Chapter 9

Income From Real Estate Rentals and Royalties

Use Schedule E of Form 1040 to report real estate rental income and expenses. You must also file Form 4562 to claim depreciation deductions for buildings you placed in service in 2012.

Use Schedule C instead of Schedule E if you provide substantial services for the convenience of the tenants, such as maid service. That is, Schedule C is used to report payments received for the use and occupancy of rooms or other areas in a hotel, motel, boarding house, apartment, tourist home, or trailer court where services are provided primarily for the occupant.

If you rent out an apartment or room in the same building in which you live, you report the rent income less expenses allocated to the rental property (9.4).

The law prevents most homeowners from deducting losses (expenses in excess of income) on the rental of a personal vacation home or personal residence if the owner or close relatives personally use the premises during the year. Tests based on days of personal and rental use determine whether you may deduct losses (9.7).

Rental losses may also be limited by the passive activity rules discussed in Chapter 10. Real estate professionals may avoid the passive restrictions on rental income. An investor who actively manages property may deduct rental losses of up to $25,000 under an exception to the passive activity loss restrictions.

Use Schedule E to report royalties, but if you are a self-employed author, artist, or inventor, report royalty income and expenses on Schedule C.

Business rentals of equipment, vehicles, or similar personal property are reported on Schedule C, not Schedule E.

9.1 Reporting Rental Real Estate Income and Expenses

9.2 Checklist of Rental Deductions

9.3 Distinguishing Between a Repair and an Improvement

9.4 Reporting Rents From a Multi-Unit Residence

9.5 Depreciation on Converting a Home to Rental Property

9.6 Renting a Residence to a Relative

9.7 Personal Use and Rental of a Residence During the Year

9.8 Counting Personal-Use Days and Rental Days for a Residence

9.9 Allocating Expenses of a Residence to Rental Days

9.10 Rentals Lacking Profit Motive

9.11 Reporting Royalty Income

9.12 Production Costs of Books and Creative Properties

9.13 Deducting the Cost of Patents or Copyrights

9.14 Intangible Drilling Costs

9.15 Depletion Deduction

9.16 Oil and Gas Percentage Depletion