Use our Rentals and Royalties Worksheet to enter information about your rental and royalty activities.
Do NOT enter this data on Schedule E directly. The data will carry from here to Schedule E.
The Worksheet automatically handles the passive activity calculations, as well as the vacation home rules, the at-risk rules, and the allocation rules, and then carries the results to Schedule E or to the appropriate copy of the Schedule E Part I Attachment.
In the case of home mortgage interest and taxes, amounts that are not allowed as rental expenses may usually be deducted on Schedule A as itemized deductions (an exception may apply if the at-risk rules limit your deduction). We compute the amounts automatically for you, and carry them to the appropriate lines on Schedule A.
Don't use this Worksheet for any of the following:
Not-for-profit rentals
Rentals of personal property (unless the property was leased with real estate)
Operating oil, gas, or mineral interests
Your business as a self-employed writer, inventor, artist, etc.
We use these two parts of the Worksheet to determine what percent of your expenses (after adjusting for partial ownership) is allocable to rental, as opposed to personal, use.
The IRS and Tax Court methods are two alternative methods that are available for allocating itemizable expenses like home mortgage interest and property taxes if the vacation home rules apply.
The IRS method may produce a greater tax benefit in 2010 than the Tax Court method if you don't itemize your deductions, and may produce a greater tax benefit than the Tax Court method over time if in future years you'll have a net profit from this activity.
The Tax Court method may produce a greater tax benefit than the IRS method if you can fully deduct your itemized deductions, but may produce a lesser tax benefit over time if in future years you'll have a net profit from this activity. The Tax Court method may also be more likely to be challenged on audit.
If the at-risk rules pertain, and if your loss is limited because you don't have enough "at risk," then we'll automatically limit your loss to the amount entered on line 2 of the Rentals and Royalties Worksheet.
See the discussion of the at-risk calculations below for more details.
The official instructions for Form 8582 and IRS Publication 925 explain the various tests for determining whether you were a real estate professional and whether you materially participated in a rental activity.
If you indicate that you were a real estate professional for 2010, then column 1 of the Passive Activity Computation chart in Part VI should be "N," not "Y"; if it is already "Y," it will switch to "N."
Please make a note to go to line 43 of Schedule E to complete a "reconciliation" line for real estate professionals.
Your prior year passive loss carryforward amount will be shown in last year's IRS Worksheet 5, column (b) of Form 8582. If you used TaxCut for 2009, this number is in column (5) of the passive activity worksheet at the bottom of your 2009 Rentals and Royalties Worksheet.
Enter an "X" on line 6 if you totally disposed of the activity in a taxable transaction in 2010 to an unrelated party.
The effect of this is generally to trigger allowance of any current and carryforward passive losses from this activity, even if it shows a net loss for the year.
Also, if you have overall net income this year from the activity (including income realized on the disposition), that income may be used to offset passive losses from other activities this year.
The income or loss from the disposition is used in our passive activity calculations (see the descriptions of the calculations on the passive activity worksheets for more details).
Important Note: You should complete Form 4797 to determine the gain or loss from your disposition of the activity and enter the gain or loss amount on this Worksheet. Amounts shown on Form 4797 will be carried to Form 1040. The numbers you enter here are used in our passive activity calculation but aren't carried to Form 1040.
In this part of the form, we calculate how much of your expenses are actually deductible.
The first column of expenses is where you enter your "raw" expenses, before any adjustment. In a few instances (for example, mortgage interest and depreciation) we carry the relevant amounts from other forms.
In the second column, we calculate your portion of the expenses. If you owned less than 100% of the rental and you checked the box to have us multiply your income/expenses by the ownership percentage, then the second column will equal the first column multiplied by your percentage ownership. Otherwise, the amount in the second column will be the same as the amount in the first column.
The portion of the expenses allocable to the rental appears in the third column. This is equal to the product of the amount shown in the second column and the applicable allocation percentage from Part II or Part III. In the case of expenses related solely to the activity, the third column equals the second column.
In the fourth column, we figure out how much of these allocable expenses can be deducted.
If you have a net profit from the rental activity, all of your allocable expenses may be deducted, and the calculation is very straightforward.
If you have a net loss from the rental activity, then this part of the Worksheet can get tricky. In that case, part or all of your loss may be disallowed, depending on which of the various loss-limiting rules applies.
Here's a rundown:
If the vacation home rules apply (that is, if box 2f in Part II of the Worksheet is checked), all of your expenses that relate to the rental activity itself and not to the dwelling are allowed. This includes advertising expense, rental commissions, auto and travel, legal and professional fees, management fees, supplies for the rental activity, FICA and employment taxes, non-mortgage interest, and other expenses not for the dwelling.
If, after these expenses are deducted, there's still income, we begin to allow the itemized deductions (for example, home mortgage interest and taxes). If there's a loss at this point, all other expenses must be deferred and rolled over to next year. But if there's income, we allow the other expenses. Depreciation is the last one allowed (which makes it the most likely expense to be disallowed this year and carried forward).
If your allowed itemized deductions haven't produced a loss, we keep going until net profit is zero. The rest of the expenses are deferred, to be rolled over to next year.
If the at-risk rules might apply, and the vacation home rules haven't limited the loss so far, then we use yet a third approach to figure the amount of allowable loss, and which items are deducted.
Once again, we start with gross revenue. Then we start with the not-for-dwelling expenses, then we deduct the itemized deductions, then we deduct the other expenses, and we save depreciation for last.
There is scant authority for this approach. Actually, there is no firm authority in the tax rules for any other approach either. If this situation applies to you, you may wish to consult a professional tax advisor. To find out how you can talk to an H&R Block tax professional, click the Ask a Tax Advisor button.
We keep going along this list until our loss just equals the amount you entered as the amount "at risk."
If the at-risk rules apply to you and not all of your investment is at risk, you should complete a Form 6198 and enter the amount of allowable loss for this rental activity on Part IV, line 2 of the Rentals and Royalties Worksheet.
Our basic calculation for the passive activity rules is shown in Part VI of the Worksheet.
If the activity is a rental and the vacation home rules don't apply, and if you're not a real estate professional who materially participated, then we indicate that the activity is passive. We set the box for "active participation" depending on your response to the "active participation" question above.
If the activity is a rental and the vacation home rules do apply, then the activity is non-passive.
If the activity is a royalty, then we indicate that it is nonpassive and not "active participation" rental property.