Rental expenses > than rental income and AGI >150K

[rlb_ny]

My AGI is >150K and my rental expense and other rental expenses are more that my rental income.

Im not a real estate professional., and the result on my schedule e is a loss.  

However Turbo Tax 2021 and previous ones when this occurs deducts from my gross in come as a loss on the 1040 form.

I thought that you cant take a loss (based on the expenses) if your income is greater than 150K ?

Why does turbo tax do this?

[Carl]

Have you yet completed your tax return in its entirety so that the programs "knows" what your final AGI is? I ask, because you haven't indicated what version/flavor of TurboTax you're using. I do know if using the Home & Business version (desktop) or the Self-Employed version (online) that you complete the rental section before you even get started on personal income. In such a case, the program can't possibly know your "true" AGI if all that has been completed is the Rental & Royalty Income section of the program.

Once you complete the tax return in its entirety, the program performs "final checks" before you e-file, and will adjust as necessary.

[rlb_ny]

Im using the windows  premier version that has the latest updates (2021).

Yes I ran the final checks and no errors where found.  Taxes are complete and it still allows a deduction for loss on my rental expenses (rental expenses > rental income on schedule e and then on 1040 sheet) even though my AGI >150K and im not a real estate professional.

Also this is consistent with the previous turbotax premier versions starting back in 2018, 2019, 2020 and now 2021.

I was first alerted by NYS who identified the error in my 2018 version.   I went through several iterations and spent hours in trying to identify if this is a bug in turbotax or if it is legal.  

I even contacted turbotax support several times and they issued problem numbers but they closed them.

So wondering if this is legal or a bug.   You should be able to easily replicate this by updating a W2 and then add the real estate expenses to see it.

Just would like to know if this is a bug with TurboTax or not and if so they should fix it and even refund my penalties.    Im sure I cant be the only one that came across this.

[Carl]

@MayraM would you or one of the other moderators check this out please?

[rlb_ny]

I look forward to seeing a comprehensive answer from a TurboTax expert, whether this is a TurboTax bug or not.

I believe from everything I have read that this is a systemic bug with TurboTax dating back several versions (unless there is something in the tax code that allows non-real estate professionals with AGI >150K to take expenses as an overall loss on your 1040).

It will require a Tax Expert, a user, and a programmer to determine/fix this.

I have never comprehensive reply (saying TurboTax is correct or incorrect) other than just generic links to IRS publications, which tells me that intuit didn't have the right people looking into this. Again, I can't be the only person that came across this.

[AmeliesUncle]

Do you also use the property for personal use?

Is it short-term rentals?

Are you providing "services" (such as maid service or meals) to the clients?

Are you reporting it in the rental section and it is showing up on Schedule E?

What type of property did you classify it as (Box 1b on Schedule E)?

Are you using the Online version of TurboTax, or are you using the CD/downloaded version?  EDIT:   I see above that you are using the Windows version.

[AmeliesUncle]

This is part 2 ...

Because you are using the Windows version, can you go to the "Forms" (I think it is in the upper right hand corner), then on the left side look for the "Schedule E Worksheet".  Can you take a screen-shot of a portion of that (make sure no personal information is showing). 

Below is a blank version of the information I want to see (your version might not look exactly as this shows, but it should be fairly close).

[GeorgeM777]

@rlb_ny...In connection with reviewing your question, we recreated a situation that mirrors what you are experiencing.   To correct our test return to reflect that the rental property loss was not deductible, we changed a response on the page in the Rental Property section which asks the following question: "Do Any of These Situations Apply?"

In our test return, we had indicated that the property had been sold during the year.  That was an error on our part, and therefore, we unchecked that box and upon doing so, the rental property loss was removed from Schedule 1, line 5, as well as the relevant line on the Form 1040.  Please check your entries on the aforementioned page and follow-up with any additional comments/questions. 

[rlb_ny]

OK i went into that section.  - Nothing is checked (i did not sell).  But some other things you can mirror as you walk through.  It is a vactation-short-term, nothing is checked in any other situations;  property was not rented all year 17/21 (rented/personal).  active participant, no qualified designated area, 100% owned.

So if you go back at my previous post the issue in the "other expenses" - its after the when you enter common expenses (enter 1000's and that gets clipped); when you enter the "other expenses"(make some up like lawn maint, painting, etc) and make it more than the income from the rental - that is was then deducted on the 1040.

If you are having issues replicating this I can show you this and walk through with you.  If you email me we can set a time up friday afternoon.

[rlb_ny]

[rlb_ny]

One other note to go along with the previous post if you look at the schedule e work sheet the other expenses are listed in lines 19 a through e and listed in the column c and subtracted from the rental income to give a loss.

[DianeW777]

I will interject one comment based on your screen image above.  I notice that the box is checked beside 'Other passive exceptions' which should NOT be checked.  Remove this selection. This alone may be side stepping the passive activity loss (PAL) required limitation based on your income. TurboTax needs that box to be clear for the right calculations because you have no exception in the situation.

• See the image below for clarification

[rlb_ny]

How do you change the other passive  exceptions  and where in the program is that asked ?  Ill try by the form wont let me uncheck it.  Ill be glad to try that.

I tried several combinations in the entries and nothing works to uncheck other passive exception.

Note its a vacation, i own and make the decisions.      Its related to the "other expenses" not the common expenses.  Please try to replicate and you can see. 

[DianeW777]

My steps to obtain the desired result - 

1. None of the above for Real Estate Professional
2. Selected Vacation or short-term (used for personal and rented for short-term periods)
3. Selected None of the above (New, Sold, Rented, Converted, Carryovers- should not make a difference)
4. Selected No, this property was not rented all year - entered 17 rented and 21 personal use
5. Selected Yes, I owned 100% of rental and Yes, I owned this property all year
6. Selected Yes, I am an active participant and No, I did not pay for work... (would not make a difference)
7. Selected Ener my rental info myself
8. Selected None of the above for designated areas
9. Entered Rental Income - Did not receive any form  $5,000
10. Entered expenses in excess of income (repairs, supplies and RE tax) Total $16,500 
11. No entry for Any Other Situations?

When I reviewed forms the box was not checked however the expenses were limited.  Please update if you follow my steps and continue to have an issue.

If you like, you can send a copy of your return that will be scrubbed to eliminate your personal data by using these steps:

1. Click on Online in the top left menu of TurboTax CD/Download for Windows
2. Select 'Send Tax File to Agent'
3. Write down or send an image of your token number then place in this issue.
4. We can then review your exact scenario for a solution.

[AmeliesUncle]

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@rlb_ny wrote:

 property was not rented all year 17/21 (rented/personal). 

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That makes it non-passive, which allows the losses to be used against your other income.

Publication 925:

The following aren’t passive activities.

1. Trade or business activities in which you materially participated for the tax year.

2. A working interest in an oil or gas well that you hold directly or through an entity that doesn’t limit your liability (such as a general partner interest in a partnership). It doesn’t matter whether you materially participated in the activity for the tax year. However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. See Temporary Regulations section 1.469-1T(e)(4)(ii).

3. The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental.

4. An activity of trading personal property for the account of those who own interests in the activity. See Temporary Regulations section 1.469-1T(e)(6).

5. Rental real estate activities in which you materially participated as a real estate professional. See Real Estate Professional , later.

https://www.irs.gov/publications/p925#en_US_2020_publink[phone number removed]