Losses when renting a room in your own home

You neither have a vacation home nor a home office. Your portion of the home that is rental is completely separate from the potion of the house that is your residence.

Expenses are prorated according to square footage and for the amount of time, if any, that there was also personal use. Making repairs is not personal use. 

You need to indicate that you have a multi-family situation.

Thank you. That's what I am doing. The issue is I should not be able to use the losses from that property to offset anything else than passive income. The software is letting me offset my wages with the losses from that property, which is not allowed. I should have the option to carry forward the excess losses/expenses to next year instead of having to do it myself manually and not including all my expenses.

 There is a special provision for rentals.

As a general rule, rental properties are, by definition, passive activities and are subject to the passive activity loss rules. These rules are quite complex. In general, the passive activity rules limit your ability to offset other types of income with net passive losses.

But the good news is there is an exception: If you actively participate in a rental real estate activity, you can deduct up to $25,000 of your rental loss even though it’s passive. To actively participate means that you own at least 10% of the property, and you make major management decisions, such as approving new tenants, setting rental terms, approving improvements and so forth.

But this exception phases out as your income rises . If you have modified Adjusted Gross Income over $100,000, the $25,000 rental real estate exception decreases by $0.50 for every dollar over $100,000. The exception is completely phased out when your modified adjusted gross income reaches $150,000

My understanding of IRC section 280A is that because it is my residence no deduction for loss is allowed. I do not use that room (rented to a long-term tenant over 30 days), but it is still part of my home. Am I correct in my interpretation that I cannot use the exception and deduct up to $25,000 based on my AGI, because it is a portion of my residence?

No, you are not correct.

It just is not common for residential rental real estate to actually show a profit "on paper" each year, at tax filing time. It's more common for the SCH E to show a loss.  The "General" rule of thumb is that passive losses in excess of the passive income get carried over to the next year. Therefore, those carry over losses will just continue to increase with each passing year.  

One exception is that if you are "actively involved" in the passive activity in a tax year, then you can deduct a maximum of $25K against other ordinary income, if specific conditions are met.

- You were actively involved in the activity (renting a room in your house, most likely you were.)

- You have the taxable "other" ordinary income to deduct it from.

- Your MAGI does not exceed specified thresholds, determined by your filing status. For details (to see if the program is applying things correctly) see IRS Pub 925 page 4 starting at the bottom of the first column, "Special $25,000 Allowance". Then check that you don't exceed the MAGI threshold as applies to your filing status on that same page, 3rd column, "Phaseout rule".

@Carl Based on the discussion above with @ColeenD3  it seems that deduction does not apply for renting portion of you residence including room in your house. Do you have a different interpretation of IRC section 280A that would let this deduction be used when renting portion of your residence?

Also, does TurboTax has a way to figure out excess losses and depreciation to be carried over to next year similar to IRS worksheet 5-1?

Based on the discussion above with @ColeenD3  it seems that deduction does not apply for renting portion of you residence including room in your house.

That is correct. For some reason I wasn't keeping in mind that the rental was a portion of your residence.

Also, does TurboTax has a way to figure out excess losses and depreciation to be carried over to next year

Not sure how the program works in your case. But I do know that on my rentals my excess losses were carried over by the program up until a few years after I had paid off one of my rentals.  It only took 2-3 years after the payoff year for me to "use up" all my carry over losses, and I've not had any since.

If you have any losses to be carried over say from 2020 to 2021, a form 8582 will be generated and the carry over loss for residential rental property will be shown as a negative number on line 1d of that form, and possibly on line 4 if you have nothing for 2 and 3.

@Carl Thanks a lot for the answer. Appreciate it. In my case it seems Turbotax keeps offsetting my active income (wages) with the rental income losses from the room in house when it should not and does not generate losses to be carried over to next year and it seems I have to do it manually. Which was my initial question, is there anyway to update TurboTax so that the active income is not offset by unallowable passive rental income.

@GabiU was there a change in 2018 with the TCJA that allows this offset against other ordinary income when renting a room in your house now? I do know there was a change that now allows losses of up to $25K against other ordinary income each year, meaning it's perfectly possible that one could have no carry overs at all, ever. But does it apply to this thread?

@ColeenD3 

@jcphil from what I see in IRS Pub 527 page 13, 3rd column at https://www.irs.gov/pub/irs-pdf/p527.pdf#en_US_2020_publink1000219119 section, "Exception for Rental Real Estate Activity with Active Participation" indicates you can take up to $25K if you meet the requirements outlined there. I see nowhere anything indicating it doesn't apply to your setup.

The only thing I see in pub 527 is that if the property is not rented for profit, then not only can you not use losses to offset other income, you also can not carry any losses forward. Basically, you just "lose it" permanently and forever.

It depends. JCPhil Carl must be working on this simultaneously with myself. He is correct though. There is a question in your rental profile that asks if you are an active participant. If you say no to this question, your entire losses are disallowed. This is the workaround that you would use to exclude the $25,000 passive loss exclusion.

Yes, it is possible not to have a carryover at all unless the losses are above the $25,000 amount. 

Thanks @DaveF1006 for clarifying. I completely forgot about that "active participation" thing here.

@DaveF1006 , @Carl , @Hal_Al  I have the identical situation you helped with before but a remaining question:

I rent a room in my home (private residence) call that "C". It is dedicated uniquely to be rented out. I do not personally use it. I ALSO rent out apartments in separate buildings that are NOT my private residence. Call those "A" and "B".  I am NOT a real estate professional, though. I just spend 'the time needed' to rent out the places, prepare taxes, organize repairs, etc.

When I follow the TTax step-by-step it puts my rented room-in-home "C" into Column C in Schedule E, arrives at a loss (after I pro-rated all costs by square foot method, including a share of depreciation on my home) AND THEN TOTALS THAT LOSS WITH GAINS ON RENTAL PROPERTIES in columns A and B AND LOWERS MY OVERALL RENTAL REAL ESTATE INCOME (ie. Passive Income).

However, (like several TTax users have, also) my understanding is that renting out a room in your HOME/PRIMARY RESIDENCE is a "special situation" and "IRC section 280A(c)(5) limits deductions to such residential rental income; no deduction for loss is allowed. In meeting this limitation, homeowner expenses are deducted in a specified order—first, the allocated portion of mortgage interest and property taxes; second, allocated amounts of indirect expenses other than depreciation (but only to the extent of remaining income); and last, allowable depreciation only if there is sufficient rental revenue to prevent reporting a rental loss [Proposed Regulations section 1.280A-3(d)(3)]."

So, my understanding is that Turbotax should 

1) apply this 'staggered allowance/not of deductions - interest/tax, allocated expenses, depreciation (like it does for home offices on form 8829)

2) prevent any resulting losses to be applied to PASSIVE (as well as active) incomes in Schedule E and instead carry them forward.

TTax is NOT doing that!  Is that correct or simply a tax situation that program "can not handle"?

If the latter, then how can I manually adjust Schedule E to not run against the the tax law?

Many many thanks for clarifying this. I have been searching for days on TTax forum and the internet (Nolo, etc.), now, and still not have clarity how to correctly do this on TTax.

TTax step-by-step it puts my rented room-in-home "C" into Column C in Schedule E, arrives at a loss (after I pro-rated all costs by square foot method, including a share of depreciation on my home) AND THEN TOTALS THAT LOSS WITH GAINS ON RENTAL PROPERTIES in columns A and B AND LOWERS MY OVERALL RENTAL REAL ESTATE INCOME (ie. Passive Income).

Exactly as it should.

my understanding is that renting out a room in your HOME/PRIMARY RESIDENCE is a "special situation" and "IRC section 280A(c)(5) limits deductions to such residential rental income; no deduction for loss is allowed.

Your understanding appears to be wrong. You have no personal use of the percentage being rented out, and it's rented at FMV to a non-related party. So all losses are allowed with the excess loss carried over.

I have been searching for days on TTax forum and the internet (Nolo, etc.),

I personally don't take what websites other than irs.gov say as gospel. I've seen 3rd party sites where one interprets an irs publication one way, and other interprets the IRC the opposite way. Leaves to much room for mistakes. I myself go by the pubs, as I find the IRCs to be extremely wrought with an over abundance of legalese.

Also, Proposed Regulations section 1.280A-3(d)(3)] is just that; a proposal. It's not law until passed by congress. Don't know when that was posted on the website. But I get the impression it's pretty old since it provides publish dates back in the 1980's. Being that it's signed by Jerome Kertz as the Commissioner of Internal Revenue makes me disregard it even more since he was the commissioner from 1977 - 1980. Additionally, he passed away back in 2015.

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@Carl wrote:

Also, Proposed Regulations section 1.280A-3(d)(3)] is just that; a proposal. It's not law until passed by congress. Don't know when that was posted on the website. But I get the impression it's pretty old since it provides publish dates back in the 1980's.

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Treasury regulations are never passed by Congress and the age of a regulation makes absolutely no difference with regard to its force and effect nor does the identity of the current (or past) Commissioner.

Congressed passed the Internal Revenue Code which grants the authority to the Treasury Department to promulgate regulations which have the same effect as actual law (although any Code section would supplant a regulation to the extent the two were inconsistent).

A proposed regulation provides at least some guidance as to how the Treasury Department would interpret a particular Code section.

@Carl - Point well taken!  To save a bit of 'face' on my side, though. The article by the Professor in Accounting in the National CPA Journal was only a year or two old though 😉

In general, proposed regulations are viewed by the courts as carrying no more weight than a position advanced in a brief. They are merely suggestions made for public comment and are not entitled to deference. See the McNamee v. Dep't of Treasury, 488 F.3d 100, 109 (2d Cir. 2007) case, suggesting that proposed Treasury regulations do not represent the considered interpretation of a statute and are merely an option under consideration.  The Internal Revenue Manual appears to confirm that taxpayers are not bound by proposed regulations: Proposed regulations provide guidance concerning Treasury's interpretation of a Code section. * * * Taxpayers may rely on a proposed regulation, although they are not required to do so. Courts almost uniformly regard no deference whatsoever to proposed regulations.

This is an old thread, but there is a lot of incorrect information here.  When you rent out rooms in your home, your deductions are limited to the amount of rental income.  This is based on 280A(c)(5), and this has been upheld in tax court.  This limitation doesn't apply if the tenants have a separate "dwelling unit" (such as a duplex, where the rental portion has its own kitchen, etc.), but if they are sharing your "dwelling unit", then your deductions are limited to your rental income.  The $25,000 loss allowance doesn't apply.  But there is an exception for short-term rentals.

For people who prefer to see an IRS source, see IRS publication 415:

"If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. 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. If you itemize your deductions on Schedule A (Form 1040), Itemized Deductions, you may still be able to deduct your personal portion of mortgage interest, property taxes, and casualty losses from federally declared disasters on that schedule."

If you want to read how it plays out in tax court, see FRANK SHIH v. COMMISSIONER (1997).  

"Each tenant had exclusive use of his or her bedroom and, along with petitioner, had access to and the right to use the common areas of the house, including the kitchen, living room, dining room, bathroom, and laundry room."  ... "Taking into account petitioner's personal use of the San Bruno residence during the qualified rental period would, based solely upon such use, give rise to the application of section 280A(c)(5). Because petitioner continued to use the San Bruno residence for personal purposes (as his residence) while attempting to rent out the remaining bedrooms, he cannot rely upon section 280A(d)(4) to avoid the application of section 280A(c)(5). See Walsh v. Commissioner, T.C. Memo. 1987-18."

"If a taxpayer uses a dwelling unit for rental purposes and as a residence during the taxable year, section 280A(c)(5) limits the deductions attributable to the rental use of the dwelling unit to an amount not to exceed the excess of the gross rental income derived from the rental use over the sum of: (1) The deductions allocable to the rental use that are otherwise allowable regardless of such rental use (such as mortgage interest and real estate taxes); plus (2) any deductions that are allocable to the rental activity in which the rental use of the residence occurs, but that are not allocable to the rental use of the residence itself. As a result, a taxpayer cannot normally offset against unrelated income a net rental loss incurred from, and attributable to, the rental use of the taxpayer's residence. Feldman v. Commissioner, 84 T.C. 1, 5 (1985), affd. 791 F.2d 781 (9th Cir. 1986)."