How can I change a rental property classified as nonpassive to passive?

[ppatrick1]

I just realized that my rental property is classified as nonpassive in the 2019 and 2020 software.  I've tried going back through the questions in the 2019 and 2020 software to make sure the real estate professional box is not checked.  I've the deleted the whole property and started from scratch and it still shows as nonpassive.  I entered a new rental property in 2020 and it shows correctly as passive.  Help please...I've done everything I can think of to fix this.

[AmeliesUncle]

Did you have any "personal days" for the rental property?

Did you accidently mark it as a "self rental" or rental of "land"?

How have you determined it is being treated as non-passive?  Some people misunderstand how some of those rules work, so I want to make sure you are understanding things correctly.

[ppatrick1]

Yes, I did have personal days.  I entered the number of rented days and personal days in the questionnaire.

I went through the questions multiple times to make sure everything was checked correctly.  Plus, tried different variations and got the same result.  The 'self rental" and rental of "land" were not checked.  I also started a completely new return without importing anything and entered from scratch.  Still shows as nonpassive.

For this particular property, there was (4) loss and it was deducted from my other ordinary income and shows as nonpassive in the worksheet.  I entered a new property this year that has a loss and it shows as passive and losses are carried forward instead of applied to ordinary income.

[AmeliesUncle · Accepted solution]

If at least 10% of the days are personal days, that changes the rules, and in many cases can allow a deductible loss.  I suspect that is what you are encountering.

As a side note, I forgot to ask ask if the average rental period is 7 days or less,  which would also change the rules about passive activities.  But whether or not that applies to you might not matter because as I said before, I suspect it is the personal days that is doing it for you.

[ppatrick1]

Ok. Yes, for 2019 and 2020, the number of personal days are more than 10% of rented days.  I know that affects some deductions, but wasn't aware that it affected passive vs. nonpassive.  Can you provide me a link to the applicable IRS reg or publication?

Yes, this is a vacation rental, so majority of rentals would be 7 days or less.

Thanks for the assistance.

[ppatrick1]

Thanks again for the help.  I read the IRS pub about passive activities and found the vacation home rental exception.

[isamom1982]

@AmeliesUncle - You seem to be the expert, here 😉

I rent out a room in my home (my main residence) for part of the year usually for 7-30 days (for the rest of the time it stays empty).   I use (2021 Home and Business Desktop edition) and have other 'standard' rental property I use Schedule E for.

My understanding is that I should use Schedule E for this room renal in my personal residence, also. But that it will be treated as "non-passive" activity and thus can not generate losses and not be totaled with the passive gains/losses on Schedule E.

--> Does TTax account for all of that and leads me through it in the Step-by-Step*   In particular:

1) Does Turbo Tax help decide if I can use a DEPRECIATION deduction for this room (Schedule E line 18) and. If so, does TT calculate the depreciable basis amount, create a Form 4562 and track the depreciation year on year?  (I assume the pro-ration of the depreciation happens based on the % of total square footage of the residence).

2) Most importantly: Does TT SEPARATE the handling of the "room  in residence" column in Schedule E to account for this "Non-Passive" character? -- I understand that  a "special provision" kicks in that disallows losses (they need to be carried forward) - IRC section 280A.  Thus incomes or losses from this column of Schedule E should not be totaled with other as happens with 'normal rental income / losses that ARE passive.

*Note that I can not simply try it out myself, yet, since the Depr and Amort. Area in TT desktop is still "under construction as of March 22nd! (TT investigation # INV-19570)

[MarilynG1]

If you rent a room in your home, and each individual rental is 14 days or less, you don't need to report this.

Click this link for more info on Renting Out a Room in Your Home. 

[isamom1982]

@MarilynG1 that is INCORRECT.  The 14 day rule applies cumulatively for the entire fiscal year.  So If you rented a certain room in your residence 7, then 13, then 12, 7, 4, etc. days during the year you most definitely DO have to report it - even though none of the rentals lasted longer than 14 days.  Hope that helps.