Putting in expenses and/or asset depreciation actually increases my taxes?

[cmoy]

Hi there - just wanted to understand how putting in either depreciation assets and or rental expenses such as management fees or repairs, in isolation, actually INCREASES my taxes?  To me this doesn't make any sense.  It would make more sense to me if there was a hard cap of expenses such that adding more expenses would not be deductible and thus neither increase/decrease taxes, but this tax increase showing onTurbo Tax does not make any sense.  Someone please explain how this can happen?

So here is my situation.  Property A is somewhat profitable, although this summer I renovated the house, so there were a lot of expenses plus new depreciable assets (new windows, new flooring, appliances, etc), plus no income for those 3 months.  Let's say that the profit for this year is $10K.  Property B is a condo that has losses because of land and asset depreciation (plus I get socked with high HOA fees that eats up any profit).  Let's say that the profit for Property B is -10K.  A third Property C out of state property that was our second home with no one else living in it was by happenstance turned into a rental.  A lot of work was done to fix the house in early 2021, and was put up for sale/rental around February, but no acceptable takers for either and we rented out part of the house at the end of summer to a neighbor to defray a tiny bit of the costs.  Profit on this at this point let's say is -15K.  Since we did a lot of work on Property A and Property C, I was playing around with Turbo Tax with the assets and management expenses, and it turned out that if I eliminated assets and/or reduced the management expenses, the Federal tax actually went down, and vice versa.  Which as mentioned in the first paragraph makes no sense.  Any ideas?

[RaifH]

A and B sound fairly straightforward as they were rental properties all year long, even if A was vacant for a period of time. Depending on your income, you can take up to a $25,000 loss on rental activities. If your income is above $150,000 then you can not use your rental losses to offset any non-passive income and the loss gets carried forward. 

Since C was a second home for at least a portion of the year, it is possible if you were adjusting the number of days that it was available as a rental, by definition this would decrease the personal use days. This would not impact your rental loss if you already are capped out for 2021 but would reduce your personal deductions for the property taxes and mortgage interest. 

[SweetieJean]

The EIC might also be coming into play.  It is calculated on a bell curve/pyramid basis.  That is, it goes up as your income does to a certain point, but then starts to come down.

[cmoy]

thanks, I have a feeling that the answer is somewhere related to what you were mentioning.  But this is still confusing, as (carrying a loss forward) <>  (my Federal taxes going up).  So are you saying that if Property A profit is 10K, Property B is -10K and Property C is -15K, any other additional expenses/depreciation added to any of the properties will result in a carryover loss?  Even though 10 + -10 + -15 = -15K?  I'm still confused.  Yes, I guess I'm in  that > 150K category.

Regarding the Property C, so I currently am saying that the house was rented out for only 150 days, even though the house was vacant and available for sale/rent the whole year, except for maybe the Jan 1-Feb 15 time period when it was being renovated.  Should I say that the house was available the whole year for rent?  I guess I can play around with that and see if my taxes change or not.  Technically I was living there for only part of the renovation part for a couple of weeks or so.

[RaifH]

If you say House C was available all year for rent, you would not be able to take any of the mortgage or property taxes as a personal deduction, which would probably further increase your taxes. Increasing your personal use days by pushing back the date that you converted it to rental use would potentially increase your personal deductions. 

I could continue to guess, but it would be helpful if I had a diagnostic file of your return to look at to see if I can more accurately diagnose what is going on. 

You can send us a “diagnostic” file that has your “numbers” but not your personal information.  If you would like to do this, here are the instructions: 

Go to the black panel on the left side of your program and select Tax Tools. 

1. Then select Tools below Tax Tools. 
2. A window will pop up which says Tools Center.  
3. On this screen, select Share my file with Agent. 
4. You will see a message explaining what the diagnostic copy is.  Click okay through this screen and then you will get a Token number. 
5. Reply to this thread with your Token number. This will allow us to open a copy of your return without seeing any personal information.  

I will then be able to see exactly what you are seeing and can determine what exactly is going on in your return and provide you with a more tailored answer.