Personal vs Rental Days (Seasonal Property)

[Pinevalleyite]

We had a beach property would only be viable as a rental during the summer months. So maximum availability was about 8-9 weeks a year. We would use the property one week in June and come down some weekends in spring. I've always put in the exact days for both ie. say 56 days rented and 18 days personal use. Based on that, TurboTax would allocate the expenses and taxes appropriately. We sold this year and I noticed that TurboTax only created form 8582 (passive losses) for 2018 and 2019. We had a loss every year. What would have prevented the form being created since 2013 when we bought and started renting the property? Is it based on the number of days we used those years vs rented or a maximum W2 income threshold? I don't calculate days rented (or rentable) based on 365 days because it would be unrealistic and is truly a seasonal property that rents by the week in summer.

[Carl]

What would have prevented the form being created since 2013 when we bought and started renting the property?

While it's not self-evident to you, it's quite obvious to me. Will take a bit to explain.

Apparently, every year you've been seasonally renting the property out, you've been converting the property from personal use to rental, and then a few months later in that same tax year you converted it back from a rental to personal use.  Unfortunately, that was wrong for your specific situation.  Here's what happened and why. I'm picking dates and numbers out of this air here, just so you get a basic understanding.

- Converted from personal to rental on Jun 1
- Used cost basis of $100,000, allocating $30K to the land. So depreciation was done on $70K based on a MACRS 27.5 year depreciation schedule to fully depreciate.

- Got $1000 of depreciation for the year.

- Converted property back to personal use on Sept 1

The NEXT YEAR

- Converted from personal to rental on Jun 1

- Incorrectly used the same cost basis of $100,000, allocating $30K to the land. So depreciation was based on a MACRS 27.5 year depreciation schedule based on an incorrect cost basis, with the 27.5 year count starting over (incorrectly) in the 2nd year, "as if" if was the first year.

I should not need to carry this scenario on any further. You should get the "gist" of what happened here. Your first year's depreciation went to "la-la land" when you itold to the program the 2nd year, was the first year.

So in order for things to be correct, in the 2nd year you should have reduced your cost basis (on the structure only) by the amount of the prior year's depreciation. Then you do that "every year" you convert the property to rental and then back to personal. Then your numbers upon reporting the sale would not have gotten your attention.

For the carry over losses, if you "actively participate" in the rental activity each year, and have the "other" (non-rental) income to deduct those losses from, then once your rental expenses gets your taxable rental income zero, you are allowed to deduct up to $25K of the left over losses from that "other" ordinary income - such as W-2 income you received in the same tax year. So it's very likely that you don't have any carry over losses. (I'm not saying you don't. I'm saying it's a "possibility" you don't.)

What would have been easier and correct, is if you just left the property classified as a rental for the entire year, and all years beyond that first year. Then you just report the days rented for what they actually are, and the days of personal use for the remainder of the year.

Then enter total expenses and let the program "do the math" to allocate between the SCH E and SCH A accordingly.

This would then have allowed the program to keep track of your depreciation history and carry over losses. As it stands now, this is a real whammy for you. On top of that, if your state also taxes personal income that makes it a double-whammy.  Since you sold the property in 2020, this "will" raise flags with the IRS. I would highly recommend you seek professional help for your 2020 taxes to get this sale reported correctly and in a way that will significantly reduce (hopefully!) the probability of an audit 24-36 months down the road.

[Pinevalleyite]

Thanks but to be clear, we always classified it as a rental from the first year. We always put in how many days it was rented and how many days we used it for personal use and TurboTax allocated the expenses accordingly on Schedule E to account for the 1099 we received as well as the commissions we paid, insurance, license fee to rent it, etc. I'm just wondering if every year, based on the days rented vs what we used Turbotax used those numbers to calculate depreciation as well as any passive loss carryover.

[Carl]

Thanks for the clarification. Now I have a better understanding of just why your carry over losses aren't there. Since you sold the property in 2020, there are no carry over losses. You get to realize all those losses in the tax year you sell. Most likely, those losses did not exceed the gain on the sale and therefore actually reduced the taxability of that gain, and probably some of the recaptured depreciation also.

[Pinevalleyite]

Yeah I'm doing the 2020 taxes and that's the difficulty. I went back to the tax form in 2013 and on. We never made a profit, but it appears schedule E always adjusted our expenses such that they were never more than the rent we received until we got to 2017. In addition, even though there was a form attached to the 2013 taxes that shows the expected depreciation, it appears it changed on schedule E during the years and I don't know if that was based on the percentage it was rented, ie. some years it was 35 days rented and 30 days used by us and using those 2 factors, the business percentage would be 54%, and other years it was 56 rented and 18 us so 76%. I'm also trying to figure out if I should not have included the value of the land upfront or now. As it is a beach property, the land was worth more than the dwelling on all of the property tax records. Wondering also if QBI which was new one year and Safe Harbor come into play at all here. I'm probably making it more complicated than it needs to be.