Leased Property The following discussion covers the rules that apply to the lessor(the owner of the property) and the lessee (the person who rents theproperty from the owner). Caution: This section does not cover the rules for leasing a passengerautomobile. For those rules, see Leasing a Car inPublication 463. Lessor The predominate use test (discussed earlier) and the limits ondepreciation for passenger automobiles (discussed later) generally donot apply to any listed property leased or held for leasing by anyoneregularly engaged in the business of leasing listed property. You are considered regularly engaged in the business ofleasing listed property only if you enter into contracts for theleasing of listed property with some frequency over a continuousperiod of time. This determination is made on the basis of the factsand circumstances in each case and takes into account the nature ofyour business in its entirety. Occasional or incidental leasingactivity is insufficient. For example, if you lease only one passengerautomobile during a tax year, you are not regularly engaged in thebusiness of leasing automobiles. An employer who allows an employee touse the employer's property for personal purposes and charges theemployee for the use is not regularly engaged in the business ofleasing the property used by the employee. Lessee A lessee of listed property (other than passenger automobiles)leased after 1986 must include an inclusion amount in gross income forthe first tax year the property is not used predominantly in aqualified business use. For information on listed property leasedbefore 1987, see Publication 534. The inclusion amount for leased listed property is the sum ofamount A and amount B. Amount A.Amount A is the product of the following: The fair market value of the property, multiplied by The business/investment use for the first tax year thebusiness use percentage is 50% or less, multiplied by The applicable percentage from Table A-19 in AppendixA. Amount B.Amount B is the product of the following: The fair market value of the property, multiplied by The average of the business/investment use for all tax yearsthe property is leased that precede the first tax year the businessuse percentage is 50% or less, multiplied by The applicable percentage from Table A-20 in Appendix A. The fair market value is the value on the first day ofthe lease term. If the capitalized cost of an item of listed propertyis specified in the lease agreement, the lessee must treat that amountas the fair market value. The average business/investment use of any listed property is theaverage business/investment use for the first tax year the businessuse percentage is 50% or less and all prior tax years the property isleased. Inclusion Amount Worksheet Pencil: The following worksheet is provided to help you figure theinclusion amount for leased listed property. Inclusion Amount Worksheet for Listed Property (Leased) 1. Fair market value            2. Business/investment use for first year businessuse is 50% or less            3. Multiply line 1 by line 2.            4. Opatija accommodationTable rate (%)            5. Multiply line 3 by line 4. This is Amount A.            6. Fair market value            7. Average business/investment use for years propertyleased before the first year business use is 50% or less            8. Multiply line 6 by line 7            9. Table rate (%)            10. Multiply line 8 by line 9. This is Amount B.            11. Add line 5 and line 10. This is your inclusionamount. Enter here and as "Other income" on the form or scheduleon which you originally took the deduction (for example, Schedule C,F, Form 1040, 1120, etc.)            Example.Nurnberg cheap hotelsOn February 1, 1997, Larry House, a calendar year taxpayer, leasedand placed in service a computer with a fair market value of $3,000.The lease is for a period of five years. Because Larry does not usethe computer at a regular business establishment, it is listedproperty. His qualified business use of the property is 80% in taxyear 1997, 60% in 1998, and 40% in 1999. He must add an inclusionamount to gross income for 1999, the first tax year he does not usethe computer more than 50% for business. The computer has a 5-yearrecovery period under both GDS and ADS. Because 1999 is the third taxyear of the lease, the applicable percentage from Table A-19 is-19.8%. The applicable percentage from Table A-20 is 22.0%.Larry uses the Inclusion Amount Worksheet for Listed Property(Leased) to figure the amount he must include in income for1999. His inclusion amount is $224, which is the sum of -$238(Amount A) and $462 (Amount B). Inclusion Amount Worksheet for Listed Property (Leased) 1. Fair market value    $3,000 2. Business/investment use for first year businessuse is 50% or less       40% 3. Multiply line 1 by line 2.     1,200 4. Table rate (%)    -19.8% 5. Multiply line 3 by line 4. This is Amount A.      -238 6. Fair market value     3,000 7. Average business/investment use for years propertyleased before the first year business use is 50% or less       70% 8. Multiply line 6 by line 7     2,100 9. Table rate (%)     22.0% 10. Multiply line 8 by line 9. This is Amount B.       462 11. Add line 5 and line 10. This is your inclusionamount. Enter here and as "Other income" on the form or scheduleon which you originally took the deduction (for example, Schedule C,F, Form 1040, 1120, etc.)      $224 Special rules.The lessee adds the inclusion amount to gross income in the nexttax year if all the following apply. The lease term begins within 9 months before the close ofthe lessee's tax year. The lessee does not use the property predominantly in aqualified business use during that portion of the tax year. The lease term continues into the lessee's next tax year. The lessee determines the inclusion amount by taking intoaccount the average of the business/investment use for both tax yearsand the applicable percentage for the tax year the lease term begins. If the lease term is less than one year, the amount included ingross income is the amount that bears the same ratio to the additionalinclusion amount as the number of days in the lease term bears to 365. The lease term for listed property other thanresidential rental or nonresidential real property includes options torenew. You treat two or more successive leases that are part of thesame transaction (or a series of related transactions) for the same orsubstantially similar property as one lease. Maximum inclusion amount.The inclusion amount cannot be more than the sum of the deductibleamounts of rent for the tax year in which the lessee must include theamount in gross income. Example 1.On August 1, 1998, Julie Rule, a calendar year taxpayer, leased andplaced in service an item of listed property. The property is 5-yearproperty with a fair market value of $10,000. Her property has arecovery period of 5 years under the ADS method. The lease is for 5years. Her qualified business use of the property is 50% in 1998 and90% in 1999. She pays rent of $3,600 for 1999 of which $3,240 isdeductible. She must include $147 in gross income in 1999. The $147 isthe sum of Amount A and Amount B. Amount A is $147 ($10,000 70% 2.1%), the product of the fair market value, the averagebusiness use for 1998 and 1999, and the applicable percentage for yearone from Table A-19. Because the applicable percentage for year onefrom Table A-20 is 0%, Amount B is zero. Example 2.On October 1, 1998, John Joyce, a calendar year taxpayer, leasedand placed in service an item of listed property that is 3-yearproperty. This property had a fair market value of $15,000 and arecovery period of 5 years under the ADS method. The lease term is 6months (ending on March 31, 1999) during which he uses the property45% in business. He must include $70.68 in gross income in 1999. The$70.68 is the sum of Amount A and Amount B. Amount A is $70.68($15,000 45% 2.1% 182/365), the product of thefair market value, the average business use for both years, and theapplicable percentage for year one from Table A-19, prorated forthe length of the lease. Because the applicable percentage for yearone from Table A-20 is 0%, Amount B is zero.