special allowance of residential rental passive loss deduction. Can I deduct less that maximum allowed ?

[Tomek]

If I qualify for special allowance of residential rental loss deduction (entered in line 22 of Schedule E for year 2019), do I have to take maximum allowable deduction (i.e. $25000 for joint return), or can I adjust/lower that deduction, since beyond certain, much smaller amount, there is no tax advantage for me - tax due stays zero (I have very low income).  I would carry not claimed portion to the next year.

I have read number of IRS publications, including 527, 925, and none of them states clearly that I have to take a full/max amount if allowed and available.  IRS says: "up to $25000" for married filling joint returns. "up to" to me means $0 to $25000 .

[M-MTax]

Yeah but by 'up to' they're talking about the phaseout rule for AGI and not the flexibility to take as much as you want or need. You have to take as much as is allowed and there is no carry over to next year.

[Critter-3]

If the passive loss creates an NOL then that can be carried forward.  

[Tomek]

martinmarks1919,

Thanks for the response.

Can you refer me to some IRS writings in this regard, please ?

What experience do you have with dealing with this issue ?

Have you tried to push the lowered this deduction through IRS ?

[M-MTax]

Read Sec. 469 of the Code and the Regs. Critter-3 is right about the NOL btw but you can't pick and choose the special allowance amount....you have to use as much as you can to offset and there's no carry over of the allowance amount except you can carry over the amount that exceeds the special allowance.

[Critter-3]

As my teacher used to say ... when all else fails LOOK at the form and the forms instructions ... at no time does the form give you the option to choose an amount ... you are required to follow the form instructions and math. 

FORM:  https://www.irs.gov/pub/irs-pdf/f8582.pdf

INSTRUCTIONS:  https://www.irs.gov/pub/irs-pdf/i8582.pdf

[Tomek]

Critter-3,

The form 8582 is just to establish upper limitations of the deduction. I do not see specific instructions where the entry to line 22 (deductible rental real estate loss) of Schedule E should be taken from.  The only one from Schedule E instructions is: " You may need to complete Form 8582 to figure the amount of loss, if any, to enter on line 22."

[Critter-3]

Save a PDF of the return and follow the forms and worksheets to see the flow.  If you are using the downloaded version then switch to the FORMS mode where you can also data source where the amounts are coming from to better track the answers. 

[Tomek]

Critter-3,

I am doing it and in these vital for my issue places the data source is not well explained by Turbo Tax.

It looks like I am trying to go against the crowd, hehehe

Thanks for all your advices, though

[Critter-3]

Not all tax issues are a DIY project especially the passive loss and NOL situations ...  I highly recommend you seek local professional assistance to get it right or get an understanding of what is happening.   

The TT program is really very good at completing the tax forms and doing the math needed ... 99% of the time it is a user entry error or misunderstanding of the concept which causes problems by overriding an amount or answering a question incorrectly. 

With the exception of depreciation VS a 179 deduction there are really no places in the income tax return where you have an option to enter  an amount not dictated by the forms/instructions.  

[Carl]

This is just "rough" and I'm not going to get into the details of marital status, filing status, and income thresholds. But generally:

If you have $25,000 loss on rental property *after* getting your taxable passive income to zero, that remaining $25K can be claimed/deducted from other ordinary taxable income. However, if that "other" income is say, $20K, then you can only deduct $20K bringing your total tax liability for the year to zero. The remaining $5K of loss is carried forward as a passive loss carry over. You can't decide to take a lower deduction against your other ordinary income. The rules don't allow for that. Just because the rules don't address it directly, doesn't make it legal.

However, if you want to do that then by all means go ahead. More than likely you'll end up in tax court in about 3-5 years over it. Then it would be very interesting (as well as definitive) to see how the tax court rules.  Once there's either a clarification of the existing rules, or a decision handed down by a federal tax court, that will end any and all discussion on this and settle the matter once and for all.

[Critter-3]

To sum things up ... NO you cannot choose to ignore or change the amounts calculated by the program on the IRS forms per the IRS instructions   HOWEVER  the unused loss is NOT lost just carried over until it can be used.   Please trust  the program and review the forms prior to filing to see how all this is  handled.

[M-MTax]

Sorry but this is WRONG! The unused part of the $25,000 special allowance IS NOT CARRIED OVER! The example provided by Carl is WRONG. If your total SCH E loss is $20,000 then ONLY $20,000 of the special allowance is used and you CAN'T CARRY OVER THE REMAINING UNUSED $5,000. Read the Code!!!!!!

[Tomek]

I have study code section § 469 and did not find a single writing about requirement of using maximum allowable special deduction on real estate rental.

The only place they are talking about limitation on this deduction is § 469 (i) - $25,000 offset for rental real estate activities, and there is only talk about upper limitation of $25000 for married filling joint return and $12500 for married filling separate return if the filler lived apart from his/her spouse for entire tax year.

Instructions for line 22 ( Allowable Passive Loss Deduction) of Schedule E are very vague, and they are as follow:

" Do not complete line 22 if the amount on line 21 is from royalty properties.
If you have a rental real estate loss from a passive activity (defined earlier), the amount of loss you can deduct may be limited by the passive activity loss rules. You may need to complete Form 8582 to figure the amount of loss, if any, to enter on line 22. See the Instructions for Form 8582 to determine if your loss is limited.

If your rental real estate loss is not from a passive activity or you meet the Exception for Certain Rental Real Estate Activities (explained earlier), you do not have to complete Form 8582. Enter the loss from line 21 on line 22.

If you have an unallowed rental real estate loss from a prior year that after completing Form 8582 you can include this year, include that loss on line 22.

Instructions for form 8582 do not describe how to use nor where to forward the results of filling this form.

[M-MTax]

Oh boy! I was wrong in that you should NOT read the tax code because you don't know how to read statutory law. The first sentence in 469(i)(1) is "In the case of any natural person, subsection (a) shall not apply to that portion of the passive activity loss or the deduction equivalent" and THAT refers you back to 469(a) which disallows ALL passive activity losses and forces you to carry them forward. The $25,000 allowance is an EXCEPTION to sub (a) but ONLY to the extent you HAVE A LOSS! You can't carry the unused allowance forward to the next year. But you can do it your way and get audited for all I care. I'm done arguing with you.