Part II. Expenses—Farm Rental Property

Capitalizing costs of producing property and acquiring property for resale. If you produced real or tangible personal property or acquired property for resale, certain expenses may have to be included in inventory costs or capitalized. These expenses include the direct costs of the property and the share of any indirect costs allocable to that property. For details and exceptions, see Capitalizing costs of producing property and acquiring property for resale in the Instructions for Schedule F (Form 1040).

How to report. Do not reduce your expenses on lines 8 through 30f by the expenses you must capitalize. Instead, enter the total amount capitalized in parentheses on line 30g. On the line to the left of the line 30g entry space, enter “263A.” Line 10. Expenses you paid or incurred for soil and water conservation, prevention of erosion, or endangered species recovery can be deducted only if they are consistent with a conservation plan approved by the Natural Resources Conservation Service of the Department of Agriculture or a recovery plan approved pursuant to the Endangered Species Act of 1973 for the area in which your land is located. If no plan exists, your expenses must be consistent with a plan of a comparable state agency. Your deduction, however, cannot exceed 25% of your gross income from farming. See the instructions for Schedule F (Form 1040), line 12. Line 12. Enter your depreciation and section 179 expense deduction. For details, including whether you must file Form 4562, Depreciation and Amortization, see chapter 7 of Pub. 225 and the Instructions for Form 4562. Lines 19a and 19b. Your interest expense could be limited. See the Instructions for Form 8990 for more information.

The tax treatment of interest expense differs depending on its type. For example, home mortgage interest and investment interest are treated differently. You must allocate (classify) your interest expense so it is deducted (or capitalized) on the correct line of your tax return and it gets the right tax treatment. These rules could affect how much interest you are allowed to deduct on Form 4835. See the instructions for Schedule F (Form 1040), lines 21a and 21b. Line 22a. If you rented or leased vehicles, machinery, or equipment, enter on line 22a the business portion of your rental cost. But if you leased a vehicle for a term of 30 days or more, you may have to reduce your deduction by an inclusion amount. See Leasing a Car in Pub. 463, Travel, Gift, and Car Expenses.

Lines 30a through 30g. Enter expenses not listed on another line. See the instructions for Schedule F (Form 1040), lines 32a through 32f. If you are required to capitalize expenses, see How to report under Capitalizing costs of producing property and acquiring property for resale on this page. Line 31. If you entered capitalized expenses on line 30g, your total expenses on line 31 will equal the total of lines 8 through 30f reduced by the amount on line 30g. Line 32. If line 31 is more than line 7, don’t enter your loss on line 32. If you have a loss, you must apply the at-risk rules and the passive activity loss rules. To apply these rules, follow the instructions for line 34 and the Instructions for Form 8582. After applying these rules, the amount of your allowable loss may be smaller than the amount figured by subtracting line 31 from line 7.

• If line 7 is more than line 31 and you don’t have prior year unallowed passive activity losses from this activity, subtract line 31 from line 7. The result is your net farm rental income.

• If line 7 is more than line 31 and you have prior year unallowed passive activity losses from this activity, don’t enter your net farm rental income on line 32 until you have figured the amount of prior year unallowed passive activity losses you may claim this year. Use Form 8582 to figure the amount of prior year unallowed passive activity losses you may include on line 32. If there is a net loss after applying the prior year unallowed loss against the net farm rental income, enter zero on line 32 and enter the net loss on line 34c. Indicate that you are including prior year passive activity losses by entering “PAL” on the dotted line to the left of the entry space for line 32. Note: You may need to include information from Form 4835 on Form 8582 even if you have a net profit. For more information, see the Instructions for Form 8582. Line 34. To determine your deductible loss, you may need to complete Form 8582 regardless of whether you checked box 34a or 34b. However, if you checked box 34b, you must complete Form 6198, At-Risk Limitations, before you complete Form 8582. See the instructions for Schedule F (Form 1040), line 36.

Do not complete Form 8582 if either of the following applies.

• You meet all of the conditions listed under Exception for Certain Rental Real Estate Activities in the Instructions for Schedule E (Form 1040). Instead, enter your deductible loss on line 34c and on Schedule E (Form 1040), line 40.

• You were a real estate professional (as defined in the Instructions for Schedule E (Form 1040)) and you materially participated in the operation of this activity (under the passive activity loss rules). See the Instructions for Form 8582 for the definition of “material participation.” Your loss is not subject to the passive activity loss limitations. Instead, enter your deductible loss on line 34c and on Schedule E (Form 1040), line 40. Also, include the loss in the total for Schedule E (Form 1040), line 43.