Line 11, Form 4562 not counting Rental Income from Line 3, Schedule E

[Hubby]

I have a single rental property for which I am an active and material participant.  As per the IRS instructions for form 4562, line 11 (shown below) my taxable income should include my Rental Income from Schedule E, Line 3.  This is my income without regard to my 179 expense deduction and my operating loss deductions.  However, Turbotax Premier 2020 does not include this value resulting in a Business Income limitation.  Am I correct in thinking this value should be counted as taxable income?  If so, does anyone know why Turbotax is not counting it?

Instructions for Line 11, Form 4562

Individuals. Enter the smaller of line 5 or the total taxable income from any trade or business you actively conducted, computed without regard to any section 179 expense deduction, the deduction for one-half of self-employment taxes under section 164(f), or any net operating loss deduction. Also, include all wages, salaries, tips, and other compensation you earned as an employee (from Form 1040, line 1). Do not reduce this amount by unreimbursed employee business expenses. If you are married filing a joint return, combine the total taxable incomes for you and your spouse.

[Carl]

"Enter the smaller of line 5 or the total taxable income"

For starters, assets classified as residential rental real estate assets do not qualify for SEC179.  But may qualify for the Special Depreciation Allowance, which is different.

It is not common for residential rental real estate to show a taxable gain. When you add up the deductible rental expenses of mortgage interest, property taxes and insurance and add that to the standard depreciation you are required to take by law, those four items alone will most likely exceed the total rental income received for the tax year. Add to that the other allowed rental expenses of cleaning, maintenance, repairs, etc., and you're practically guaranteed to have a loss every single year the rental property is in service at 100% business use. Therefore I would fully expect your rental property to show a loss on line 26 of the SCH E, even without taking into account any other allowed deductions. So that means the amount on line 26 is the lesser amount. (Would not surprise me at all if it was a negative number, usually indicated by the number being enclosed in parenthesis.)

[AmeliesUncle · Accepted solution]

1) Section 179 only applies if your rental rises to the level of a "Trade or Business".  Does your rental activity rise to that level?

2) Because it is most common that rentals for TurboTax users do NOT rise to the level of a "Trade or Business", TurboTax assumes it does NOT qualify, so it does NOT add the income to that section on Form 4562.  If the rental does qualify, you need to override that amount on Form 4562 (which can only be done using the CD/downloaded version of TurboTax).

[AmeliesUncle]

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@Carl wrote:

For starters, assets classified as residential rental real estate assets do not qualify for SEC179.

They certainly can qualify for Section 179, *IF* the rental activity rises to the level of a "Trade or Business".

[Carl]

But only having a single rental property while it can't be ruled out, I seriously doubt it rises anywhere close to the level of a trade or business.

[AmeliesUncle]

I agree.

[Mike9241]

most likely it's classified as a passive activity (does the income flow to form 8582) passive activities are treated as a trade or business. 

per line 11 instructions A mere passive investor is not considered to actively conduct a trade or business.

[Hubby]

Thank you all for your responses.  I was treating this rental as a trade or business.  I'm far from a mere passive investor and circumstances appeared to qualify my property as such for this single year.  I did a lot of reading and the lack of clarity I found on the qualifications of a trade or business gave me belief that it may apply to my situation.  I just read Revenue Procedure 2019-38 and it makes clear that a minimum of 250 activity hours are required in 3 of the past 5 years so in my case that's where I disqualify.

Now I have to study my depreciation options for all the improvements.  All are 5-year class except for the new roof.  I want to use the most accelerated option but I think I read in p527 that Residential Rentals must use the straight line method.  Back to the books, thanks again!

[Hubby]

Oh, Carl,

Yes my line 26 is negative this year due to high repair costs.  Only recently was this income slightly positive since there was no more mortgage interest deduction.

However, if I were a qualified trade or business I would still be facing my original concern which is my SEC179 deduction would be severely limited by my business income limitation from line 11 on form 4562.  My wife and I are both retired and the wages component of this total value is very small resulting in allowable deduction of next to nothing.  My deduction would not be limited at all if included in the total value on line 11 is my income from the rental property.  It is the following wording from the instructions from form 4562 that leads me to believe I can include the income from SCH E line 3 while excluding the SEC179 dep expense as well as the other operation expenses.

"computed without regard to any section 179 expense deduction, the deduction for one-half of self-employment taxes under section 164(f), or any net operating loss deduction".

If this were the case then this loss would increase my allowable deduction and further reduce my AGI.  My AGI would not be negative because I have capital gains.  I was able to drill down in the Turbotax Depr Options sheet, Federal SEC179 section and add this assumed income component on line 3b.  This made the values work out in my favor, right or wrong I'm not sure.  Definitely a bit confusing which is why I reached out for help but at least I don't have to worry about that now because I'm definitely not qualified as a trade or business.

Thanks again for your input