Is TT calculating rentals correctly?

[TomL1]

It's not matching Pub 527, Table 5.1. It's assuming I'm not taking the standard deduction and allowing a percentage of mortgage and real estate taxes plus 100% of direct rental expenses on Sched E. It's also allowing a portion of my 2023 loss carryover based on F8562, but the current year income and expenses are zeroed out - it's only looking at the 2023 carryover amount. TT seems to be toggling on the 14 day or 10% personal use rule. If I set it to <14, then there is no expense deduction at all, >15 get the above scenario. This looks like a bug in the software???

[DawnC]

• Under the 14-day rule, you don't report any of the income you earn from a short-term rental, as long as you rent the property (or room) for no more than 14 days during the year, and you use the property yourself for 14 days or more during the year.
• Even if you meet the 14-day rule, companies like Airbnb, HomeAway, or VRBO may report income for a short-term rental to the IRS on a Form 1099-K. You can add the income to your tax return as additional income, and subtract it as an adjustment to income, noting that it qualifies for the 14-day exception.
• If you rent for longer than the 14-day exception period, detail the dates precisely so you can properly calculate personal and business expenses.
• You can deduct all “ordinary and necessary” expenses to operate your rental business, including guest-service fees unless you use the 14-day rule. In this case, since the income doesn't have to be claimed, the expenses cannot be claimed either.

10 Tax Tips for Vacation Rentals

[TomL1]

Sorry for the confusion. I'm referring to the Personal Use rule: You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of:

1. 14 days, or

2. 10% of the total days it is rented to others at a fair rental price.

[MaryK4]

If you enter personal use days, the worksheet uses the number of personal use days to determine whether the property qualifies as a residence and also to determine the expense allocation between rental and personal use of the property. If you have it set to less than 14 days, it applies the Augusta rule so you do not report the income or expenses.  @TomL1 
 

[TomL1]

Isn't the Augusta Rule about RENTING for 14 or fewer days? In my scenario I actually rented for 119 days. If I set PERSONAL USE to 14 or less days, the software basically allows no expense deduction, but also ignores the income, so kind of like the Augusta Rule. If I set PERSONAL USE to greater than 14 days, it prorates the mortgage interest and property taxes, allows 100% of the management fees, and allows a percentage of the loss carryover from 2023 (based on MAGI and the $25,000 limit rule). Then it disallows all operating expenses and 2024 depreciation which become carryover for next year. Its calculating, in this scenario a -$19,320 rental deduction on Sched E ($13,623 of current net expenses plus $5,768 of allowed carryover). It's only looking at MAGI for the carryover calculation. This doesn't seem correct.

[MaryK4]

I see what you are saying, when I tried to recreate, the 14 days of rental was the only way I could get it to stop the income/expenses.  I would like to take a deeper look at this. However, I need a diagnostic file which is a copy of your tax return that has all of your personal information removed. You can send one to us by following the directions below:

TurboTax Online:

1. Sign into your online account.
2. Locate the Tax Tools on the left-hand side of the screen.
3. A drop-down will appear. Select Tools
4. On the pop-up screen, click on “Share my file with agent.”
5. This will generate a message that a diagnostic file gets sanitized and transmitted to us.
6. Please provide the Token Number that was generated in the response.

TurboTax Desktop/Download Versions:

1. Open your return.
2. Click the Online tab in the black bar across the top of TurboTax and select “Send Tax File to Agent” *
3. This will generate a message that a diagnostic copy will be created.  Click on OK and the tax file will be sanitized and transmitted to us.
4. Please provide the Token Number (including the dash) that was generated in the response.

*(If using a MAC, go to the menu at the top of the screen, select Help, then, “Send Tax File to Agent”)

@TomL1 
 

[TomL1]

[phone number removed]5766

[TomL1]

"16777109-62065766"

[MaryK4]

Got it, will get back to you asap

[TomL1]

1 6 7 7 7 1 0 9 - 6 2 0 6 5 7 6 6

[MaryK4]

If you have more than 15 days/10% personal days, it changes the passive activity classification.  This allows the some of the rental expenses to offset other (nonpassive income), but it limits your deduction for general home operating expenses to the extent that rental income for this property exceeds the fully deductible expenses. The excess expenses are then carried forward.  If you had fewer than 15 days/10 personal days, it is treated as a passive activity, which provides more deductions, but they are all passive so they can only be used against passive income.  See Limit on deductions.

 @TomL1 

[TomL1]

Right, but that same section refers you to Worksheet 5.1 which does an entirely different calculation than TT. Since I'm not itemizing, the worksheet only allows the expenses to the extent they offset the income, then applies everything else to carryforward - in my case that should be nearly $60,000 in operating expenses and $23,000 in depreciation. Instead, TT allows for a $19,390 deduction to regular income. Then is passes to next year $9,984 in unallowed carryforward from 2023, plus $50,085 (operating expenses of $27,121 and depreciation of $22,964). Honestly, I'll take this if TT stands behind the calculations since its extremely more favorable to this year's taxes, but it still seems like something is out of whack with the software.

[AmyC]

I am looking through your return. I am using Topic no. 415, Renting residential and vacation property as a stating point. It states:

A day of personal use of a dwelling unit is any day that the unit is used by:

• You or any other person who has an interest in it, unless you rent your interest to another owner as their main home and the other owner pays a fair rental price under a shared equity financing agreement
• A member of your family or of a family of any other person who has an interest in it, unless the family member uses it as their main home and pays a fair rental price
• Anyone under an agreement that lets you use some other dwelling unit
• Anyone at less than fair rental price

Assuming you had 15 days of actual personal use,  Topic no. 415, Renting residential and vacation property

You won't be able to deduct your rental expense in excess of the gross rental income limitation (your gross rental income less the rental portion of mortgage interest, real estate taxes, casualty losses, and rental expenses like realtors' fees and advertising costs). However, you may be able to carry forward some of these rental expenses to the next year, subject to the gross rental income limitation for that year.

Please take a look at your Sch E worksheet. You will see your expenses on the left, what is allowed to be reported on the Sch E and then the last two columns are the division between rental and personal use. 

• None of the personal use expenses can be deducted or carried forward.
• Your Sch E allow the management fees, mortgage interest and real estate tax. The other items are prorated.
• I can see the Sch E limiting as it should.

Let's talk about the carryovers for next year. You said it should be $60,000 in operating costs but that isn't the case. The $27,121 is the business use portion of the home and the full depreciation amount of $22,964 is being carried forward. The remaining difference is from your personal use of the property. You can't claim a business loss on your personal use of the home.

References:

About Form 8582, Passive Activity Loss Limitations

About Schedule E (Form 1040), Supplemental Income and Loss