct from your
Page 2 Publication 527 (2006)

rental income. It includes information on the Uncollected rent. If you are a cash basis tax- Other Expenses
expenses you can deduct if you rent a condo- payer, you do not report uncollected rent. Be-
minium or cooperative apartment, if you rent cause you do not include it in your income, you In addition to depreciation and the cost of re-
part of your property, or if you change your cannot deduct it. pairs, you can deduct the following expenses
property to rental use. Depreciation, which you If you use an accrual method, you report from your rental income.
can also deduct from your rental income, is income when you earn it. If you are unable to
discussed later under Depreciation.
• Advertising.
collect the rent, you may be able to deduct it as a
business bad debt. See chapter 10 of Publica- • Cleaning and maintenance.
When to deduct. You generally deduct your
tion 535 for more information about business
rental expenses in the year you pay them. • Utilities.
bad debts.
Vacant rental property. If you hold property • Insurance.
for rental purposes, you may be able to deduct Repairs and Improvements • Taxes.
your ordinary and necessary expenses (includ-
ing depreciation) for managing, conserving, or You can deduct the cost of repairs to your rental • Interest.
maintaining the property while the property is property. You cannot deduct the cost of im- • Points.
vacant. However, you cannot deduct any loss of provements. You recover the cost of improve-
rental income for the period the property is va- ments by taking depreciation (explained later). • Commissions.
cant. Separate the costs of repairs and im- • Tax return preparation fees.
Pre-rental expenses. You can deduct your provements, and keep accurate rec- • Travel expenses.
ordinary and necessary expenses for managing,
RECORDS
ords. You will need to know the cost of
conserving, or maintaining rental property from improvements when you sell or depreciate your • Rental payments.
the time you make it available for rent. property. • Local transportation expenses.
Depreciation. You can begin to depreciate Some of these expenses are discussed next.
Repairs. A repair keeps your property in good
rental property when it is ready and available for
operating condition. It does not materially add to Rental payments for property. You can de-
rent. See Placed-in-Service Date under Depre-
the value of your property or substantially product the rent you pay for property that you use
ciation, later.
long its life. Repainting your property inside or for rental purposes. If you buy a leasehold for
Expenses for rental property sold. If you sell out, fixing gutters or floors, fixing leaks, plaster- rental purposes, you can deduct an equal part of
property you held for rental purposes, you can ing, and replacing broken windows are exam- the cost each year over the term of the lease.
deduct the ordinary and necessary expenses for ples of repairs.
managing, conserving, or maintaining the prop- If you make repairs as part of an extensive Rental of equipment. You can deduct the
erty until it is sold. remodeling or restoration of your property, the rent you pay for equipment that you use for
whole job is an improvement. rental purposes. However, in some cases, lease
Personal use of rental property. If you contracts are actually purchase contracts. If so,
sometimes use your rental property for personal you cannot deduct these payments. You can
Improvements. An improvement adds to the
purposes, you must divide your expenses be- recover the cost of purchased equipment
value of property, prolongs its useful life, or
tween rental and personal use. Also, your rental through depreciation.
adapts it to new uses. Table 1 shows examples
expense deductions may be limited. See Per-
of many improvements.
sonal Use of Dwelling Unit (Including Vacation Insurance premiums paid in advance. If you
Home), later. If you make an improvement to property, the pay an insurance premium for more than one
cost of the improvement must be capitalized. year in advance, each year you can deduct the
Part interest. If you own a part interest in The capitalized cost can generally be depreci- part of the premium payment that will apply to
rental property, you can deduct your part of the ated as if the improvement were separate prop- that year. You cannot deduct the total premium
expenses that you paid. erty. in the year you pay it.
Table 1. Examples of Improvements Local benefit taxes. Generally, you cannot
deduct charges for local benefits that increase
Caution. Work you do (or have done) on your home that does not add much to either the value of your property, such as charges for
the value or the life of the property, but rather keeps the property in good condition, is putting in streets, sidewalks, or water and sewer
considered a repair, not an improvement. systems. These charges are nondepreciable
capital expenditures. You must add them to the
Additions Heating & Air Conditioning basis of your property. You can deduct local
Bedroom Heating system benefit taxes if they are for maintaining, repair-
Bathroom Central air conditioning ing, or paying interest charges for the benefits.
Deck Furnace
Garage Duct work Interest expense. You can deduct mortgage
Porch Central humidifier interest you pay on your rental property. Chapter
Patio Filtration system 4 of Publication 535 explains mortgage interest
in detail.
Lawn & Grounds Plumbing
Landscaping Septic system Expenses paid to obtain a mortgage.
Driveway Water heater Certain expenses you pay to obtain a mortgage
Walkway Soft water system on your rental property cannot be deducted as
Fence Filtration system interest. These expenses, which include mort-
Retaining wall gage commissions, abstract fees, and recording
Sprinkler system Interior Improvements fees, are capital expenses. However, you can
Swimming pool Built-in appliances amortize them over the life of the mortgage.
Kitchen modernization
Miscellaneous Flooring Form 1098. If you paid $600 or more of
Storm windows, doors Wall-to-wall carpeting mortgage interest on your rental property to any
New roof one person, you should receive a Form 1098,
Central vacuum Insulation Mortgage Interest Statement, or similar state-
Wiring upgrades Attic ment showing the interest you paid for the year.
Satellite dish Walls, floor If you and at least one other person (other than
Security system Pipes, duct work your spouse if you file a joint return) were liable
for, and paid interest on, the mortgage, and the
Publication 527 (2006) Page 3

other person received the Form 1098, report Constant-yield method. If the OID is not de to collect rental income or to manage, conserve,
your share of the interest on Schedule E (Form minimis, you must use the constant-yield or maintain your rental property. You must prop-
1040), line 13. Attach a statement to your return method to figure how much you can deduct each erly allocate your expenses between rental and
showing the name and address of the other year. nonrental activities. You cannot deduct the cost
person. In the left margin of Schedule E, next to You figure your deduction for the first year in of traveling away from home if the primary pur-
line 13, enter “See attached.” the following manner. pose of the trip was the improvement of your
property. You recover the cost of improvements
Points. The term “points” is often used to 1. Determine the issue price of the loan. Gen- by taking depreciation. For information on travel
describe some of the charges paid by a bor- erally, this equals the proceeds of the loan.
expenses, see chapter 1 of Publication 463.
rower to take out a loan or a mortgage. These If you paid points on the loan, the issue
charges are also called loan origination fees, price generally is the difference between To deduct travel expenses, you must
maximum loan charges, or premium charges. If the proceeds and the points. keep records that follow the rules in
any of these charges (points) are solely for the
RECORDS
chapter 5 of Publication 463.
2. Multiply the result in (1) by the yield to
use of money, they are interest. maturity.
Points paid when you take out a loan or Local transportation expenses. You can de-
mortgage result in original issue discount (OID). 3. Subtract any qualified stated interest pay-
duct your ordinary and necessary local transpor-
In general, the points (OID) are deductible as ments from the result in (2). This is the
tation expenses if you incur them to collect rental
OID you can deduct in the first year.
interest unless they must be capitalized. How income or to manage, conserve, or maintain
you figure the amount of points (OID) you can To figure your deduction in any subsequent your rental property.
deduct each year depends on whether or not year, you start with the adjusted issue price. To Generally, if you use your personal car,
your total OID, including the OID resulting from get the adjusted issue price, add to the issue pickup truck, or light van for rental activities, you
the points, is insignificant or de minimis. If the price any OID previously deducted. Then follow can deduct the expenses using one of two meth-
OID is not de minimis, you must use the con- steps (2) and (3) above. ods: actual expenses or the standard mileage
stant-yield method to figure how much you can The yield to maturity (YTM) is generally rate. For 2006, the standard mileage rate is 441/2
deduct. shown in the literature you receive from your cents a mile for all business miles. For more
lender. If you do not have this information, con- information, see chapter 4 of Publication 463.
De minimis OID. The OID is de minimis if it
sult your lender or tax advisor. In general, the
is less than one-fourth of 1% (.0025) of the To deduct car expenses under either
YTM is the discount rate that, when used in
stated redemption price at maturity multiplied by method, you must keep records that
computing the present value of all principal and
the number of full years from the date of original RECORDS
follow the rules in chapter 5 of Publica-
interest payments, produces an amount equal to
issue to maturity (the term of the loan). tion 463. In addition, you must complete Form
the principal amount of the loan.
If the OID is de minimis, you can choose one Qualified stated interest (QSI) is stated inter- 4562, Part V, and attach it to your tax return.
of the following ways to figure the amount you est that is unconditionally payable in cash or
can deduct each year. property (other than another loan of the issuer) Tax return preparation. You can deduct, as a
1. On a constant-yield basis over the term of at least annually over the term of the loan at a rental expense, the part of tax return preparation
the loan. single fixed rate. fees you paid to prepare Schedule E (Form
1040), Part I. For example, on your 2006 Sched-
2. On a straight line basis over the term of Example of constant yield. The facts are ule E you can deduct fees paid in 2006 to pre-
the loan. the same as in the previous example. The yield pare Part I of your 2005 Schedule E. You can
to maturity on your loan is 10.2467%, com-
3. In proportion to stated interest payments. also deduct, as a rental expense, any expense
pounded annually.
(other than federal taxes and penalties) you paid
4. In its entirety at maturity of the loan. You figure the amount of points (OID) you
to resolve a tax underpayment related to your
can deduct in 2006 as follows.
You make this choice by deducting the OID in a rental activities.
manner consistent with the method chosen on
Principal amount of the loan . . . . . $100,000
your timely filed tax return for the tax year in Minus: Points . . . . . . . . . . . . . . 1,500 Condominiums
which the loan is issued. Issue price of the loan . . . . . . . . . $ 98,500 and Cooperatives
Multiplied by: YTM . . . . . . . . . . . × .102467
Example of de minimis amount. On Janu- Total . . . . . . . . . . . . . . . . . . . . 10,093 If you rent out a condominium or a cooperative
ary 1, 2006, you took out a loan for $100,000. Minus: QSI . . . . . . . . . . . . . . . . 10,000 apartment, special rules apply. Condominiums
The loan matures on January 1, 2016 (a 10-year Points (OID) deductible in 2006 $ 93 are treated differently from cooperatives.
term), and the stated principal amount of the You figure the deduction for 2007 as follows.
loan ($100,000) is payable on that date. An
interest payment of $10,000 is payable to the Issue price . . . . . . . . . . . . . . . . $98,500 Condominium
bank on January 2 of each year, beginning on Plus: Points (OID) deducted in 2006 93
January 2, 2007. When the loan was made, you Adjusted issue price . . . . . . . . . . $98,593 If you own a condominium, you own a dwelling
paid $1,500 in points to the bank. The points Multiplied by: YTM . . . . . . . . . . . × .102467 unit in a multi-unit building. You also own a
reduced the issue price of the loan from Total . . . . . . . . . . . . . . . . . . . . 10,103 share of the common elements of the structure,
$100,000 to $98,500, resulting in $1,500 of OID. Minus: QSI . . . . . . . . . . . . . . . . 10,000 such as land, lobbies, elevators, and service
You determine that the points (OID) you paid are Points (OID) deductible in 2007 . . $ 103 areas. You and the other condominium owners
de minimis based on the following computation. may pay dues or assessments to a special cor-
Loan or mortgage ends. If your loan or poration that is organized to take care of the
Redemption price at maturity mortgage ends, you may be able to deduct any common elements.
(principal amount of the loan) . . . . . $100,000 remaining points (OID) in the tax year in which
If you rent your condominium to others, you
Multiplied by: The term of the loan in the loan or mortgage ends. A loan or mortgage
can deduct:
complete years . . . . . . . . . . . . . . × 10 may end due to a refinancing, prepayment, fore-
Multiplied by . . . . . . . . . . . . . . . . × .0025 closure, or similar event. However, if the refi- • Depreciation,
De minimis amount $ 2,500 nancing is with the same lender, the remaining
points (OID) generally are not deductible in the
• Repairs,
The points (OID) you paid ($1,500) are less than
the de minimis amount. Therefore, you have de
year in which the refinancing occurs, but may be • Upkeep,
deductible over the term of the new mortgage or
minimis OID and you can choose one of the four
loan.
• Dues,
ways discussed earlier to figure the amount you
• Interest and taxes, and
can deduct each year. Under the straight line Travel expenses. You can deduct the ordi-
method, you can deduct $150 each year for 10 nary and necessary expenses of traveling away • Assessments for the care of the common
years. from home if the primary purpose of the trip was parts of the structure.

You cannot deduct special assessments you deduct these expenses only if they, together to certain limitations, only if you itemize your
pay to a condominium management corporation with certain other miscellaneous itemized de- deductions on Schedule A (Form 1040).
for improvements. But you may be able to re- ductions, total more than 2% of your adjusted You cannot deduct any part of the cost of the
cover your share of the cost of any improvement gross income. first phone line even if your tenants have unlim-
by taking depreciation. ited use of it.
Postponing decision. If your rental income is You do not have to divide the expenses that
Cooperative more than your rental expenses for at least 3 belong only to the rental part of your property.
years out of a period of 5 consecutive years, you For example, if you paint a room that you rent, or
If you have a cooperative apartment that you are presumed to be renting your property to if you pay premiums for liability insurance in
rent to others, you can usually deduct, as a make a profit. You may choose to postpone the connection with renting a room in your home,
rental expense, all the maintenance fees you decision of whether the rental is for profit by filing your entire cost is a rental expense. If you install
pay to the cooperative housing corporation. Form 5213. a second phone line strictly for your tenant’s
However, you cannot deduct a payment See Publication 535 for more information. use, all of the cost of the second line is deducti-
earmarked for a capital asset or improvement,
ble as a rental expense. You can deduct depre-
or otherwise charged to the corporation’s capital
ciation, discussed later, on the part of the
account. For example, you cannot deduct a pay-
property used for rental purposes as well as on
ment used to pave a community parking lot,
install a new roof, or pay the principal of the
Property Changed the furniture and equipment you use for rental
purposes.
corporation’s mortgage. You must add the pay-
ment to the basis of your stock in the corpora-
to Rental Use
How to divide expenses. If an expense is for
tion. If you change your home or other property (or a both rental use and personal use, such as mort-
Treat as a capital cost the amount you were part of it) to rental use at any time other than the gage interest or heat for the entire house, you
assessed for capital items. This cannot be more beginning of your tax year, you must divide must divide the expense between rental use and
than the amount by which your payments to the yearly expenses, such as taxes and insurance, personal use. You can use any reasonable
corporation exceeded your share of the corpora- between rental use and personal use. method for dividing the expense. It may be rea-
tion’s mortgage interest and real estate taxes. sonable to divide the cost of some items (for
You can deduct as rental expenses only the
Your share of interest and taxes is the example, water) based on the number of people
part of the expense that is for the part of the year
amount the corporation elected to allocate to using them. However, the two most common
the property was used or held for rental pur-
you, if it reasonably reflects those expenses for methods for dividing an expense are one based
poses.
your apartment. Otherwise, figure your share in on the number of rooms in your home and one
For depreciation purposes, treat the property
the following way. based on the square footage of your home.
as being placed in service on the conversion
1. Divide the number of your shares of stock date.
You cannot deduct depreciation or insur- Example. You rent a room in your house.
by the total number of shares outstanding,
ance for the part of the year the property was The room is 12 × 15 feet, or 180 square feet.
including any shares held by the corpora-
held for personal use. However, you can include Your entire house has 1,800 square feet of floor
tion.
the home mortgage interest and real estate tax space. You can deduct as a rental expense 10%
2. Multiply the corporation’s deductible inter- of any expense that must be divided between
expenses for the part of the year the property
est by the number you figured in (1). This rental use and personal use. If your heating bill
was held for personal use as an itemized deduc-
is your share of the interest. for the year for the entire house was $600, $60
tion on Schedule A (Form 1040).
($600 × 10%) is a rental expense. The balance,
3. Multiply the corporation’s deductible taxes
Example. Your tax year is the calendar $540, is a personal expense that you cannot
by the number you figured in (1). This is
year. You moved from your home in May and deduct.
your share of the taxes.
started renting it out on June 1. You can deduct
In addition to the maintenance fees paid to as rental expenses seven-twelfths of your yearly
the cooperative housing corporation, you can expenses, such as taxes and insurance.
deduct your direct payments for repairs, upkeep,
and other rental expenses, including interest
Starting with June, you can deduct as rental Personal Use of
expenses the amounts you pay for items gener-
paid on a loan used to buy your stock in the
corporation. The depreciation deduction allowed
ally billed monthly, such as utilities. Dwelling Unit
for cooperative apartments is discussed later. When figuring depreciation, treat the prop-
erty as placed in service on June 1.
(Including Vacation
Home)
Not Rented for Profit Renting Part of
If you have any personal use of a dwelling unit
(defined later) (including a vacation home) that
If you do not rent your property to make a profit, you rent, you must divide your expenses be-
you can deduct your rental expenses only up to Property tween rental use and personal use. See Figuring
the amount of your rental income. You cannot Days of Personal Use and How To Divide Ex-
carry forward to the next year any rental ex- If you rent part of your property, you must divide penses, later.
penses that are more than your rental income for certain expenses between the part of the prop- If you used a dwelling unit for personal pur-
the year. For more information about the rules erty used for rental purposes and the part of the poses, it may be considered a “dwelling unit
for an activity not engaged in for profit, see property used for personal purposes, as though used as a home.” If it is, you cannot deduct
chapter 1 of Publication 535. you actually had two separate pieces of prop- rental expenses that are more than your rental
erty. income for the unit. See Dwelling Unit Used as
Where to report. Report your not-for-profit You can deduct the expenses related to the Home and How To Figure Rental Income and
rental income on Form 1040, line 21. You can part of the property used for rental purposes, Deductions, later. If the dwelling unit is not con-
include your mortgage interest (if you use the such as home mortgage interest and real estate sidered a dwelling unit used as a home, you can
property as your main home or second home), taxes, as rental expenses on Schedule E (Form deduct rental expenses that are more than your
real estate taxes, and casualty losses on the 1040). You can also deduct as a rental expense rental income for the unit, subject to certain
appropriate lines of Schedule A (Form 1040) if a part of other expenses that normally are non- limits. See Limits on Rental Losses, later.
you itemize your deductions. deductible personal expenses, such as ex-
Claim your other rental expenses, subject to penses for electricity, or painting the outside of Exception for minimal rental use. If you use
the rules explained in chapter 1 of Publication your house. the dwelling unit as a home and you rent it fewer
535, as miscellaneous itemized deductions on You can deduct the expenses for the part of than 15 days during the year, do not include any
line 22 of Schedule A (Form 1040). You can the property used for personal purposes, subject of the rent in your income and do not deduct any

of the rental expenses. See Dwelling Unit Used bathroom, and a small kitchen. You rented the months). On the following June 1, you move
as Home, later. basement apartment at a fair rental price to back into your old house.
college students during the regular school year. The days you used the house as your main
Dwelling unit. A dwelling unit includes a You rented to them on a 9-month lease (273 home from January 1 to February 28 and from
house, apartment, condominium, mobile home, days). You figured 10% of the total days rented June 1 to December 31 of the next year are not
boat, vacation home, or similar property. A to others at a fair rental price is 27 days. counted as days of personal use.
dwelling unit has basic living accommodations,
During June (30 days), your brothers stayed
such as sleeping space, a toilet, and cooking Example 2. On January 31, you moved out
with you and lived in the basement apartment
facilities. A dwelling unit does not include prop- of the condominium where you had lived for 3
erty used solely as a hotel, motel, inn, or similar rent free.
years. You offered it for rent at a fair rental price
establishment. Your basement apartment was used as a beginning on February 1. You were unable to
Property is used solely as a hotel, motel, inn, home because you used it for personal pur- rent it until April. On September 15, you sold the
or similar establishment if it is regularly available poses for 30 days. Rent-free use by your broth- condominium.
for occupancy by paying customers and is not ers is considered personal use. Your personal The days you used the condominium as your
used by an owner as a home during the year. use (30 days) is more than the greater of 14 main home from January 1 to January 31 are not
days or 10% of the total days it was rented (27 counted as days of personal use when deter-
Example. You rent a room in your home days). mining whether you used it as a home.
that is always available for short-term occu-
pancy by paying customers. You do not use the Example 2. You rented the guest bedroom
room yourself and you allow only paying cus- in your home at a fair rental price during the local
Figuring Days
tomers to use the room. The room is used solely college’s homecoming, commencement, and of Personal Use
as a hotel, motel, inn, or similar establishment football weekends (a total of 27 days). Your
A day of personal use of a dwelling unit is any
and is not a dwelling unit. sister-in-law stayed in the room, rent free, for the
day that the unit is used by any of the following
last 3 weeks (21 days) in July. You figured 10%
persons.
Dwelling Unit Used as Home of the total days rented to others at a fair rental
price is 3 days. 1. You or any other person who has an inter-
The tax treatment of rental income and ex- The room was used as a home because you est in it, unless you rent it to another owner
penses for a dwelling unit that you also use for used it for personal purposes for 21 days. That is as his or her main home under a shared
personal purposes depends on whether you use more than the greater of 14 days or 10% of the equity financing agreement (defined later).
it as a home. (See How To Figure Rental Income 27 days it was rented (3 days). However, see Use as Main Home Before
and Deductions, later). or After Renting under Dwelling Unit Used
You use a dwelling unit as a home during Example 3. You own a condominium apart- As Home, earlier.
the tax year if you use it for personal purposes ment in a resort area. You rented it at a fair rental
more than the greater of: 2. A member of your family or a member of
price for a total of 170 days during the year. For
the family of any other person who has an
12 of these days, the tenant was not able to use interest in it, unless the family member
1. 14 days, or
the apartment and allowed you to use it even uses the dwelling unit as his or her main
2. 10% of the total days it is rented to others though you did not refund any of the rent. Your home and pays a fair rental price. Family
at a fair rental price. family actually used the apartment for 10 of includes only brothers and sisters,
See Figuring Days of Personal Use, later. those days. Therefore, the apartment is treated half-brothers and half-sisters, spouses, an-
If a dwelling unit is used for personal pur- as having been rented for 160 (170 – 10) days. cestors (parents, grandparents, etc.) and
poses on a day it is rented at a fair rental price, You figure 10% of the total days rented to others lineal descendants (children, grandchild-
do not count that day as a day of rental use in at a fair rental price is 16 days. Your family also ren, etc.).
applying (2) above. Instead, count it as a day of used the apartment for 7 other days during the
year. 3. Anyone under an arrangement that lets
personal use in applying both (1) and (2) above.
you use some other dwelling unit.
This rule does not apply when dividing expenses You used the apartment as a home because
between rental and personal use. you used it for personal purposes for 17 days. 4. Anyone at less than a fair rental price.
That is more than the greater of 14 days or 10%
Fair rental price. A fair rental price for your of the 160 days it was rented (16 days). Main home. If the other person or member of
property generally is the amount of rent that a
the family in (1) or (2) above has more than one
person who is not related to you would be willing
home, his or her main home is ordinarily the one
to pay. The rent you charge is not a fair rental Use as Main Home he or she lived in most of the time.
price if it is substantially less than the rents Before or After Renting
charged for other properties that are similar to Shared equity financing agreement. This is
your property. For purposes of determining whether a dwelling an agreement under which two or more persons
Ask yourself the following questions when unit was used as a home, you may not have to acquire undivided interests for more than 50
comparing another property with yours. count days you used the property as your main years in an entire dwelling unit, including the
home before or after renting it or offering it for
• Is it used for the same purpose? land, and one or more of the co-owners is enti-
rent as days of personal use. Do not count them tled to occupy the unit as his or her main home
• Is it approximately the same size? as days of personal use if: upon payment of rent to the other co-owner or
• Is it in approximately the same condition? • You rented or tried to rent the property for owners.
• Does it have similar furnishings? 12 or more consecutive months. Donation of use of property. You use a
• Is it in a similar location? • You rented or tried to rent the property for dwelling unit for personal purposes if:
a period of less than 12 consecutive • You donate the use of the unit to a charita-
If any of the answers are no, the properties months and the period ended because ble organization,
probably are not similar. you sold or exchanged the property.
• The organization sells the use of the unit
Examples This special rule does not apply when dividing at a fund-raising event, and
expenses between rental and personal use.
The following examples show how to determine • The “purchaser” uses the unit.
whether you used your rental property as a Example 1. On February 28, you moved out
home. of the house you had lived in for 6 years be- Examples
cause you accepted a job in another town. You
Example 1. You converted the basement of rent your house at a fair rental price from March The following examples show how to determine
your home into an apartment with a bedroom, a 15 of that year to May 14 of the next year (14 days of personal use.

Table 2. Worksheet for Figuring the Limit on Rental Deductions for a Dwelling Unit Used as a Home
Use this worksheet only if you answer “yes” to all the following questions.
• Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as Home.)
• Did you rent the dwelling unit 15 days or more this year?
• Is the total of your rental expenses and depreciation more than your rental income?
1. Enter rents received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2a. Enter the rental portion of deductible home mortgage interest (see instructions) . . . . . . . .
b. Enter the rental portion of real estate taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c. Enter the rental portion of deduction casualty and theft losses (see instructions) . . . . . . . .
d. Enter direct rental expenses (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
e. Fully deductible rental expenses. Add lines 2a – 2d . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Subtract line 2e from line 1. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4a. Enter the rental portion of expenses directly related to operating or maintaining the
dwelling unit (such as repairs, insurance, and utilities) . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Enter the rental portion of excess mortgage interest (see instructions) . . . . . . . . . . . . . . .
c. Add lines 4a and 4b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d. Allowable expenses. Enter the smaller of line 3 or line 4c . . . . . . . . . . . . . . . . . . . . . . .
5. Subtract line 4d from line 3. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6a. Enter the rental portion of excess casualty and theft losses (see instructions) . . . . . . . . ..
b. Enter the rental portion of depreciation of the dwelling unit . . . . . . . . . . . . . . . . . . . . . ..
c. Add lines 6a and 6b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
d. Allowable excess casualty and theft losses and depreciation. Enter the smaller of
line 5 or line 6c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
7a. Operating expenses to be carried over to next year. Subtract line 4d from line 4c . . . .
b. Excess casualty and theft losses and depreciation to be carried over to next year.
Subtract line 6d from line 6c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enter the amounts on lines 2e, 4d, and 6d on the appropriate lines of Schedule E (Form 1040), Part I.
Worksheet Instructions
Follow these instructions for the worksheet above. If you were unable to deduct all your expenses last year because of the rental income limit, add
these unused amounts to your expenses for this year.
Line 2a. Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A (Form 1040) if you had not rented the unit. Do not
include interest on a loan that did not benefit the dwelling unit. For example, do not include interest on a home equity loan used to pay off credit cards or
other personal loans, buy a car, or pay college tuition. Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a
loan. Enter the rental portion of this interest on line 2a of the worksheet.
Line 2c. Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A (Form 1040) if you had not rented the
dwelling unit. To do this, complete Form 4684, Casualties and Thefts, Section A, treating the losses as personal losses. On Form 4684, line 19, enter
10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. If your loss occurred after August 24, 2005,
and was the result of Hurricane Katrina, enter zero on line 19. Enter the rental portion of the result from Form 4684, line 21, on line 2c of this worksheet.
Note. Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Instead, figure the personal portion on a separate Form 4684.
Line 2d. Enter the total of your rental expenses that are directly related only to the rental activity. These include interest on loans used for rental
activities other than to buy, build, or improve the dwelling unit. Also include rental agency fees, advertising, office supplies, and depreciation on office
equipment used in your rental activity.
Line 4b. On line 2a, you entered the rental portion of the mortgage interest you could deduct on Schedule A if you had not rented the dwelling unit.
Enter on line 4b of this worksheet the rental portion of the mortgage interest you could not deduct on Schedule A because it is more than the limit on home
mortgage interest. Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions).
Line 6a. To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet.
A. Enter the amount from Form 4684, line 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

B. Enter the rental portion of A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Enter the amount from line 2c of this worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Subtract C from B. Enter the result here and on line 6a of this worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocating the limited deduction. If you cannot deduct all of the amount on line 4c or 6c this year, you can allocate the allowable deduction in any
way you wish among the expenses included on line 4c or 6c. Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I.

Example 1. You and your neighbor are the unit under the rules explained in How To rental expenses. See How To Report Rental
co-owners of a condominium at the beach. You Figure Rental Income and Deductions, later. Income and Expenses, later.
rent the unit to vacationers whenever possible. When dividing your expenses, follow these Your deductible rental expenses can be
The unit is not used as a main home by anyone. rules. more than your gross rental income. However,
Your neighbor uses the unit for 2 weeks every see Limits on Rental Losses, later.
year. • Any day that the unit is rented at a fair
Because your neighbor has an interest in the rental price is a day of rental use even if
unit, both of you are considered to have used the you used the unit for personal purposes Property Used as a Home
unit for personal purposes during those 2 that day. This rule does not apply when
weeks. determining whether you used the unit as If you use a dwelling unit as a home during the
a home. year, how you figure your rental income and
Example 2. You and your neighbors are deductions depends on how many days the unit
• Any day that the unit is available for rent was rented at a fair rental price.
co-owners of a house under a shared equity
but not actually rented is not a day of
financing agreement. Your neighbors live in the Rented fewer than 15 days. If you use a
rental use.
house and pay you a fair rental price. dwelling unit as a home and you rent it fewer
Even though your neighbors have an interest than 15 days during the year, do not include any
in the house, the days your neighbors live there Example. Your beach cottage was avail- rental income in your income. Also, you cannot
are not counted as days of personal use by you. able for rent from June 1 through August 31 (92 deduct any expenses as rental expenses.
This is because your neighbors rent the house days). Your family uses the cottage during the
as their main home under a shared equity fi- last 2 weeks in May (14 days). You were unable Rented 15 days or more. If you use a dwell-
nancing agreement. to find a renter for the first week in August (7 ing unit as a home and rent it 15 days or more
days). The person who rented the cottage for during the year, you include all your rental in-
Example 3. You own a rental property that July allowed you to use it over a weekend (2 come in your income. See How To Report
you rent to your son. Your son has no interest in days) without any reduction in or refund of rent. Rental Income and Expenses, later. If you had a
this property. He uses it as his main home. He The cottage was not used at all before May 17 or net profit from the rental property for the year
pays you a fair rental price for the property. after August 31. (that is, if your rental income is more than the
Your son’s use of the property is not personal total of your rental expenses, including depreci-
You figure the part of the cottage expenses
use by you because your son is using it as his ation), deduct all of your rental expenses. How-
to treat as rental expenses as follows.
main home, he has no interest in the property, ever, if you had a net loss, your deduction for
and he is paying you a fair rental price. • The cottage was used for rental a total of certain rental expenses is limited.
85 days (92 − 7). The days it was avail-
Limit on deductions. If your rental ex-
Example 4. You rent your beach house to able for rent but not rented (7 days) are
penses are more than your rental income, you
Rosa. Rosa rents her house in the mountains to not days of rental use. The July weekend cannot use the excess expenses to offset in-
you. You each pay a fair rental price. (2 days) you used it is rental use because come from other sources. The excess can be
You are using your house for personal pur- you received a fair rental price for the carried forward to the next year and treated as
poses on the days that Rosa uses it because weekend. rental expenses for the same property. Any ex-
your house is used by Rosa under an arrange- • You used the cottage for personal pur- penses carried forward to next year will be sub-
ment that allows you to use her house. poses for 14 days (the last 2 weeks in ject to any limits that apply next year. You can
May). deduct the expenses carried over to a year only
Example 5. You rent an apartment to your up to the amount of your rental income for that
mother at less than a fair rental price. You are • The total use of the cottage was 99 days year, even if you do not use the property as your
using the apartment for personal purposes on (14 days personal use + 85 days rental home for that year.
the days that your mother rents it because you use). To figure your deductible rental expenses
rent it for less than a fair rental price. • Your rental expenses are 85/99 (86%) of and any carryover to next year, use Table 2.
the cottage expenses.
Days Used for When determining whether you used the cot-
Repairs and Maintenance tage as a home, the July weekend (2 days) you Depreciation
Any day that you spend working substantially full used it is personal use even though you re-
ceived a fair rental price for the weekend. There- You recover the cost of income producing prop-
time repairing and maintaining (not improving)
fore, you had 16 days of personal use and 83 erty through yearly tax deductions. You do this
your property is not counted as a day of personal
days of rental use for this purpose. Because you by depreciating the property; that is, by deduct-
use. Do not count such a day as a day of per-
used the cottage for personal purposes more ing some of the cost on the tax return each year.
sonal use even if family members use the prop-
than 14 days and more than 10% of the days of Three basic factors determine how much de-
erty for recreational purposes on the same day.
rental use (8 days), you used it as a home. If you preciation you can deduct. They are: (1) your
Example. You own a cabin in the mountains have a net loss, you may not be able to deduct basis in the property, (2) the recovery period for
that you rent during the summer. You spend 3 all of the rental expenses. See Property Used as the property, and (3) the depreciation method
days at the cabin each May, working full time to a Home in the following discussion. used. You cannot simply deduct your mortgage
repair anything that was damaged over the win- or principal payments, or the cost of furniture,
fixtures and equipment, as an expense.
ter and get the cabin ready for the summer. You How To Figure Rental You can deduct depreciation only on the part
also spend 3 days each September, working full
time to repair any damage done by renters and
Income and Deductions of your property used for rental purposes. De-
getting the cabin ready for the winter. preciation reduces your basis for figuring gain or
How you figure your rental income and deduc- loss on a later sale or exchange.
These 6 days do not count as days of per- tions depends on whether you used the dwelling You may have to use Form 4562 to figure
sonal use even if your family uses the cabin unit as a home (see Dwelling Unit Used as and report your depreciation. See How To Re-
while you are repairing it. Home, earlier) and, if you used it as a home, port Rental Income and Expenses, later. Also
how many days the property was rented at a fair see Publication 946.
How To Divide Expenses rental price.
Claiming the correct amount of depreciation.
If you use a dwelling unit for both rental and You should claim the correct amount of depreci-
personal purposes, divide your expenses be- Property Not Used as a Home ation each tax year. Even if you did not claim
tween the rental use and the personal use based depreciation that you were entitled to deduct,
on the number of days used for each purpose. If you do not use a dwelling unit as a home, you must still reduce your basis in the property
You can deduct expenses for the rental use of report all the rental income and deduct all the by the full amount of depreciation that you could

have deducted. See Decreases to basis, later, all part of the cost of land and cannot be depreci- type of property and when it was placed in serv-
for more information. If you did not deduct the ated. ice. For property used in rental activities you use
correct amount of depreciation for property in one of the following.
any year, you may be able to make a correction Property you own. To claim depreciation, • MACRS (Modified Accelerated Cost Re-
for that year by filing Form 1040X, Amended you usually must be the owner of the property. covery System) for property placed in
U.S. Individual Income Tax Return. If you are not You are considered as owning property even if it service after 1986.
allowed to make the correction on an amended is subject to a debt.
return, you can change your accounting method • ACRS (Accelerated Cost Recovery Sys-
Rented property. Generally, if you pay rent tem) for property placed in service after
to claim the correct amount of depreciation. See
on property, you cannot depreciate that prop- 1980 but before 1987.
Changing your accounting method, later.
erty. Usually, only the owner can depreciate it. If
Filing an amended return. You can file an you make permanent improvements to the prop- • Useful lives and either straight line or an
amended return to correct the amount of depre- erty, you may be able to depreciate the improve- accelerated method of depreciation, such
ciation claimed for any property in any of the ments. See Additions or improvements to as the declining balance method, for prop-
following situations. property, later. erty placed in service before 1981.
• You claimed the incorrect amount be- Cooperative apartments. If you are a ten-
ant-stockholder in a cooperative housing corpo- This publication discusses MACRS
cause of a mathematical error made in
any year. ration and rent your cooperative apartment to ! only. If you need information about de-
others, you can deduct depreciation for your
CAUTION
preciating property placed in service
• You claimed the incorrect amount be- stock in the corporation. before 1987, see Publication 534.
cause of a posting error made in any year. If you placed property in service before 2006,
Figure your depreciation deduction as fol-
• You have not adopted a method of ac- lows. continue to use the same method of figuring
counting for the property. depreciation that you used in the past.
1. Figure the depreciation for all the deprecia-
If an amended return is allowed, you must file ble real property owned by the corporation. Section 179 deduction. You cannot claim the
it by the later of the following dates. (Depreciation methods are discussed section 179 deduction for property held to pro-
later.) If you bought your cooperative stock duce rental income. See chapter 2 of Publication
• 3 years from the date you filed your origi- after its first offering, figure the depreciable 946.
nal return for the year in which you did not basis of this property as follows.
deduct the correct amount. (A return filed Alternative minimum tax. If you use acceler-
early is considered filed on the due date.) a. Multiply your cost per share by the total ated depreciation, you may have to file Form
number of outstanding shares. 6251, Alternative Minimum Tax – Individuals.
• 2 years from the time you paid your tax for
Accelerated depreciation can be determined
that year. b. Add to the amount figured in (a) any
under MACRS, ACRS, and any other method
mortgage debt on the property on the
that allows you to deduct more depreciation than
Changing your accounting method. To date you bought the stock. you could deduct using a straight line method.
change your accounting method, you must file
c. Subtract from the amount figured in (b)
Form 3115, Application for Change in Account-
ing Method, to get the consent of the IRS. In
any mortgage debt that is not for the Special Depreciation
depreciable real property, such as the Allowance
some instances, that consent is automatic. For
part for the land.
more information, see Changing Your Account-
ing Method in Publication 946. You can take a special depreciation allowance
2. Subtract from the amount figured in (1) any (in addition to your regular MACRS depreciation
depreciation for space owned by the cor- deduction) for qualified Gulf Opportunity Zone
poration that can be rented but cannot be (GO Zone) property you placed in service in
What Property Can be Depreciated lived in by tenant-stockholders. 2006. The allowance is 50% of the property’s
You can depreciate your property if it meets all 3. Divide the number of your shares of stock depreciable basis. You figure the special depre-
by the total number of shares outstanding, ciation allowance before you figure your regular
the following requirements.
including any shares held by the corpora- MACRS deduction.
• You own the property. tion.
Electing a lower or no special allowance.
• You use the property in your business or 4. Multiply the result of (2) by the percentage You can elect to deduct a 30% or no special
income-producing activity (such as rental you figured in (3). This is your depreciation allowance for all property in each class of prop-
property). on the stock. erty placed in service during the tax year. To
• The property has a determinable useful Your depreciation deduction for the year
make an election, attach a statement to your
life. return indicating what election you are making
cannot be more than the part of your adjusted and the class of property for which you are
• The property is expected to last more than basis (defined later) in the stock of the corpora- making the election.
1 year. tion that is allocable to your rental property.
See Cooperative apartments under What
• The property is not excepted property Property Can Be Depreciated? in chapter 1 of Qualified Gulf Opportunity Zone
(such as property placed in service and Publication 946 for more information. Property
disposed of in the same year and section
197 intangibles). No deduction greater than basis. The total Your property is qualified GO Zone property if it
of all your yearly depreciation deductions cannot meets the following requirements.
Property having a determinable useful life. be more than the cost or other basis of the
1. It is one of the following types of property.
To be depreciable, your property must have a property. For this purpose, your yearly deprecia-
determinable useful life. This means that it must tion deductions include any depreciation that a. Property depreciated under MACRS
be something that wears out, decays, gets used you were allowed to claim, even if you did not with a recovery period of 20 years or
up, becomes obsolete, or loses its value from claim it. less.
natural causes.
b. Water utility property.
Land. You can never depreciate the cost of Depreciation Methods c. Certain computer software.
land because land does not wear out, become
obsolete, or get used up. The costs of clearing, There are three ways to figure depreciation. The d. Qualified leasehold improvement prop-
grading, planting, and landscaping are usually depreciation method you use depends on the erty.

Table 3. MACRS Recovery Periods for Property Used in Rental Activities club, massage parlor, hot tub facility, sun-
tan facility, or any store, the principal busi-
ness of which is the sale of alcoholic
MACRS Recovery Period
beverages for consumption off premises.
General Alternative
• Any gambling or animal racing property.
Depreciation Depreciation
Type of Property System System • Property for which you elected not to claim
any special depreciation allowance.
Computers and their peripheral equipment . . . . . . . . . . . . . 5 years 5 years
Office machinery, such as:
Typewriters More information. For more information
Calculators about the special depreciation allowance, see
Copiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years 6 years Publication 946.
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years 5 years
Light trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years 5 years MACRS
Appliances, such as:
Stoves Most business and investment property placed
Refrigerators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years 9 years in service after 1986 is depreciated using
Carpets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years 9 years MACRS.
Furniture used in rental property . . . . . . . . . . . . . . . . . . . . 5 years 9 years MACRS consists of two systems that deter-
mine how you depreciate your property — the
Office furniture and equipment, such as:
Desks General Depreciation System (GDS) and the
Files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 years 10 years Alternative Depreciation System (ADS). GDS is
Any property that does not have a class life and that has not used to figure your depreciation deduction for
been designated by law as being in any other class . . . . 7 years 12 years property used in most rental activities, unless
you elect ADS.
Roads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 years 20 years To figure your MACRS deduction, you need
Shrubbery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 years 20 years to know the following information about your
Fences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 years 20 years property:
Residential rental property (buildings or structures) 1. Its recovery period,
and structural components such as furnaces,
waterpipes, venting, etc. . . . . . . . . . . . . . . . . . . . . . . 27.5 years 40 years 2. Its placed-in-service date, and
Additions and improvements, such as a new roof . . . . . . . . . The same recovery period as 3. Its depreciable basis.
that of the property to which
the addition or improvement is Personal home changed to rental use. You
made, determined as if the must use MACRS to figure the depreciation on
property were placed in
property used as your home and changed to
service at the same time as
rental property in 2006.
the addition or improvement.
Excluded property. You cannot use MACRS
for certain personal property placed in service in
e. Certain nonresidential real property and Original use test. The original use of the your rental property in 2006 if it had been previ-
residential rental property. property in the GO Zone must have begun with ously placed in service before MACRS became
you after August 27, 2005. effective. Generally, personal property is ex-
2. It meets the tests explained next under Used property can be qualified GO Zone cluded from MACRS if you (or a person related
Other tests to be met. property if it has not previously been used within to you) owned or used it in 1986 or if your tenant
3. It is not excepted property explained later the GO Zone. Also, additional capital expendi- is a person (or someone related to the person)
under Excepted property. tures you incurred after August 27, 2005, to who owned or used it in 1986. However, the
recondition or rebuild your property meet the property is not excluded if your 2006 deduction
original use test if the original use of the property under MACRS (using a half-year convention) is
Other tests to be met. To be qualified GO
in the GO Zone began with you. less than the deduction you would have under
Zone property, the property must meet all of the
following tests. If you sold property you placed in service ACRS. See Can You Use MACRS To Depreci-
after August 27, 2005, and you leased it back ate Your Property? in Publication 946 for more
• Acquisition date test. within 3 months after you originally placed the information.
• Placed-in-service date test. property in service, the lessor is considered to
be the original user of the property.
• Substantial use test. Recovery Periods Under GDS
• Original use test. Excepted property. Qualified GO Zone prop-
Each item of property that can be depreciated is
erty does not include any of the following.
assigned to a property class. The recovery pe-
Acquisition date test. You must have ac- • Property required to be depreciated using riod of the property depends on the class the
quired the property by purchase after August 27, property is in. Under GDS, the recovery period
the Alternative Depreciation System
2005, with no binding written contract for the of an asset is generally the same as its property
(ADS).
acquisition in effect before August 28, 2005. class. The property classes under GDS are:
• Property any portion of which is financed
Placed-in-service date test. The property
with the proceeds of a tax-exempt obliga- • 3-year property,
must be placed in service for use in your trade or
tion under section 103 of the Internal Rev-
business or for the production of income before • 5-year property,
enue Code.
January 1, 2008 (January 1, 2009, in the case of • 7-year property,
qualifying nonresidential real property and resi- • Any qualified revitalization building for
dential rental property). which you have elected to claim a com- • 10-year property,
Substantial use test. Substantially all (80
mercial revitalization deduction for quali- • 15-year property,
fied revitalization expenditures.
percent or more) of the use of the property must • 20-year property,
be in the GO Zone and in the active conduct of • Any property used in connection with any
your trade or business in the GO Zone. private or commercial golf course, country • Nonresidential real property, and

• Residential rental property. placed in service at the same time as the addi- Cost Basis
tion or improvement.
The class to which property is assigned is The basis of property you buy is usually its cost.
determined by its class life. Class lives and re- Example. You own a residential rental The cost is the amount you pay for it in cash, in
covery periods for most assets are listed in Ap- house that you have been renting since 1986 debt obligation, in other property, or in services.
pendix B in Publication 946. and that you are depreciating under ACRS. You Your cost also includes amounts you pay for:
Under GDS, property that you placed in serv- put an addition onto the house and placed it in • Sales tax charged on the purchase (see
ice during 2006 in your rental activities generally service in 2006. You must use MACRS for the Caution below),
falls into one of the following classes. Also see addition. Under GDS, the addition is depreciated
Table 3. as residential rental property over 27.5 years.
• Freight charges to obtain the property, and
• 5-year property. This class includes com- • Installation and testing charges.
puters and peripheral equipment, office ma-
chinery (typewriters, calculators, copiers, Placed-in-Service Date
At the time this publication went to
etc.), automobiles, and light trucks.
This class also includes appliances, car-
You can begin to depreciate property when you ! print, Congress was considering legis-
place it in service in your trade or business or for
CAUTION
lation that would extend the deduction
peting, furniture, etc., used in a residential the production of income. Property is considered for state and local general sales tax that expired
rental real estate activity. placed in service in a rental activity when it is at the end of 2005. If this deduction is extended,
Depreciation on automobiles, certain com- ready and available for a specific use in that you may be able to take a deduction for your
puters, and cellular telephones is limited. activity. state and local general sales taxes instead of
See chapter 5 of Publication 946. state and local income taxes as an itemized
deduction on Schedule A (Form 1040). If you
• 7-year property. This class includes office Example 1. On November 22 of last year,
make that choice, you cannot include those
furniture and equipment (desks, files, etc.). you purchased a dishwasher for your rental
property. The appliance was delivered on De- sales taxes as part of your cost basis. To find out
This class also includes any property that if this legislation was enacted, and for more
does not have a class life and that has not cember 7, but was not installed and ready for
details, go to www.irs.gov, click on More Forms
been designated by law as being in any use until January 3 of this year. Because the
and Publications, and then on What’s Hot in
other class. dishwasher was not ready for use last year, it is
forms and publications, or see Publication 553,
not considered placed in service until this year.
• 15-year property. This class includes Highlights of 2006 Tax Changes.
If the appliance had been ready for use when
roads and shrubbery (if depreciable).
it was delivered in December of last year, it Loans with low or no interest. If you buy
• Residential rental property. This class would have been considered placed in service in property on any time-payment plan that charges
includes any real property that is a rental December, even if it was not actually used until little or no interest, the basis of your property is
building or structure (including a mobile this year. your stated purchase price, less the amount
home) for which 80% or more of the gross considered to be unstated interest. See Un-
rental income for the tax year is from Example 2. On April 6, you purchased a stated Interest and Original Issue Discount in
dwelling units. It does not include a unit in house to use as residential rental property. You Publication 537, Installment Sales.
a hotel, motel, inn, or other establishment made extensive repairs to the house and had it
where more than half of the units are used Real property. If you buy real property, such
ready for rent on July 5. You began to advertise as a building and land, certain fees and other
on a transient basis. If you live in any part the house for rent in July and actually rented it
of the building or structure, the gross expenses you pay are part of your cost basis in
beginning September 1. The house is consid- the property.
rental income includes the fair rental value ered placed in service in July when it was ready
of the part you live in. The recovery period Real estate taxes. If you buy real property
and available for rent. You can begin to depreci-
for residential rental property is 27.5 and agree to pay real estate taxes on it that were
ate the house in July.
years. owed by the seller and the seller did not reim-
Example 3. You moved from your home in burse you, the taxes you pay are treated as part
The other property classes do not gen- July. During August and September you made of your basis in the property. You cannot deduct
them as taxes paid.
! erally apply to property used in rental several repairs to the house. On October 1, you
If you reimburse the seller for real estate
CAUTION
activities. These classes are not dis- listed the property for rent with a real estate
cussed in this publication. See Publication 946 taxes the seller paid for you, you can usually
company, which rented it on December 1. The
for more information. deduct that amount. Do not include that amount
property is considered placed in service on Oc-
in your basis in the property.
tober 1, the date when it was available for rent.
Qualified Indian reservation property. Settlement fees and other costs. Settle-
Shorter recovery periods were provided under ment fees and closing costs that are for buying
MACRS for qualified Indian reservation property Depreciable Basis the property are part of your basis in the prop-
placed in service on Indian reservations before erty. These include:
The depreciable basis of property used in a
2006. For more information, see chapter 4 of
rental activity is generally its adjusted basis • Abstract fees,
Publication 946.
when you place it in service in that activity. This • Charges for installing utility services,
is its cost or other basis when you acquired it,
Additions or improvements to property.
adjusted for certain items occurring before you • Legal fees,
Treat depreciable additions or improvements
you make to any property as separate property place it in service in the rental activity. • Recording fees,
items for depreciation purposes. The recovery If you depreciate your property under • Surveys,
period for an addition or improvement to prop- MACRS, you may also have to reduce your
erty begins on the later of: basis by certain deductions and credits with re- • Transfer taxes,
1. The date the addition or improvement is

spect to the property. • Title insurance, and
Basis and adjusted basis are explained in
placed in service, or the following discussions. • Any amounts the seller owes that you
agree to pay, such as back taxes or inter-
2. The date the property to which the addition If you used the property for personal est, recording or mortgage fees, charges
or improvement was made is placed in
service. ! purposes before changing it to rental for improvements or repairs, and sales
CAUTION
use, its depreciable basis is the lesser commissions.
The property class and recovery period of of its adjusted basis or its fair market value when
the addition or improvement is the one that you change it to rental use. See Basis of Prop- Some settlement fees and closing costs you
would apply to the original property if it were erty Changed to Rental Use, later. cannot include in your basis in the property are:

1. Fire insurance premiums, If you received property in one of these ways, certain costs you can choose either to deduct or
see Publication 551 for information on how to to capitalize. If you capitalize these costs, in-
2. Rent or other charges relating to occu- figure your basis. clude them in your basis. If you deduct them, do
pancy of the property before closing, and
not include them in your basis.
3. Charges connected with getting or refi- The costs you may be able to choose to
nancing a loan, such as: Adjusted Basis deduct or to capitalize include carrying charges,
such as interest and taxes, that you must pay to
a. Points (discount points, loan origination Before you can figure allowable depreciation,
own property.
fees), you may have to make certain adjustments (in-
creases and decreases) to the basis of the prop- For more information about deducting or
b. Mortgage insurance premiums, erty. The result of these adjustments to the basis capitalizing costs, see chapter 7 in Publication
is the adjusted basis. 535.
c. Loan assumption fees,
d. Cost of a credit report, and Increases to basis. You must increase the Decreases to basis. You must decrease the
basis of any property by the cost of all items basis of your property by any items that repre-
e. Fees for an appraisal required by a properly added to a capital account. This in- sent a return of your cost. These include:
lender. cludes:
• The amount of any insurance or other pay-
Also, do not include amounts placed in es- • The cost of any additions or improvements ment you receive as the result of a casu-
crow for the future payment of items such as having a useful life of more than one year, alty or theft loss,
taxes and insurance. • Amounts spent after a casualty to restore • Any deductible casualty loss not covered
Assumption of a mortgage. If you buy the damaged property,
by insurance,
property and become liable for an existing mort- • The cost of extending utility service lines • Any amount you receive for granting an
gage on the property, your basis is the amount to the property, and
you pay for the property plus the amount that still easement,
• Legal fees, such as the cost of defending
must be paid on the mortgage.
and perfecting title. • Any residential energy credit you were al-
lowed before 1986, or after 2005, if you
Example. You buy a building for $60,000 added the cost of the energy items to the
cash and assume a mortgage of $240,000 on it. Additions or improvements. Add to the
basis of your property the amount an addition or basis of your home, and
Your basis is $300,000.
improvement actually cost you, including any • The amount of depreciation you could
Land and buildings. If you buy buildings and amount you borrowed to make the addition or have deducted on your tax returns under
your cost includes the cost of the land on which improvement. This includes all direct costs, such the method of depreciation you selected. If
they stand, you must divide the cost between the as material and labor, but not your own labor. It you took less depreciation than you could
land and the buildings to figure the basis for also includes all expenses related to the addition have under the method you selected, you
depreciation of the buildings. The part of the cost or improvement. must decrease the basis by the amount
that you allocate to each asset is the ratio of the For example, if you had an architect draw up you could have taken under that method.
fair market value of that asset to the fair market plans for remodeling your property, the archi-
value of the whole property at the time you buy tect’s fee is a part of the cost of the remodeling. If you deducted more depreciation than you
it. Or, if you had your lot surveyed to put up a should have, you must decrease your basis by
If you are not certain of the fair market values fence, the cost of the survey is a part of the cost the amount you should have deducted, plus the
of the land and the buildings, you can divide the of the fence. part of the excess you deducted that actually
cost between them based on their assessed Keep separate accounts for depreciable ad-
lowered your tax liability for any year.
values for real estate tax purposes. ditions or improvements made after you place
the property in service in your rental activity. For
Example. You buy a house and land for information on depreciating additions or im- Basis of Property
$100,000. The purchase contract does not provements, see Additions or improvements to
Changed to Rental Use
specify how much of the purchase price is for the property, earlier, under Recovery Periods Under
house and how much is for the land. GDS. When you change property you held for per-
The latest real estate tax assessment on the The cost of landscaping improvements sonal use to rental use (for example, you rent
property was based on an assessed value of
$80,000, of which $68,000 is for the house and
! is usually treated as an addition to the your former home), you figure the basis for de-
preciation using the lesser of fair market value or
CAUTION
basis of the land, which is not deprecia-
$12,000 is for the land. ble. See What Property Can Be Depreciated, adjusted basis.
You can allocate 85% ($68,000 ÷ $80,000) earlier.
of the purchase price to the house and 15% Fair market value. This is the price at which
($12,000 ÷ $80,000) of the purchase price to the Assessments for local improvements. the property would change hands between a
land. Assessments for items which tend to increase buyer and a seller, neither having to buy or sell,
Your basis in the house is $85,000 (85% of the value of property, such as streets and side- and both having reasonable knowledge of all the
$100,000) and your basis in the land is $15,000 walks, must be added to the basis of the prop- relevant facts. Sales of similar property, on or
(15% of $100,000). erty. For example, if your city installs curbing on about the same date, may be helpful in figuring
the street in front of your house, and assesses the fair market value of the property.
you and your neighbors for the cost of curbing,
Basis Other Than Cost you must add the assessment to the basis of Figuring the basis. The basis for deprecia-
your property. Also add the cost of legal fees tion is the lesser of:
There are many times when you cannot use cost paid to obtain a decrease in an assessment
as a basis. You cannot use cost as a basis for levied against property to pay for local improve- • The fair market value of the property on
property that you received: ments. You cannot deduct these items as taxes the date you changed it to rental use, or
• In return for services you performed,
or depreciate them. • Your adjusted basis on the date of the
Assessments for maintenance or repair or change — that is, your original cost or
• In an exchange for other property, meeting interest charges are deductible as other basis of the property, plus the cost of
taxes. Do not add them to your basis in the
• As a gift,
property.
permanent additions or improvements
since you acquired it, minus deductions for
• From your spouse, or from your former
Deducting vs. capitalizing costs. You any casualty or theft losses claimed on
spouse as the result of a divorce, or earlier years’ income tax returns and other
cannot add to your basis costs that are deducti-
• As an inheritance. ble as current expenses. However, there are decreases to basis.

Example. Several years ago you built your Declining Balance Method 1. Subtract the depreciation taken in the first
home for $140,000 on a lot that cost you year ($100) from the basis of the property
$14,000. Before changing the property to rental To figure your MACRS deduction, first deter- ($1,000), and
use last year, you added $28,000 of permanent mine your declining balance rate from the table
on the next page. However, if you elect to use 2. Multiply the remaining basis ($900) by
improvements to the house and claimed a
the 150% declining balance method for 5- or 22.22%. The depreciation for the second
$3,500 deduction for a casualty loss to the
7-year property, figure the declining balance year is $200.
house. Because land is not depreciable, you can
only include the cost of the house when figuring rate by dividing 1.5 (150%) by the recovery pe-
riod for the property. Residential rental property. In the first year
the basis for depreciation.
In the first tax year, multiply the adjusted that you claim depreciation for residential rental
The adjusted basis of the house at the time
basis of the property by the declining balance property, you can only claim depreciation for the
of the change in use was $164,500 ($140,000 +
rate and apply the appropriate convention to number of months the property is in use, and
$28,000 − $3,500).
figure your depreciation. In later years (before you must use the mid-month convention (ex-
On the date of the change in use, your prop- plained under Conventions, next).
erty had a fair market value of $168,000, of the year you switch to the straight line method),
which $21,000 was for the land and $147,000 use the following steps to figure your deprecia-
was for the house. tion.
Conventions
The basis for depreciation on the house is 1. Reduce your adjusted basis by the depre-
the fair market value at the date of the change ciation allowable for the earlier years. Under MACRS, conventions establish when the
($147,000), because it is less than your adjusted recovery period begins and ends. The conven-
basis ($164,500). 2. Multiply the new adjusted basis in (1) by tion you use determines the number of months
the same rate used in earlier years. for which you can claim depreciation in the year
MACRS Depreciation See Conventions, later, for information on de- you place property in service and in the year you
dispose of the property.
Under GDS preciation in the year you dispose of property.
Mid-month convention. A mid-month con-
You can figure your MACRS depreciation de- Declining balance rates. The following table vention is used for all residential rental property
duction under GDS in one of two ways. The shows the declining balance rate that applies for and nonresidential real property. Under this con-
deduction is substantially the same both ways. each class of property and the first year for vention, you treat all property placed in service,
(The difference, if any, is slight.) You can either: which the straight line method will give an equal or disposed of, during any month as placed in
or greater deduction. (The rates for 5- and
• Actually compute the deduction using the 7-year property are based on the 200% declin-
service, or disposed of, at the midpoint of that
depreciation method and convention that month.
ing balance method. The rate for 15-year prop-
apply over the recovery period of the property is based on the 150% declining balance Mid-quarter convention. A mid-quarter con-
erty, or method.) vention must be used if the mid-month conven-
• Use the percentage from the optional tion does not apply and the total depreciable
MACRS tables, shown later. Class Declining Balance Rate Year basis of MACRS property placed in service in
5 40% 4th the last 3 months of a tax year (excluding non-
If you actually compute the deduction, the de- 7 28.57% 5th residential real property, residential rental prop-
preciation method you use depends on the class 15 10% 7th erty, and property placed in service and
of the property. disposed of in the same year) is more than 40%
of the total basis of all such property you place in
5-, 7-, or 15-year property. For property in the service during the year.
5- or 7-year class, use the 200% declining bal- Straight Line Method
Under this convention, you treat all property
ance method and a half-year convention. How- To figure your MACRS deduction under the placed in service, or disposed of, during any
ever, in limited cases you must use the straight line method, you must apply a different quarter of a tax year as placed in service, or
mid-quarter convention, if it applies. These con- depreciation rate to the adjusted basis of your disposed of, at the midpoint of the quarter.
ventions are explained later. For property in the property for each tax year in the recovery period.
15-year class, use the 150% declining balance In the first year, multiply the adjusted basis of Example. During the tax year, Tom Martin
method and a half-year convention. the property by the straight line rate. You must purchased the following items to use in his rental
You can also choose to use the 150% declin- figure the depreciation for the first year using the property. He elects not to claim the special de-
ing balance method for property in the 5- or convention that applies. (See Conventions, preciation allowance, discussed earlier.
7-year class. The choice to use the 150%
method for one item in a class of property ap-
later.) • A dishwasher for $400 that he placed in
plies to all property in that class that is placed in service in January.
Straight line rate. For any tax year, figure the
service during the tax year of the election. You straight line rate by dividing the number 1 by the • Used furniture for $100 that he placed in
make this election on Form 4562. In Part III, years remaining in the recovery period at the service in September.
column (f), enter “150 DB.” beginning of the tax year. When figuring the
If you use either the 200% or 150% declining number of years remaining, you must take into
• A refrigerator for $500 that he placed in
service in October.
balance method, you figure your deduction us- account the convention used in the first year. If
ing the straight line method in the first tax year the remaining recovery period at the beginning Tom uses the calendar year as his tax year. The
that the straight line method gives you an equal of the tax year is less than 1 year, the straight total basis of all property placed in service that
or larger deduction. line rate for that tax year is 100%. year is $1,000. The $500 basis of the refrigerator
You can also choose to use the straight line placed in service during the last 3 months of his
method with a half-year or mid-quarter conven- Example. You place in service property with tax year exceeds $400 (40% × $1,000). Tom
tion for 5-, 7-, or 15-year property. The choice to a basis of $1,000 and a 5-year recovery period. must use the mid-quarter convention instead of
use the straight line method for one item in a The straight line rate is 20% (1 divided by 5) for the half-year convention for all three items.
class of property applies to all property in that the first tax year. After you apply the half-year
class that is placed in service during the tax year convention, the first year rate is 10% (20% di- Half-year convention. The half-year conven-
of the election. You elect the straight line method vided by 2). Depreciation for the first year is tion is used if neither the mid-quarter convention
on Form 4562. In Part III, column (f), enter “S/L.” $100. nor the mid-month convention applies. Under
Once you make this election, you cannot At the beginning of the second year, the this convention, you treat all property placed in
change to another method. remaining recovery period is 41/2 years because service, or disposed of, during a tax year as
of the half-year convention. The straight line rate placed in service, or disposed of, at the midpoint
Residential rental property. You must use for the second year is 22.22% (1 divided by 4.5). of that tax year.
the straight line method and a mid-month con- To figure your depreciation deduction for the If this convention applies, you deduct a
vention for residential rental property. second year: half-year of depreciation for the first year and the

Figure the depreciation deduction by multi-

Table 4. Optional MACRS Tables plying your unadjusted basis in the property by
Table 4-A. MACRS 5-Year Property the percentage shown in the appropriate table.
Your unadjusted basis is your depreciable basis
Half-year convention Mid-quarter convention without reduction for MACRS depreciation pre-
viously claimed.
Year First Second Third Fourth Once you begin using an optional table to
quarter quarter quarter quarter figure depreciation, you must continue to use it
for the entire recovery period unless there is an
1 20.00% 35.00% 25.00% 15.00% 5.00% adjustment to the basis of your property for a
2 32.00 26.00 30.00 34.00 38.00 reason other than:
3 19.20 15.60 18.00 20.40 22.80
4 11.52 11.01 11.37 12.24 13.68 1. Depreciation allowed or allowable, or
5 11.52 11.01 11.37 11.30 10.94
6 5.76 1.38 4.26 7.06 9.58 2. An addition or improvement that is depreci-
ated as a separate item of property.
Table 4-B. MACRS 7-Year Property If there is an adjustment for any reason other
than (1) or (2) (for example, because of a de-
Half-year convention Mid-quarter convention ductible casualty loss) you can no longer use the
table. For the year of the adjustment and for the
Year First Second Third Fourth remaining recovery period, figure depreciation
quarter quarter quarter quarter using the property’s adjusted basis at the end of
the year and the appropriate depreciation
1 14.29% 25.00% 17.85% 10.71% 3.57% method, as explained earlier under MACRS De-
2 24.49 21.43 23.47 25.51 27.55 preciation Under GDS.
3 17.49 15.31 16.76 18.22 19.68
4 12.49 10.93 11.97 13.02 14.06 Tables 4-A, 4-B, and 4-C. The percentages in
5 8.93 8.75 8.87 9.30 10.04 these tables take into account the half-year and
6 8.92 8.74 8.87 8.85 8.73 mid-quarter conventions. Use Table 4-A for
5-year property, Table 4-B for 7-year property,
and Table 4-C for 15-year property. Use the
Table 4-C. MACRS 15-Year Property
percentage in the second column (half-year con-
Half-year convention Mid-quarter convention vention) unless you must use the mid-quarter
convention (explained earlier). If you must use
Year First Second Third Fourth the mid-quarter convention, use the column that
quarter quarter quarter quarter corresponds to the calendar year quarter in
which you placed the property in service.
1 5.00% 8.75% 6.25% 3.75% 1.25%
2 9.50 9.13 9.38 9.63 9.88 Example 1. You purchased a stove and re-
3 8.55 8.21 8.44 8.66 8.89 frigerator and placed them in service in June.
4 7.70 7.39 7.59 7.80 8.00 Your basis in the stove is $600 and your basis in
5 6.93 6.65 6.83 7.02 7.20 the refrigerator is $1,000. Both are 5-year prop-
6 6.23 5.99 6.15 6.31 6.48 erty. Using the half-year convention column in
Table 4-A, you find the depreciation percentage
Table 4-D. Residential Rental Property (27.5-year) for year 1 is 20%. For that year your depreciation
deduction is $120 ($600 × .20) for the stove and
Use the row for the month of the taxable year placed in service. $200 ($1,000 × .20) for the refrigerator.
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 For year 2, you find your depreciation per-
centage is 32%. That year’s depreciation deduc-
Jan. 3.485% 3.636% 3.636% 3.636% 3.636% 3.636% tion will be $192 ($600 × .32) for the stove and
Feb. 3.182 3.636 3.636 3.636 3.636 3.636 $320 ($1,000 × .32) for the refrigerator.
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 Example 2. Assume the same facts as in
May 2.273 3.636 3.636 3.636 3.636 3.636 Example 1, except you buy the refrigerator in
June 1.970 3.636 3.636 3.636 3.636 3.636 October instead of June. You must use the
July 1.667 3.636 3.636 3.636 3.636 3.636 mid-quarter convention to figure depreciation on
Aug. 1.364 3.636 3.636 3.636 3.636 3.636 the stove and refrigerator. The refrigerator was
Sept. 1.061 3.636 3.636 3.636 3.636 3.636 placed in service in the last 3 months of the tax
Oct. 0.758 3.636 3.636 3.636 3.636 3.636 year, and its basis ($1,000) is more than 40% of
the total basis of all property placed in service
Nov. 0.455 3.636 3.636 3.636 3.636 3.636 during the year ($1,600 × .40 = $640).
Dec. 0.152 3.636 3.636 3.636 3.636 3.636 Because you placed the refrigerator in serv-
ice in October, you use the fourth quarter col-
umn of Table 4-A and find that the depreciation
last year that you depreciate the property. You 4-C make the change from declining balance to percentage for year 1 is 5%. Your depreciation
deduct a full year of depreciation for any other straight line in the year that straight line will yield deduction for the refrigerator is $50 ($1,000 ×
year during the recovery period. a larger deduction. See Declining Balance .05).
Method, earlier. Because you placed the stove in service in
Optional Tables If you elect to use the straight line method for June, you use the second quarter column of
5-, 7-, or 15-year property, or the 150% declining Table 4-A and find that the depreciation percent-
You can use the tables in Table 4 to compute balance method for 5- or 7-year property, use age for year 1 is 25%. For that year, your depre-
annual depreciation under MACRS. The tables the tables in Appendix A of Publication 946. ciation deduction for the stove is $150 ($600 ×
show the percentages for the first 6 years. See .25).
Appendix A of Publication 946 for complete ta-
bles. The percentages in Tables 4-A, 4-B, and How to use the tables. The following section Table 4-D. Use this table for residential rental
explains how to use the optional tables. property. Find the row for the month that you

placed the property in service. Use the percent- other payment you received. For more informa- from passive activities. Nor can you offset taxes
ages listed for that month to figure your depreci- tion, see Publication 547. on income, other than passive income, with
ation deduction. The mid-month convention is credits resulting from passive activities. Any ex-
How to report. If you had a casualty or theft
taken into account in the percentages shown in cess loss or credit is carried forward to the next
that involved property used in your rental activ-
the table. tax year.
ity, you figure the net gain or loss in Section B of
Form 4684, Casualties and Thefts. Also, you For a detailed discussion of these rules, see
Example. You purchased a single family Publication 925.
may have to report the net gain or loss from
rental house and placed it in service in February. You may have to complete Form 8582 to
Form 4684 on Form 4797, Sales of Business
Your basis in the house is $160,000. Using Ta- figure the amount of any passive activity loss for
Property. (Follow the instructions for Form
ble 4-D, you find that the percentage for property the current tax year for all activities and the
4684.)
placed in service in February of year 1 is amount of the passive activity loss allowed on
3.182%. That year’s depreciation deduction is your tax return. See Form 8582 not required
$5,091 ($160,000 × .03182). under Losses From Rental Real Estate Activi-
MACRS Depreciation Limits on ties, later, to determine whether you have to

complete Form 8582.
Under ADS Rental Losses
If you choose, you can use the ADS method for Rental real estate activities are generally con- Exception for Real Estate
most property. Under ADS, you use the straight sidered passive activities, and the amount of Professionals
line method of depreciation. loss you can deduct is limited. Generally, you
Table 3 shows the recovery periods for prop- Rental activities in which you materially partici-
cannot deduct losses from rental real estate
erty used in rental activities that you depreciate pated during the year are not passive activities
activities unless you have income from other
under ADS. if, for that year, you were a real estate profes-
passive activities. However, you may be able to
See Appendix B in Publication 946 for other sional. Losses from these activities are not lim-
deduct rental losses without regard to whether
property. If your property is not listed, it is con- ited by the passive activity rules.
you have income from other passive activities if
sidered to have no class life. Under ADS, per- you “materially” or “actively” participated in your For this purpose, each interest you have in a
sonal property with no class life is depreciated rental activity. See Passive Activity Limits, later. rental real estate activity is a separate activity,
using a recovery period of 12 years. Losses from passive activities are first sub- unless you choose to treat all interests in rental
Use the mid-month convention for residential ject to the at-risk rules. At-risk rules limit the real estate activities as one activity.
rental property and nonresidential real property. amount of deductible losses from holding most If you were a real estate professional for
For all other property, use the half-year or real property placed in service after 1986. 2006, complete line 43 of Schedule E (Form
mid-quarter convention. 1040).
Exception. If your rental losses are less than
Election. For property placed in service dur- $25,000, and you actively participated in the Real estate professional. You qualified as a
ing 2006 you choose to use ADS by entering the rental activity, the passive activity limits probably real estate professional for the tax year if you
depreciation on Form 4562, Part III, line 20. do not apply to you. See Losses From Rental met both of the following requirements.
The election of ADS for one item in a class of Real Estate Activities, later.
property generally applies to all property in that 1. More than half of the personal services
Property used as a home. If you used the
class that is placed in service during the tax year you performed in all trades or businesses
rental property as a home during the year, the
of the election. However, the election applies on during the tax year were performed in real
passive activity rules do not apply to that home.
a property-by-property basis for residential property trades or businesses in which you
Instead, you must follow the rules explained
rental property and nonresidential real property. materially participated.
under Personal Use of Dwelling Unit (Including
Once you choose to use ADS, you cannot
Vacation Home), earlier. 2. You performed more than 750 hours of
change your election.
services during the tax year in real prop-
At-Risk Rules erty trades or businesses in which you ma-
terially participated.
The at-risk rules place a limit on the amount you
Casualties and Thefts can deduct as losses from activities often de-
Do not count personal services you per-
formed as an employee in real property trades or
scribed as tax shelters. Losses from holding real businesses unless you were a 5% owner of your
As a result of a casualty or theft, you may have a
property (other than mineral property) placed in employer. You were a 5% owner if you owned
loss related to your property. You may be able to
service before 1987 are not subject to the at-risk (or are considered to have owned) more than
deduct the loss on your income tax return. For
rules. 5% of your employer’s outstanding stock, or
information on casualty and theft losses (busi-
Generally, any loss from an activity subject capital or profits interest.
ness and nonbusiness), see Publication 547.
to the at-risk rules is allowed only to the extent of
If you file a joint return, do not count your
Casualty. Damage to, destruction of, or loss the total amount you have at risk in the activity at
spouse’s personal services to determine
of property is a casualty if it results from an the end of the tax year. You are considered at
whether you met the preceding requirements.
identifiable event that is sudden, unexpected, or risk in an activity to the extent of cash and the
However, you can count your spouse’s partici-
unusual. adjusted basis of other property you contributed
pation in an activity in determining if you materi-
to the activity and certain amounts borrowed for
Theft. The unlawful taking and removing of ally participated.
use in the activity. See Publication 925 for more
your money or property with the intent to deprive information. Real property trades or businesses. A
you of it is a theft. real property trade or business is a trade or
Gain from casualty or theft. When you have Passive Activity Limits business that does any of the following with real
property.
a casualty to, or theft of, your property and you
In general, all rental activities (except those
receive money, including insurance, that is more • Develops or redevelops it.
meeting the exception for real estate profession-
than your adjusted basis in the property, you
generally must report the gain. However, under
als, below) are passive activities. For this pur- • Constructs or reconstructs it.
pose, a rental activity is an activity from which
certain circumstances, you may defer paying tax • Acquires it.
you receive income mainly for the use of tangi-
by choosing to postpone reporting the gain. To
do this, you must generally buy replacement
ble property, rather than for services. • Converts it.
property within 2 years after the close of the first Limits on passive activity deductions and • Rents or leases it.
tax year in which any part of your gain is real- credits. Deductions for losses from passive
ized. The cost of the replacement property must activities are limited. You generally cannot offset
• Operates or manages it.
be equal to or more than the net insurance or income, other than passive income, with losses • Brokers it.

Material participation. Generally, you materi- Example. Mike is single and had the follow- legislation was enacted, and for more details, go
ally participated in an activity for the tax year if ing income and losses during the tax year: to www.irs.gov, click on More Forms and Publi-
you were involved in its operations on a regular, cations, and then on What’s Hot in forms and
continuous, and substantial basis during the Salary . . . . . . . . . . . . . . . . . . . . . $42,300 publications, or see Publication 553, Highlights
year. For more information, see Publication 925. Dividends . . . . . . . . . . . . . . . . . . . 300 of 2006 Tax Changes.
Interest . . . . . . . . . . . . . . . . . . . . 1,400
Participating spouse. If you are married, Rental loss . . . . . . . . . . . . . . . . . . (4,000)
determine whether you materially participated in
Form 8582 not required. Do not complete
an activity by also counting any participation in The rental loss resulted from the rental of a
house Mike owned. Mike had advertised and Form 8582 if you meet all of the following condi-
the activity by your spouse during the year. Do
rented the house to the current tenant himself. tions.
this even if your spouse owns no interest in the
activity or files a separate return for the year. He also collected the rents, which usually came • Your only passive activities were rental
by mail. All repairs were either done or con- real estate activities in which you actively
Choice to treat all interests as one activity. tracted out by Mike. participated.
If you were a real estate professional and had Even though the rental loss is a loss from a
more than one rental real estate interest during passive activity, because Mike actively partici- • Your overall net loss from these activities
the year, you can choose to treat all the interests pated in the rental property management, he is $25,000 or less ($12,500 or less if mar-
as one activity. You can make this choice for any can use the entire $4,000 loss to offset his other ried filing separately).
year that you qualify as a real estate profes- income. • You do not have any prior year unallowed
sional. If you forgo making the choice for one losses from any passive activities.
year, you can still make it for a later year. Maximum special allowance. If your modi-
If you make the choice, it is binding for the fied adjusted gross income is $100,000 or less • If married filing separately, you lived apart
($50,000 or less if married filing separately), you from your spouse all year.
tax year you make it and for any later year that
you are a real estate professional. This is true can deduct your loss up to $25,000 ($12,500 if • You have no current or prior year unal-
even if you are not a real estate professional in married filing separately). If your modified ad- lowed credits from passive activities.
any intervening year. (For that year, the excep- justed gross income is more than $100,000
tion for real estate professionals will not apply in (more than $50,000 if married filing separately), • Your modified adjusted gross income is
determining whether your activity is subject to this special allowance is limited to 50% of the $100,000 or less ($50,000 or less if mar-
the passive activity rules.) difference between $150,000 ($75,000 if married filing separately).
ried filing separately) and your modified ad-
See the instructions for Schedule E (Form • You do not hold any interest in a rental
justed gross income. If your modified adjusted
1040) for information about making this choice. real estate activity as a limited partner or
gross income is $150,000 or more ($75,000 or
as a beneficiary of an estate or a trust.
more if you are married filing separately), you
generally cannot use the special allowance.
Losses From Rental If you meet all of the conditions listed above,
Real Estate Activities Modified adjusted gross income. This is your rental real estate activities are not limited
your adjusted gross income from Form 1040, by the passive activity rules and you do not have
If you or your spouse actively participated in a line 38, figured without taking into account: to complete Form 8582. Enter each rental real
passive rental real estate activity, you can de-
estate loss from line 22 of Schedule E (Form
duct up to $25,000 of loss from the activity from 1. Taxable social security or equivalent tier 1
1040) on line 23 of Schedule E.
your nonpassive income. This special allowance railroad retirement benefits,
is an exception to the general rule disallowing If you do not meet all of the conditions listed
2. Deductible contributions to an IRA or cer- above, see the instructions for Form 8582 to find
losses in excess of income from passive activi-
tain other qualified retirement plans,
ties. Similarly, you can offset credits from the out if you must complete and attach that form to
activity against the tax on up to $25,000 of 3. The exclusion allowed for qualified U.S. your tax return.
nonpassive income after taking into account any savings bond interest used to pay higher
losses allowed under this exception. educational expenses,
If you are married, filing a separate return, 4. The exclusion allowed for em-
and lived apart from your spouse for the entire
tax year, your special allowance cannot be more
ployer-provided adoption benefits, How To Report
than $12,500. If you lived with your spouse at 5. Any passive activity income or loss in-
cluded on Form 8582,
Rental Income
any time during the year and are filing a sepa-
rate return, you cannot use the special allow- 6. Any passive income or loss or any loss and Expenses
ance to reduce your nonpassive income or tax allowable by reason of the exception for
on nonpassive income. real estate professionals discussed earlier, If you rent buildings, rooms, or apartments, and
The maximum amount of the special allow- provide only heat and light, trash collection, etc.,
ance is reduced if your modified adjusted gross 7. Any overall loss from a publicly traded
you normally report your rental income and ex-
income is more than $100,000 ($50,000 if mar- partnership (see Publicly Traded Partner-
penses on Schedule E (Form 1040), Part I. How-
ried filing separately). ships (PTPs) in the instructions for Form
ever, do not use that schedule to report a
8582),
not-for-profit activity. See Not Rented For Profit,
Example. Jane is single and has $40,000 in 8. The deduction for one-half of earlier.
wages, $2,000 of passive income from a limited self-employment tax, If you provide significant services that are
partnership, and $3,500 of passive loss from a
rental real estate activity in which she actively 9. The deduction allowed for interest on stu- primarily for your tenant’s convenience, such as
participated. $2,000 of Jane’s $3,500 loss off- dent loans, or regular cleaning, changing linen, or maid serv-
sets her passive income. The remaining $1,500 ice, you report your rental income and expenses
10. The deduction for income attributable to
loss can be deducted from her $40,000 wages. domestic activities (see the instructions for on Schedule C (Form 1040), Profit or Loss From
Form 8903). Business, or Schedule C-EZ, Net Profit From
Active participation. You actively partici- Business. Significant services do not include the
pated in a rental real estate activity if you (and At the time this publication went to furnishing of heat and light, cleaning of public
your spouse) owned at least 10% of the rental ! print, Congress was considering legis- areas, trash collection, etc. For information, see
Publication 334, Tax Guide for Small Business
property and you made management decisions CAUTION
lation that would extend the deduction
in a significant and bona fide sense. Manage- for tuition and fees. If this deduction is extended, (For Individuals Who Use Schedule C or C-EZ).
ment decisions include approving new tenants, it also would not be taken into account when You also may have to pay self-employment tax
deciding on rental terms, approving expendi- figuring modified adjusted gross income for the on your rental income. See chapter 10 in Publi-
tures, and similar decisions. maximum special allowance. To find out if this cation 334, Tax Guide for Small Business.

Schedule E (Form 1040) to return it to her tenant at the end of the lease, She uses Table 4-D to find her depreciation
she does not include it in her income. Her house percentage. Because she placed the property in
Use Schedule E (Form 1040), Part I, to report expenses for the year are as follows: service in February, she finds the percentage to
your rental income and expenses. List your total be 3.182%.
income, expenses, and depreciation for each Mortgage interest . . . . . . . . . . . . . . $1,800
Fire insurance (1-year policy) . . . . . . 100 On April 1, Eileen bought a new dishwasher
rental property. Be sure to answer the question
Miscellaneous repairs (after renting) 297 for the rental property at a cost of $425. The
on line 2.
If you have more than three rental or royalty Real estate taxes imposed and paid 1,200 dishwasher is personal property used in a rental
properties, complete and attach as many real estate activity, which has a 5-year recovery
Eileen must divide the real estate taxes,
Schedules E as are needed to list the properties. period. She uses the percentage under
mortgage interest, and fire insurance between
Complete lines 1 and 2 for each property. How- “Half-year convention” in Table 4-A to figure her
the personal use of the property and the rental
ever, fill in the “Totals” column on only one MACRS depreciation deduction for the dish-
use of the property. She can deduct
Schedule E. The figures in the “Totals” column washer.
eleven-twelfths of these expenses as rental ex-
on that Schedule E should be the combined On May 1, Eileen paid $4,000 to have a
penses. She can include the balance of the
totals of all Schedules E.
allowable taxes and mortgage interest on furnace installed in the house. The furnace is
Page 2 of Schedule E is used to report in-
Schedule A (Form 1040) if she itemizes. She residential rental property. Because she placed
come or loss from partnerships, S corporations,
estates, trusts, and real estate mortgage invest- cannot deduct the balance of the fire insurance the property in service in May, she finds the
ment conduits. If you need to use page 2 of because it is a personal expense. percentage from Table 4-D to be 2.273%.
Schedule E, use page 2 of the same Schedule E Eileen bought this house in 1981 for Eileen figures her net rental income or loss
you used to enter the combined totals in Part I. $35,000. Her property tax was based on as- for the house as follows:
On Schedule E, page 1, line 20, enter the sessed values of $10,000 for the land and
depreciation you are claiming. You must com- $25,000 for the house. Before changing it to Total rental income received
plete and attach Form 4562 for rental activities rental property, Eileen added several improve- ($750 × 11) . . . . . . . . . . . . . $8,250
only if you are claiming: ments to the house. She figures her adjusted Minus: Expenses
basis as follows: Mortgage interest ($1,800 ×
• Depreciation on property placed in service 11/12) . . . . . . . . . . . . . . . . $1,650
during 2006, Improvements Cost Fire insurance ($100 × 11/12) 92
• Depreciation on listed property (such as a House . . . . . . . . . . . . . . . . . . . . . $25,000 Miscellaneous repairs . . . . 297
car), regardless of when it was placed in Remodeled kitchen . . . . . . . . . . . . 4,200 Real estate taxes ($1,200 ×
Recreation room . . . . . . . . . . . . . . 5,800 11/12) . . . . . . . . . . . . . . . . 1,100
service, or
New roof . . . . . . . . . . . . . . . . . . . 1,600 Total expenses . . . . . . . . . 3,139
• Any car expenses reported on a form Patio and deck . . . . . . . . . . . . . . . 2,400 Balance . . . . . . . . . . . . . . . $5,111
other than Schedule C or C-EZ (Form Adjusted basis . . . . . . . . . . . . . . . $39,000 Minus: Depreciation
1040) or Form 2106 or Form 2106-EZ. House ($39,000 × 3.182%) $1,241
On February 1, when Eileen changed her Dishwasher ($425 × 20%) 85
Otherwise, figure your depreciation on your own house to rental property, the property had a fair Furnace ($4,000 × 2.273%) 91
worksheet. You do not have to attach these market value of $152,000. Of this amount, Total depreciation . . . . . . . 1,417
computations to your return. $35,000 was for the land and $117,000 was for Net rental income for house $3,694
the house.
Illustrated Example Because Eileen’s adjusted basis is less than Eileen uses Schedule E (Form 1040), Part I,
the fair market value on the date of the change, to report her rental income and expenses. She
In January, Eileen Johnson bought a condomin-
Eileen uses $39,000 as her basis for deprecia- enters her income, expenses, and depreciation
ium apartment to live in. Instead of selling the
house she had been living in, she decided to tion. for the house in the column for Property A. She
change it to rental property. Eileen selected a Because the house is residential rental prop- uses Form 4562 to figure and report her depreci-
tenant and started renting the house on Febru- erty, she must use the straight line method of ation. Eileen’s Schedule E (Form 1040) is
ary 1. Eileen charges $750 a month for rent and depreciation using either the GDS recovery pe- shown next. Her Form 4562 is not shown. See
collects it herself. Eileen received a $750 secur- riod or the ADS recovery period. She chooses Publication 946 for information on how to pre-
ity deposit from her tenant. Because she plans the GDS recovery period of 27.5 years. pare Form 4562.

SCHEDULE E OMB No. 1545-0074

Supplemental Income and Loss
(Form 1040)
Department of the Treasury
(From rental real estate, royalties, partnerships,
S corporations, estates, trusts, REMICs, etc.) 2006
Attachment
䊳䊳
Internal Revenue Service (99) Attach to Form 1040, 1040NR, or Form 1041. See Instructions for Schedule E (Form 1040). Sequence No. 13
Name(s) shown on return Your social security number
Eileen Johnson 123 00 4567
Part I Income or Loss From Rental Real Estate and Royalties Note. If you are in the business of renting personal property, use
Schedule C or C-EZ (see page E-3). Report farm rental income or loss from Form 4835 on page 2, line 40.
1 List the type and location of each rental real estate property: 2 For each rental real estate property Yes No
Brick House listed on line 1, did you or your family
A use it during the tax year for personal ⻫
123 Main Street, Hometown, MN 56200 purposes for more than the greater of: A
B ● 14 days or
● 10% of the total days rented at B
C fair rental value?
(See page E-3.) C
Properties Totals
Income: (Add columns A, B, and C.)
A B C
3 Rents received 3 8,250 3 8,250
4 Royalties received 4 4
Expenses:
5 Advertising 5
6 Auto and travel (see page E-4) 6
7 Cleaning and maintenance 7
8 Commissions 8
9 Insurance 9 92
10 Legal and other professional fees 10
11 Management fees 11
12 Mortgage interest paid to banks,
etc. (see page E-4) 12 1,650 12 1,650
13 Other interest 13
14 Repairs 14 297
15 Supplies 15
16 Taxes 16 1,100
17 Utilities 17
18 Other (list) 䊳
18
19 Add lines 5 through 18 19 3,139 19 3,139

20 Depreciation expense or depletion
(see page E-4) 20 1,417 20 1,417
21 Total expenses. Add lines 19 and 20 21 4,556
22 Income or (loss) from rental real
estate or royalty properties.
Subtract line 21 from line 3 (rents)
or line 4 (royalties). If the result is
a (loss), see page E-5 to find out
if you must file Form 6198 22 3,694
23 Deductible rental real estate loss.
Caution. Your rental real estate
loss on line 22 may be limited. See
page E-5 to find out if you must
f i l e Form 8582. Real estate
professionals must complete line
43 on page 2 23 ( ) ( ) ( )
24 Income. Add positive amounts shown on line 22. Do not include any losses 24 3,694
25 Losses. Add royalty losses from line 22 and rental real estate losses from line 23. Enter total losses here 25 ( )
26 Total rental real estate and royalty income or (loss). Combine lines 24 and 25. Enter the result here.
If Parts II, III, IV, and line 40 on page 2 do not apply to you, also enter this amount on Form 1040,
line 17, or Form 1040NR, line 18. Otherwise, include this amount in the total on line 41 on page 2 26 3,694
For Paperwork Reduction Act Notice, see page E-7 of the instructions. Cat. No. 11344L Schedule E (Form 1040) 2006

How To Get Tax Help

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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.
A Assessments for Comments on publication . . . . 2 MACRS (See Modified

Accelerated Cost Recovery maintenance . . . . . . . . . . . . . . 12 Commissions . . . . . . . . . . . . . . . . 3 Accelerated Cost Recovery
System (ACRS): (See also Assessments, local (See Local Computers: System (MACRS))
Modified Accelerated Cost assessments) MACRS recovery Methods . . . . . . . . . . . . . . . . . 9, 13
Recovery System Assistance (See Tax help) periods . . . . . . . . . . . . . . . . . . 11 Ownership of property . . . . . . . 9
(MACRS)) . . . . . . . . . . . . . . . . . 10 Assumption of mortgage . . . . 12 Condominiums . . . . . . . . . . . . . 4, 6 Placement in service . . . . . . . . 5
Effective date . . . . . . . . . . . . . . . 9 Rental expense . . . . . . . . . . . . . 3
At-risk rules . . . . . . . . . . . . . . . . . 15 Constructive receipt of
Accounting methods: Rented property . . . . . . . . . . . . . 9
Attorneys’ fees . . . . . . . . . . 11, 12 income . . . . . . . . . . . . . . . . . . . . . 2
Section 179 deduction . . . . . . . 9
Accrual method . . . . . . . . . . . . . 2 Automobiles: Cooperative housing . . . . 5, 6, 9
Special depreciation
Cash method . . . . . . . . . . . . . . . 2 MACRS recovery Cost basis . . . . . . . . . . . . . . . . . . . 11 allowances . . . . . . . . . . . . . . . 9
Change of method . . . . . . . . . . . 9 periods . . . . . . . . . . . . . . . . . . 11 Credit reports . . . . . . . . . . . . . . . 12 Straight line method . . . . . . 9, 13
Constructive receipt of Credits: Useful life . . . . . . . . . . . . . . . . . . . 9
income . . . . . . . . . . . . . . . . . . . 2 B Residential energy credit before Vacant rental property . . . . . . . 3
Accrual method taxpayers . . . 2 Basis: 1986 . . . . . . . . . . . . . . . . . . . . 12 Discount, bonds and notes
ACRS (Accelerated Cost Adjusted basis . . . . . . . . . . . . . 12 issued at (See Original issue
Recovery System): Assessments for local discount (OID))
Effective date . . . . . . . . . . . . . . . 9 improvements . . . . . . . . . . . . 12
D Dividing of expenses (See
Active participation . . . . . . . . . 16 Basis other than cost . . . . . . . 12 Days of personal use . . . . . . . . . 6 Allocation of expenses)
Activities not for profit . . . . . . . 5 Cost basis . . . . . . . . . . . . . . . . . 11 Days used for repairs and Dwelling units:
Additions to property: (See also Decreases to . . . . . . . . . . . . . . . 12 maintenance . . . . . . . . . . . . . . . 8 Definition . . . . . . . . . . . . . . . . . . . 6
Improvements) . . . . . . . . . . . . . 11 Deductions: Deductions: (See also Rental Fair rental price . . . . . . . . . . . . . 6
Basis . . . . . . . . . . . . . . . . . . . . . . 12 Capitalization of costs expenses) . . . . . . . . . . . . . . . . . . 2 Personal use of . . . . . . . . . . . 5, 6
MACRS recovery period . . . . 11 vs. . . . . . . . . . . . . . . . . . . . . 12 Capitalizing costs vs. effect on
Not greater than basis . . . . . 9 basis . . . . . . . . . . . . . . . . . . . . 12
Adjusted basis: E
Fair market value . . . . . . . . . . . 12 Depreciation (See Depreciation)
MACRS depreciation . . . . . . . 12 Easements . . . . . . . . . . . . . . . . . . 12
Increases to . . . . . . . . . . . . . . . . 12 How to figure rental
Adjusted gross income (AGI): deductions . . . . . . . . . . . . . . . . 8 Equipment rental expense . . . . 3
MACRS depreciable
Modified (See Modified adjusted basis . . . . . . . . . . . . . . . . . . . . 11 Limitations on . . . . . . . . . . . . 8, 15 Expenses (See Rental expenses)
gross income (MAGI)) Property changed to rental Passive activity losses (See
Advance rent . . . . . . . . . . . . . . . . . 2 use . . . . . . . . . . . . . . . . . . . . . . 12 Passive activity)
Security deposits . . . . . . . . . . . . 2 Property not used as
F
Advertising . . . . . . . . . . . . . . . . . . . 3 home . . . . . . . . . . . . . . . . . . . . . 8 Fair market value (FMV) . . . . . 12
C Fair rental price . . . . . . . . . . . . 6, 8
Allocation of expenses: Property used as home . . . . . . 8
Capital expenditures: Fees:
Change of property to rental Depreciation . . . . . . . . . . . . . . 8-15
Deductions vs. effect on Loan origination fees . . . . . 4, 12
use . . . . . . . . . . . . . . . . . . . . . . . 5 Alternative Depreciation System
basis . . . . . . . . . . . . . . . . . . . . 12 Points (See Points)
How to divide expenses . . . . . . 8 (ADS) (See Modified
Improvements . . . . . . . . . . . . . . . 3 Settlement fees and other
Part of property rented . . . . . . . 5 Accelerated Cost Recovery
Local benefit taxes . . . . . . . . . . 3 costs . . . . . . . . . . . . . . . . . . . . 11
Personal use of rental System (MACRS))
Mortgages, payments to Tax return preparation
property . . . . . . . . . . . . . . . . 3, 5 obtain . . . . . . . . . . . . . . . . . . . . 3 Basis (See Basis)
Change of accounting fees . . . . . . . . . . . . . . . . . . . . 3, 4
Alternative Depreciation System Cars:
method . . . . . . . . . . . . . . . . . . . 9 First-year expensing . . . . . . . . . 9
(ADS): MACRS recovery
Change of property to rental Form 1040:
Election of . . . . . . . . . . . . . . . . . 15 periods . . . . . . . . . . . . . . . . . . 11
use . . . . . . . . . . . . . . . . . . . . 5, 10 Not rented for profit
MACRS . . . . . . . . . . . . . . . 10, 14 Cash method taxpayers . . . . . . 2
Claiming correct amount income . . . . . . . . . . . . . . . . . . . 5
Alternative minimum tax (AMT): Casualty losses . . . . . . . . . . . . . 15 Part of property rented . . . . . . . 5
of . . . . . . . . . . . . . . . . . . . . . . . . 8
Accelerated depreciation Change of accounting Declining balance Rental income and
methods . . . . . . . . . . . . . . . . . . 9 method . . . . . . . . . . . . . . . . . . . . 9 method . . . . . . . . . . . . . . . . 9, 13 expenses . . . . . . . . . . . . . . . . 16
Amended returns . . . . . . . . . . . . . 9 Charitable contributions: Duration of property expected to Schedule E . . . . . . . . . . . . . . . . 17
Apartments: Use of property . . . . . . . . . . . . . . 6 last more than one year . . . 9 Form 1098:
Basement apartments . . . . . . . 6 Cleaning and Eligible property . . . . . . . . . . . . . 9 Mortgage interest . . . . . . . . . . . 3
Dwelling units . . . . . . . . . . . . . . . 6 maintenance . . . . . . . . . . . . . . . 3 Excepted property . . . . . . . . . . . 9 Form 4684:
Appraisal fees . . . . . . . . . . . . . . . 12 Closing costs . . . . . . . . . . . . . . . 11 First-year expensing . . . . . . . . . 9 Casualties and thefts . . . . . . . 15

Form 4797: Loans: P Home, property also used

Sales of business Assumption fees . . . . . . . . . . . 12 Part interest: as . . . . . . . . . . . . . . . . . . . . . . 2, 8
property . . . . . . . . . . . . . . . . . 15 Charges connected with getting Expenses . . . . . . . . . . . . . . . . . . . 3 Improvements . . . . . . . . . . . . . . . 3
Form 8582: or refinancing, cost Income . . . . . . . . . . . . . . . . . . . . . 2 Insurance . . . . . . . . . . . . . . . . . . . 3
Passive activity losses . . . . . 15, basis . . . . . . . . . . . . . . . . . . . . 12 Passive activity . . . . . . . . . . . . . 15 Interest payments . . . . . . . . . . . 3
16 Low or no interest . . . . . . . . . . 11 Maximum special Local transportation
Free tax services . . . . . . . . . . . . 19 Origination fees . . . . . . . . . . . . . 4 allowance . . . . . . . . . . . . . . . . 16 expenses . . . . . . . . . . . . . . . 3, 4
Local assessments . . . . . . . . . . 12 Personal property: Not used as home . . . . . . . . . . . 8
Losses (See Gains and losses) Rental income from . . . . . . . . . . 2 Part of property rented . . . . . . . 5
G Points . . . . . . . . . . . . . . . . . . . . 3, 4
Personal use of rental property:
Gains and losses: Pre-rental expenses . . . . . . . . . 3
(See also Property changed to
At-risk rules . . . . . . . . . . . . . . . . 15 M Rental payments . . . . . . . . . . . . 3
rental use) . . . . . . . . . . . . . . . . 5-8
Casualty and theft Material participation . . . . . . . . 15 Repairs . . . . . . . . . . . . . . . . . . . . . 3
Placed-in-service date . . . . . . . 11
losses . . . . . . . . . . . . . . . . . . . 15 Minimal rental use Sale of property . . . . . . . . . . . . . 3
Limits on rental losses . . . . . . 15 Points . . . . . . . . . . . . . . . . . . 3, 4, 12
exception . . . . . . . . . . . . . . . . . . 5 Tax return preparation
Passive activity losses . . . . . . 15 Pre-rental expenses . . . . . . . . . . 3 fees . . . . . . . . . . . . . . . . . . . . 3, 4
Missing children, photographs Principal residence (See Home)
Rental real estate Taxes . . . . . . . . . . . . . . . . . . . . . . 3
of . . . . . . . . . . . . . . . . . . . . . . . . . . 1
activities . . . . . . . . . . . . . . . . . 16 Profit, property not rented Tenant, paid by . . . . . . . . . . . . . 2
Sale of rental property . . . . 2, 15 Modified Accelerated Cost for . . . . . . . . . . . . . . . . . . . . . . . . . 5 Travel expenses . . . . . . . . . . . . 3
Recovery System
General depreciation system Property changed to rental Utilities . . . . . . . . . . . . . . . . . . . . . 3
(MACRS) . . . . . . . . . . . . . . . 10-15
(GDS) (See Modified use . . . . . . . . . . . . . . . . . . . . . . . . . 5 Vacant rental property . . . . . . . 3
Accelerated Cost Recovery Additions or improvements to Basis . . . . . . . . . . . . . . . . . . . . . . 12 Rental income:
System (MACRS)) property . . . . . . . . . . . . . . . . . 11
MACRS depreciation . . . . . . . 10 Advance rent . . . . . . . . . . . . . . . . 2
Adjusted basis . . . . . . . . . . . . . 12
Property not used as home: Cancellation of lease
Alternative Depreciation System Rental income and payments . . . . . . . . . . . . . . . . . 2
H (ADS) . . . . . . . . . . . . . . . 10, 15 deductions . . . . . . . . . . . . . . . . 8 Dwelling unit used as
Help (See Tax help) Basis other than cost . . . . . . . 12 home . . . . . . . . . . . . . . . . . . . . . 6
Property used as home (See
Home: Conventions . . . . . . . . . . . . . . . 13 Use of home) Figuring . . . . . . . . . . . . . . . . . . . . 8
Main home . . . . . . . . . . . . . . . . . . 6 Cost basis . . . . . . . . . . . . . . . . . 11 Lease with option to buy . . . . . 2
Publications (See Tax help)
Use as rental property (See Use Declining balance Minimal rental use
of home) method . . . . . . . . . . . . . . . . . . 13 exception . . . . . . . . . . . . . . . . . 5
Depreciable basis . . . . . . . . . . 11 Q Not rented for profit . . . . . . . . . . 5
Determination of Qualified Gulf Opportunity Zone Not used as home . . . . . . . . . . . 8
I deduction . . . . . . . . . . . . . . . . 10 property: Part interest . . . . . . . . . . . . . . . . . 2
Improvements: (See also Effective date . . . . . . . . . . . . . . . 9 Acquisition date test . . . . . . . . 10 Property received from
Repairs) . . . . . . . . . . . . . . . . . . . . 3 Excluded property . . . . . . . . . . 10 Excepted property . . . . . . . . . . 10 tenant . . . . . . . . . . . . . . . . . . . . 2
Assessments for local General Depreciation System Original use test . . . . . . . . . . . . 10 Reporting . . . . . . . . . . . . . . . . 2, 16
improvements . . . . . . . . . . . . 12 (GDS) . . . . . . . . . . . . . . . 10, 13 Security deposit . . . . . . . . . . . . . 2
Placed in service date
Basis . . . . . . . . . . . . . . . . . . . . . . 12 Nonresidential rental Services received from
test . . . . . . . . . . . . . . . . . . . . . . 10
Depreciation of rented property . . . . . . . . . . . . . . . . . 10 tenant . . . . . . . . . . . . . . . . . . . . 2
Substantial use test . . . . . . . . 10
property . . . . . . . . . . . . . . . . . . 9 Personal home changed to Uncollected rent . . . . . . . . . . . . . 3
Qualified Gulf Opportunity Zone
MACRS recovery period . . . . 11 rental use . . . . . . . . . . . . . . . . 10 Used as home . . . . . . . . . . . . 2, 8
property, requirements for the
Indian reservation Property used in rental activities Rental losses (See Gains and
special allowance . . . . . . . . . . 9
property . . . . . . . . . . . . . . . . . . . 11 (Table 3) . . . . . . . . . . . . . . . . . 9 losses; Passive activity)
Insurance . . . . . . . . . . . . . . . . . . . . 3 Recovery periods . . . . . . . . . 9, 13 Repairs: (See also
Casualty or theft loss Residential rental R Improvements) . . . . . . . . . . . . . . 3
payments . . . . . . . . . . . . . . . . 12 property . . . . . . . . . . . . . 11, 13 Real estate Assessments for
Change of property to rental professionals . . . . . . . . . . . . . 15 maintenance . . . . . . . . . . . . . 12
Special depreciation
use . . . . . . . . . . . . . . . . . . . . . . . 5 Passive activity rules, exception Personal use of rental property
allowances . . . . . . . . . . . . . . . 9
Fire insurance premiums, cost to . . . . . . . . . . . . . . . . . . . . . . . 15 exception for days used for
Straight line method . . . . . . . . 13
basis . . . . . . . . . . . . . . . . . . . . 12 repairs and
Modified adjusted gross income Real estate taxes . . . . . . . . . . . . 11
Part of property rented . . . . . . . 5 maintenance . . . . . . . . . . . . . . 8
(MAGI) . . . . . . . . . . . . . . . . . . . . 16 Real property trades or
Premiums paid in
More information (See Tax help) businesses . . . . . . . . . . . . . . . . 15
advance . . . . . . . . . . . . . . . . . . 3
Title insurance, cost Mortgages . . . . . . . . . . . . . . . . . . . . 3 Recordkeeping requirements:
S
basis . . . . . . . . . . . . . . . . . . . . 11 Assumption of, cost Travel and transportation
Sale of property:
Interest payments: (See also basis . . . . . . . . . . . . . . . . . . . . 12 expenses . . . . . . . . . . . . . . . . . 4
Expenses . . . . . . . . . . . . . . . . . . . 3
Mortgages) . . . . . . . . . . . . . . . . . 3 Change of property to rental Recovery periods . . . . . . . . . . . 11
Gain or loss . . . . . . . . . . . . . . 2, 15
Loan origination fees . . . . . . . . 4 use . . . . . . . . . . . . . . . . . . . . . . . 5 Rent . . . . . . . . . . . . . . . . . . . . . . . . . 12 Main home . . . . . . . . . . . . . . . . . . 2
Rental expenses . . . . . . . . . . . . 3 End of, OID . . . . . . . . . . . . . . . . . 4 Advance rent . . . . . . . . . . . . . . . . 2
Section 179 deductions . . . . . . 9
Interest . . . . . . . . . . . . . . . . . . . 3, 5 Fair price . . . . . . . . . . . . . . . . . . . 6
Security deposits . . . . . . . . . . . . 2
Mortgage insurance Rental expenses . . . . . . . . . . . . . 2
L Settlement fees . . . . . . . . . . . . . 11
premiums . . . . . . . . . . . . . . . . 12 Advertising . . . . . . . . . . . . . . . . . . 3
Land: Allocation between rental and Shared equity financing
Part of property rented . . . . . . . 5
Cost basis . . . . . . . . . . . . . . . . . 12 personal uses . . . . . . . . . . . . . 8 agreements . . . . . . . . . . . . . . . . 6
Depreciation . . . . . . . . . . . . . . . . 9 Change of property to rental Special depreciation allowance:
Leases: N use . . . . . . . . . . . . . . . . . . . . . . . 5 Qualified Gulf Opportunity Zone
Cancellation payments . . . . . . 2 Nonresidential real Cleaning and property . . . . . . . . . . . . . . . . . . 9
Equipment leasing . . . . . . . . . . . 3 property . . . . . . . . . . . . . . . . . . . 10 maintenance . . . . . . . . . . . . . . 3 Special depreciation
Limits: Not-for-profit activities . . . . . . . 5 Commissions . . . . . . . . . . . . . . . 3 allowances . . . . . . . . . . . . . . . . . 9
Passive activity losses and Deductions, how to figure . . . . 8 Spouse:
credits . . . . . . . . . . . . . . . . . . . 15 Depreciation . . . . . . . . . . . . . . . . 3 Material participation . . . . . . . 16
Rental expense O Dwelling unit used as Standard mileage rates . . . . . . . 4
deductions . . . . . . . . . . . . . . . . 8 Original issue discount home . . . . . . . . . . . . . . . . . . . . . 6 Suggestions for
Rental losses . . . . . . . . . . . . . . 15 (OID) . . . . . . . . . . . . . . . . . . . . . . . 4 Equipment rental . . . . . . . . . . . . 3 publication . . . . . . . . . . . . . . . . . 2

Surveys . . . . . . . . . . . . . . . . . . . . . 11 Tax help . . . . . . . . . . . . . . . . . . . . . 19 TTY/TDD information . . . . . . . . 19 Utilities . . . . . . . . . . . . . . . . . . . . 3, 12

Tax return preparation
T fees . . . . . . . . . . . . . . . . . . . . . . 3, 4 U V
Tables and figures: Taxes: Uncollected rent: Vacant rental property . . . . . . . . 3
Declining balance depreciation Deduction of . . . . . . . . . . . . . . . . 3 Income . . . . . . . . . . . . . . . . . . . . . 3 Vacation homes:
rates . . . . . . . . . . . . . . . . . . . . 13 Local benefit taxes . . . . . . . . . . 3
Use of home: Dividing of expenses . . . . . . . . 8
Improvements, examples of Real estate taxes . . . . . . . . . . . 11
Before or after renting . . . . . . . 6 Dwelling unit . . . . . . . . . . . . . . . . 6
(Table 1) . . . . . . . . . . . . . . . . . 3 Transfer taxes . . . . . . . . . . . . . 11
Change to rental use . . . . . 5, 10 Fair rental price . . . . . . . . . . . . . 6
MACRS optional tables (Table Taxpayer Advocate . . . . . . . . . . 19 Days of personal use . . . . . . . . 6 Minimal rental use
4 – D) . . . . . . . . . . . . . . . . . . . . 14 Theft losses . . . . . . . . . . . . . . . . . 15 Fair rental price . . . . . . . . . . . . . 6 exception . . . . . . . . . . . . . . . . . 5
MACRS optional tables (Tables Title insurance . . . . . . . . . . . . . . 11 Minimal rental use Personal use of . . . . . . . . . . . . . 5
4 – A, 4 – B, and 4 – C) . . . . . 14 Transfer taxes . . . . . . . . . . . . . . . 11 exception . . . . . . . . . . . . . . . . . 5 Valuation:
MACRS recovery periods for Travel and transportation Passive activity rules Fair market value . . . . . . . . . . . 12
rental activity property (Table expenses: exception . . . . . . . . . . . . . . . . 15
3) . . . . . . . . . . . . . . . . . . . . . . . . 9 Local transportation Personal use as dwelling ■
Tax credits: expenses . . . . . . . . . . . . . . . 3, 4 unit . . . . . . . . . . . . . . . . . . . . . . . 5
Residential energy credit Recordkeeping . . . . . . . . . . . . . . 4 Rental income and
allowed before 1986, effect Rental expenses . . . . . . . . . . . . 3 deductions . . . . . . . . . . . . . . . . 8
on basis . . . . . . . . . . . . . . . . . 12 Standard mileage rate . . . . . . . 4

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Userid: ________ DTD TIP04 Leading adjust: 0% ❏ Draft ❏ Ok to Print

PAGER/SGML Fileid: P527.SGM (21-Nov-2006) (Init. & date)

Page 1 of 22 of Publication 527 9:33 - 21-NOV-2006

Property Repairs and Improvements . . . .

2006 Returns How To Divide Expenses . . . .

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A. Enter the amount from Form 4684, line 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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1. The date the addition or improvement is

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Figure the depreciation deduction by multi-

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MACRS Depreciation Limits on ties, later, to determine whether you have to

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SCHEDULE E OMB No. 1545-0074

19 Add lines 5 through 18 19 3,139 19 3,139

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How To Get Tax Help

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A Assessments for Comments on publication . . . . 2 MACRS (See Modified

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Form 4797: Loans: P Home, property also used

Publication 527 (2006) Page 21

Surveys . . . . . . . . . . . . . . . . . . . . . 11 Tax help . . . . . . . . . . . . . . . . . . . . . 19 TTY/TDD information . . . . . . . . 19 Utilities . . . . . . . . . . . . . . . . . . . . 3, 12

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