Losses when renting a room in your own home

[jcphil]

I rent a room in my own home. I bought the house in September 2020 and my expenses for that room/portion of the house are higher than my passive income/rent mainly because I had some repairs and it was rented for 3 months only. However, TurboTax does not appear to properly deal with losses when renting a room in your own home and let me offset my active income/wages with my passive income. The software is allowing me to claim a loss from my rental activity (room in house), to reduce my active income/wages using the losses, which does not seem to meet IRC section 280A(c)(5) , which precludes deduction for loss when renting a room in house.

The software should allocate losses in sequence with first 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 and should allow the excess to be carried forward for next year, but it does not seem it is working like that at this point and all the losses are offsetting wages.

[ColeenD3]

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.

[jcphil]

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.

[ColeenD3]

 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

[jcphil]

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?

[ColeenD3]

No, you are not correct.

[Carl]

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".

[jcphil]

@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?

[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.

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.

[jcphil]

@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.

[Carl]

@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 

[Carl]

@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.

[DaveF1006]

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. 

[Carl]

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

[isamom1982]

@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.