Rental Expenses This part discusses repairs and certain other expenses of rentingproperty that you ordinarily can deduct from your gross rental income.It includes information on the expenses you can deduct if you rent acondominium or cooperative apartment, if you rent part of yourproperty, or if you change your property to rental use. Depreciation,which you can also deduct from your gross rental income, is discussedlater. When to deduct.You generally deduct your rental expenses in the year you pay orincur them. Vacant rental property. If you hold property for rental purposes, you may be able to deductyour ordinary and necessary expenses for managing, conserving, ormaintaining the property while the property is vacant. However, youcannot deduct any loss of rental income for the period the property isvacant. Pre-rental expenses. You can deduct your ordinary and necessary expenses for managing,conserving, or maintaining rental property from the time you make itavailable for rent. Expenses for rental property sold.If you sell property you held for rental purposes, you can deductthe ordinary and necessary expenses for managing, conserving, ormaintaining the property until it is sold. Personal use of rental property. If you sometimes use your rental property for personal purposes,you must divide your expenses between rental and personal use. Also,your rental expense deductions may be limited. See Personal Useof Vacation Home or Dwelling Unit, later. Part interest.If you own a part interest in rental property, you can deduct yourpart of the expenses that you paid. Repairs and Improvements luxury hotels in BredaYou can deduct the cost of repairs that you make to your rentalproperty. You cannot deduct the cost of improvements. You recover thecost of improvements by taking depreciation (explained later). Files: Separate the costs of repairs and improvements, and keep accuraterecords. You will need to know the cost of improvements when you sellor depreciate your property. Repairs. A repair keeps your property in good operating condition. It doesnot materially add to the value of your property or substantiallyprolong its life. Repainting your property inside or out, fixinggutters or floors, fixing leaks, plastering, and replacing brokenwindows are examples of repairs. If you make repairs as part of an extensive remodeling orrestoration of your property, the whole job is an improvement. Table 1 Improvements. An improvement adds to the value of property, prolongs its usefullife, or adapts it to new uses. Table 1 shows examples ofmany improvements. If you make an improvement to property, the cost of the improvementmust be capitalized. The capitalized cost can generally be depreciatedas if the improvement were separate property. Other Expenses Other expenses you can deduct from your gross rental income includeadvertising, janitor and maid service, utilities, fire and liabilityinsurance, taxes, interest, commissions for the collection of rent,ordinary and necessary travel and transportation, and other expensesdiscussed next. Rental payments for property.You can deduct the rent you pay for property that you use forrental purposes. If you buy a leasehold for rental purposes, you candeduct an equal part of the cost each year over the term of the lease. Rental of equipment.You can deduct the rent you pay for equipment that you use forrental purposes. However, in some cases, lease contracts are actuallypurchase contracts. If so, you cannot deduct these payments. You canrecover the cost of purchased equipment through depreciation. Insurance premiums.You can deduct insurance premiums you pay for rental property. Ifyou pay a premium for more than one year in advance, each year you candeduct the part of the premium payment that will apply to that year.You cannot deduct the total premium in the year you pay it. Local benefit taxes.Generally, you cannot deduct charges for local benefits thatincrease the value of your property, such as charges for putting instreets, sidewalks, or water and sewer systems. These charges arecapital expenditures that you cannot depreciate. You must add them tothe basis of your property. You can deduct local benefit taxes if theyare for maintaining, repairing, or paying interest charges for thebenefits. Interest expense. You can deduct mortgage interest you pay on your rental property.Chapter 8 of Publication 535 explains mortgage interest in detail. Expenses paid to obtain a mortgage.Expenses you pay to obtain a mortgage on your rental propertycannot be deducted as interest. These expenses, which include mortgagecommissions, abstract fees, and recording fees, are capital expenses.You can amortize them over the life of the mortgage. Form 1098. If you paid $600 or more of mortgage interest on your rentalproperty to any one person, you should receive a Form 1098,Mortgage Interest Statement, or a similar statement showingthe interest you paid for the year. If you and at least one otherperson (other than your spouse if you file a joint return) were liablefor, and paid interest on the mortgage, and the other person receivedthe Form 1098, report your share of the interest on line 13 ofSchedule E (Form 1040). Attach a statement to your return showing thename and address of the other person. In the left margin of ScheduleE, next to line 13, write "See attached." Points.The term "points" is often used to describe some of thecharges paid by a borrower when the borrower takes out a loan or amortgage. These charges are also called loan origination fees,maximum loan charges, or premium charges. If any of these charges(points) are solely for the use of money, they are interest. Points paid when you take out a loan or mortgage result in originalissue discount (OID). In general, the points (OID) are deductible asinterest unless they must be capitalized. How you figure the amount ofpoints (OID) you can deduct each year depends on whether or not yourtotal OID, including the OID resulting from the points, is de minimus.If the OID is not de minimus, you must use the constant-yield methodto figure how much you can deduct. De minimus rule.In general, the OID is de minimus if it is less than one-fourth of1% (.0025) of the stated redemption price at maturity (generally, theprincipal amount of the loan) multiplied by the number of full yearsfrom the date of original issue to maturity (the term of the loan). If the OID is de minimus, you can choose one of the following waysto figure the amount you can deduct each year. On a constant-yield basis over the term of the loan. On a straight-line basis over the term of the loan. In proportion to stated interest payments. In full at maturity of the loan. You make this choice by deducting the OID in a mannerconsistent with the method chosen on your timely filed tax return forthe tax year in which the loan or mortgage is issued. Example of de minimus amount.On January 1, 1999, you took out a loan for $100,000. The loanmatures on January 1, 2009 (a 10-year term) and the stated principalamount of the loan ($100,000) is payable on that date. An interestpayment of $10,000 is payable to the bank on January 2 of each year,beginning on January 2, 2000. When the loan was made, you paid $1,500in points to the bank. The points reduced the issue price of the loanfrom $100,000 to $98,500, resulting in $1,500 of OID. You determinethat the points (OID) you paid are de minimus based on the followingcomputation. Redemption price at maturity (principal amountof the loan) $100,000 Multiplied by: The term of the loan incomplete years 10 Multiplied by     .0025 De minimus amount     $2,500 The points (OID) you paid ($1,500) are less than the deminimus amount; therefore, you have de minimus OID and you can chooseone of the four ways discussed earlier to figure the amount you candeduct each year. Under the straight line method, you can deduct $150each year for 10 years. Constant-yield method.If the OID is not de minimus, you must use the constant-yieldmethod to figure how much you can deduct each year. You figure your deduction for the first year in the followingmanner. Determine the issue price of the loan. For example, if youpaid points on a loan, subtract the points you paid from the principalamount of the loan to get the issue price. Multiply the issue price (the result in (1)) by the yield tomaturity. Subtract any qualified stated interest payments from theresult in (2). This is the amount of OID you can deduct in the firstyear. To figure your deduction in any subsequent years, you start withthe adjusted issue price. To get the adjusted issue price,add to the issue price any OID previously deducted. Then follow steps(2) and (3) above. The yield to maturity (YTM) is generally shown in theliterature you receive from your lender. If you do not have thisinformation, consult your lender or tax advisor. In general, the YTMis the discount rate that, when used in computing the present value ofall principal and interest payments, produces an amount equal to theprincipal amount of the loan. Qualified stated interest (QSI) generally is statedinterest that is unconditionally payable in cash or property (otherthan debt instruments of the issuer) at least annually at a singlefixed rate. Example of constant yield.The facts are the same as in the previous example. The yield tomaturity on your loan is 10.2467%, compounded annually. You figure the amount of points (OID) you can deduct in 1999 asfollows. Principal amount of the loan $100,000 Minus: Points      1,500 Issue price of the loan $ 98,500 Multiplied by: YTM   .102467 Total 10,093 Minus: QSI     10,000 Points (OID) deductible in 1999        $93 You figure the deduction for 2000 as follows. Issue price $98,500 Plus: Points (OID) deducted in 1999         93 Adjusted issue price $98,593 Multiplied by: YTM   .102467 Total 10,103 Minus: QSI     10,000 Points (OID) deductible in 2000       $103 Loan or mortgage ends.If your loan or mortgage ends, you may be able to deduct anyremaining points (OID) in the tax year in which the loan or mortgageends. A loan or mortgage may end due to a refinancing, prepayment,foreclosure, or similar event. However, if the refinancing is with thesame lender, the remaining points (OID) generally are not deductiblein the year in which the refinancing occurs, but may be deductibleover the term of the new mortgage or loan. Charges for services.You can deduct charges you pay for services provided for yourrental property, such as water, sewer, and trash collection. Travel expenses. You can deduct the ordinary and necessary costs of traveling awayfrom home if the primary purpose of the trip was to collect rentalincome or to manage, conserve, or maintain your rental property. Youmust properly allocate your expenses between rental and nonrentalactivities. For information on travel expenses, see chapter 1 ofPublication 463. Files: To deduct travel expenses, you must keep records that follow therules in chapter 5 of Publication 463. Local transportation expenses. You can deduct your ordinary and necessary local transportationexpenses if you incur them to collect rental income or to manage,conserve, or maintain your rental property. Generally, if you use your personal car, pickup truck, or light vanfor rental activities, you can deduct the expenses using one of twomethods: actual expenses or the standard mileage rate. For 1999, thestandard mileage rate for all business miles is: 32.5 cents a mile through March 31, 1999, and 31 cents a mile starting on April 1, 1999. For more information, see chapter 4 of Publication 463. Files: To deduct car expenses under either method, you must keep recordsthat follow the rules in chapter 5 of Publication 463. In addition, you must complete Part V of Form 4562, and attach itto your tax return. Tax return preparation. You can deduct, as a rental expense, the part of tax returnpreparation fees you paid to prepare Part I of Schedule E (Form 1040).For example, on your 1999 Schedule E you can deduct fees paid in 1999to prepare Part I of your 1998 Schedule E. You can also deduct, as arental expense, any expense you paid to resolve a tax underpaymentrelated to your rental activities. Condominiumsand Cooperatives If you rent out a condominium or a cooperative apartment, somespecial rules apply to you even though you receive the same taxtreatment as other owners of rental property. Condominiums are treateddifferently from cooperatives. Condominium If you own a condominium, you own outright a dwelling unit in amulti-unit building. You also own a share of the common elements ofthe structure, such as land, lobbies, elevators, and service areas.You and the other condominium owners may pay dues or assessments to aspecial corporation that is organized to take care of the commonelements. If you rent your condominium to others, you can deductdepreciation, repairs, upkeep, dues, and other expenses, such asinterest and taxes, and assessments for the care of the common partsof the structure. You cannot deduct special assessments you pay to acondominium management corporation for improvements. But you may beable to recover your share of the cost of any improvement by takingdepreciation. Cooperative If you have a cooperative apartment that you rent to others, youcan usually deduct, as a rental expense, all the maintenance fees youpay to the cooperative housing corporation. However, you cannot deducta payment earmarked for a capital asset or improvement, or otherwisecharged to the corporation's capital account. For example, you cannotdeduct a payment used to pave a community parking lot, install a newroof, or pay the principal of the corporation's mortgage. You must addthe payment to the basis of your stock in the corporation. Treat as a capital cost the amount you were assessed for capitalitems. This cannot be more than the amount by which your payments tothe corporation exceeded your share of the corporation's mortgageinterest and real estate taxes. Your share of interest and taxes is the amount the corporationelected to allocate to you, if it reasonably reflects those expensesfor your apartment. Otherwise, figure your share in the following way. Divide the number of your shares of stock by the totalnumber of shares outstanding, including any shares held by thecorporation. Multiply the corporation's deductible interest by the numberyou figured in (1). This is your share of the interest. Multiply the corporation's deductible taxes by the numberyou figured in (1). This is your share of the taxes. In addition to the maintenance fees paid to the cooperative housingcorporation, you can deduct your direct payments for repairs, upkeep,and other rental expenses, including interest paid on a loan used tobuy your stock in the corporation. The depreciation deduction allowedfor cooperative apartments is discussed later.