I have Vacation Home Loss Limitations on Depreciation for a rental property. When the property sells, will I need to pay Recapture on the Loss Limitations?

[TurboJake]

Example: this year's depreciation is calculated as $4,000: $1,000 reported on Schedule E + $3,000 in Vacation Home Loss Limitation.  If the property is sold, will the Depreciation Recapture be calculated from the $1,000 of depreciation reported on Schedule E or $4,000 total calculated depreciation...even though I wasn't allowed to take the full $4,000?

[TurboJake]

Does anyone else have another answer for this?  Looking to clarify since the current proposed answer specifically mentions "Passive Activity Loss Limitation" instead of the "Vacation Home Loss Limitations" which are part of this question.

[MichaelL1]

Answer did not address vacation deprciaiton not able to be used.

[TaxGuyBill · Accepted solution]

You will be taxed on the gain from the depreciation that you were eligible to actually use.  So if the vacation home rules did not allow it, there will not be any tax from that depreciation.

[cmg1]

Same situation. The Dep report shows the FULL depreciation, nothing about what was Vacation Home Loss Limitation, that I could not write off. When I sell, how does T-Tax know how much has to be recaptured?

[DianeW777]

@cmg1

It appears there are two situations taking place and it does get confusing.

1. Depreciation: The depreciation deduction for the vacation rental will be recaptured and reportable Section 1250 gain if and when the property is sold. It is considered as a deductible expense every year.
2. Passive Loss:  In a year when a rental is disposed of by sale the unallowed passive losses are fully deductible. They are not lost, therefore TurboTax knows exactly what to do with the sale if you answer the questions about sale in your tax return.  You tell TurboTax that each asset is sold and for how much, as well as the expense of sale.  The sale tells TurboTax that your full passive loss (current year and any prior year unallowed losses) is allowed to be deducted as well.

Both are used correctly and when they should be, depreciation each year of the rental; and passive losses completely used up in the year of sale.

[cmg1]

Are you saying that the vacation rental depreciation that I was not allowed to claim this year as an expense will be treated as though it was claimed after the sale and I will have to pay tax on the gain of that depreciation that I was not allowed to write off?

[AmyC]

@cmg1

No.  When you sell a home, all depreciation allowed is deducted from the sales price, whether you took it or not. Depreciation should be claimed each year.

Depreciation associated with your personal use of the asset during vacations is not allowed as it was not in business mode. Therefore, you are not deducting any depreciation and it is not being deducted when you sell since it was not allowable. There would be no additional tax consequence.

[cmg1]

Perfect explanation, thanks.

[scotchmint]

I need someone to tell me how Vacation home loss limitation is calculated 

[LeonardS]

You may deduct your suspended passive losses from the profit you earn when you sell your rental property. To take this deduction, you must sell "substantially all" of your rental activity. If you own only one rental property and sell it, then you can take the deduction because that property is your entire rental activity.

This also applies if you own several properties and treat them each as separate activities for tax purposes. However,  if you own multiple properties and elected to aggregate them as one activity for tax purposes and only sell one, you can not take the deduction because you won't have sold "substantially all" of your interest in your rental activity.

You must sell the property to an unrelated party—that is, a person other than your spouse, brothers, sisters, ancestors (parents, grandparents), lineal descendants (children, grandchildren), or a corporation or partnership in which you own more than 50%. And, the sale must be a taxable event—that is you must recognize income or loss for tax purposes. This means tax-deferred Section 1031 exchanges don't count, except to the extent you recognize any taxable income. (I.R.C. §469(g).)

[cmg1]

Hi Amy,

Hoping your still helping people.

In 2020 My sched E shows the full years depreciation ($5688) as a “Vacation Home loss Limitation” because it was rented for 91 days and I mistakenly took 15 days personal use while fixing it up on various days during the year. It sat vacant the rest of the year. It is not a vacation home by any means.  The Asset entry Worksheet and the Depreciation and Amortization Report both add in the $5688 for that year, as though I was able to deduct it. I ran through a mock sale and TTax included the 2020 $5688 (that was not allowed) as being taken and reducing the basis even though I was not allowed to deduct it. In other words, I would have to pay tax on the 2020 $5688 depreciation I was not allowed to write off against income in 2020. Am I missing a check box somewhere?

If this is the case, I may be better amending the return to show 0 days personal use.

Thanks again

Carl

[HopeS]

Based on IRS guidelines all allowed or allowable depreciation must be considered at the time of sale. You can generally figure depreciation on the business use portion. Therefore, if you made a mistake on your 2020 tax return relating to Depreciation on your rental property you will need to amend your 2020 return.  You may also, need to amend 2021 to show the correct accumulated depreciation.

Yes, as you pointed there are limitations on the number of days you can use it for personal use. See the IRS guidance below:

Rental Property / Personal Use

If you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct. You're considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for a number of days that’s more than the greater of:

1. 14 days, or
2. 10% of the total days you rent it to others at a fair rental price.

It's possible that you'll use more than one dwelling unit as a residence during the year. For example, if you live in your main home for 11 months, your home is a dwelling unit used as a residence. If you live in your vacation home for the other 30 days of the year, your vacation home is also a dwelling unit used as a residence unless you rent your vacation home to others at a fair rental value for 300 or more days during the year in this example.

See the information below on how to Amend:

Amended Return

Also, see IRS guidance in the link below:

Renting Residential and Vacation Property

@cmg1 

[Carl]

"Passive Activity Loss Limitation" instead of the "Vacation Home Loss Limitations"

For most (and most likely for you too) rental income you receive for real estate is passive income, regardless of what you call it; long term rental, short term rental, vacation rental, or anything else you want to call it.

[tagteam]

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@cmg1 wrote:

I ran through a mock sale and TTax included the 2020 $5688 (that was not allowed) as being taken and reducing the basis even though I was not allowed to deduct it.....

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It appears as if your scenario is beyond the capability of the program. 

The rule is that depreciation deductions (deductions which affect basis), abate after all other allowable deductions. In your case, recapture would only apply to that amount of the deductions for depreciation that was allowed (i.e., obviously, it abated and was not allowed so there would be no recapture on that amount).

You will most likely need to make a manual adjustment to accommodate your situation.