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Publication 534

Leased Property(p12)

The limitations on cost recovery deductions apply to the rental of listed property. The following discussion covers the rules that apply to the lessor (the owner of the property) and the lessee (the person who rents the property from the owner). See Leasing a Car in chapter 4 of Pub. 463 for a discussion of leased passenger automobiles.


The limitations on cost recovery generally do not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property.
A person is considered regularly engaged in the business of leasing listed property only if contracts for leasing of listed property are entered into with some frequency over a continuous period of time. This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of the person's business in its entirety. Occasional or incidental leasing activity is insufficient. For example, a person leasing only one passenger automobile during a tax year is not regularly engaged in the business of leasing automobiles. An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee.


A lessee of listed property (other than passenger automobiles) must include an amount in gross income called the inclusion amount for the first tax year the property is not used predominantly in a qualified business use.

Inclusion amount for property leased before 1987.(p12)

You determine the inclusion amount for property leased after June 18, 1984, and before 1987 by multiplying the fair market value of the property by both the average business/investment use percentage and the applicable percentage. You can find the applicable percentages for listed property that is 5- or 10-year recovery property in Table 19 or 20 in the Appendix.
The lease term for listed property other than 18- or 19-year real property, and residential rental or nonresidential real property, includes options to renew. For 18- or 19-year real property and residential rental or nonresidential real property that is listed property, the period of the lease does not include any option to renew at fair market value, determined at the time of renewal. You treat two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property as one lease.

Special rules.(p12)

The lessee adds the inclusion amount to gross income in the next tax year if: The lessee determines the inclusion amount by taking into account the average of the business/investment use for both tax years and the applicable percentage for the tax year the lease term begins.
If the lease term is less than one year, the amount included in gross income is the amount that bears the same ratio to the additional inclusion amount as the number of days in the lease term bears to 365.

Maximum inclusion amount.(p12)

The inclusion amount cannot be more than the sum of the deductible amounts of rent allocable to the lessee's tax year in which the amount must be included in gross income.