Schedule E VACATION RENTAL LOSS

[keith-l-bundy]

I entered vacation rental income of 6500 and expenses 20166.  I thought my prorated expenses would only allow 6500 and a loss of zero.  But Turbotax put real estate taxes and management fees in the column c causing a loss and all the other expenses in vacation loss limitation.  is this correct.

[MaryK4]

Yes, this is correct.  Because it is a vacation home (used for personal purposes more than 14 days or 10% of the rental days), the IRS requires an "ordering rule" for expenses that allows some costs to create a loss while others are limited to your income.

If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You won't be able to deduct your rental expense in excess of the gross rental income limitation (your gross rental income less the rental portion of mortgage interest, real estate taxes, casualty losses, and rental expenses like realtors' fees and advertising costs). However, you may be able to carry forward some of these rental expenses to the next year, subject to the gross rental income limitation for that year.  Topic no. 415, Renting residential and vacation property

[keith-l-bundy]

TurboTax is generating a loss on schedule E and carrying it forward to schedule 1 line 5 and then to form 1040 line 8 as a loss.  All expenses are being allocated based on personal days used and rental days except management fees are going 100% to Schedule and he 86% of real estate taxes are going to schedule E.  Here are the numbers generating the loss:  Rental Income 6500 less Mgt Fees 1625 lest RE Taxes 8229 so total 9854 in expenses leaves loss of 3354.  All other expenses were split using percentage and ended up in personal use or in vacation home loss limitation.  I don't think the loss is valid.   I called TurboTax and they said they will check their program but wanted me o clear cache and cookies and then maybe delete schedule E and reenter.  Any advice?

[RogerD1]

Rental losses are generally considered passive losses and are disallowed, but there are circumstances where these losses can be taken if:

• You qualify as a Real Estate Professional (over 750 hours and more than half your working time in real estate)
• You're an active participant:  You can claim up to $25,000 of passive losses against non-passive income.  The losses are phased out gradually for income above $100,000 and are eliminated for income above $150,000
• You have a short-term rental where the average rental period is seven days or less

Rental losses are common with expenses of property taxes, insurance, mortgage interest and depreciation as well as repairs and improvements easily exceeding the rental income.  Some of the loss you stated in your original post could be from depreciation of the rental property - it's critical to take depreciation because it gets "recaptured" and is taxed when you eventually sell the property.

With the information that you've given, it's difficult to tell exactly what your expectations for rental property income/loss should be, if only because there are so many factors to consider.  The information about management fees being 100% allocated to the rental is accurate since those only apply to the rental activity.  Most everything else should be allocated between the days rented and the days for personal use.

The only other thing I could advise would be sending a diagnostic copy of your return information that would have your personal information removed so that we could take a closer look at things for you.  If you want to try this option:

TurboTax Online:

1. Sign into your online account.
2. Locate the Tax Tools on the left-hand side of the screen.
3. A drop-down will appear. Select Tools
4. On the pop-up screen, click on “Share my file with agent.”
5. This will generate a message that a diagnostic file gets sanitized and transmitted to us.
6. Please provide the Token Number that was generated in the response.

TurboTax Desktop/Download Versions:

1. Open your return.
2. Click the Online tab in the black bar across the top of TurboTax and select “Send Tax File to Agent” *
3. This will generate a message that a diagnostic copy will be created.  Click on OK and the tax file will be sanitized and transmitted to us.
4. Please provide the Token Number  (including the dash) that was generated in the response.

*(If using a MAC, go to the menu at the top of the screen, select Help, then, “Send Tax File to Agent”)

[AmeliesUncle]

Separate from your rental, are you Itemizing your personal deductions on Schedule A?

[EDIT:  I realize this may sound like an odd question, but it actually *IS* relevant to what you are asking.]

[keith-l-bundy]

I am attaching a screenshot of schedule E worksheet.  I am NOT a real estate professional, my income is above $150,000 and I don't have any other passive activity.   Does this worksheet look correct?  Rental income is $6500 so my understanding is I cannot get a loss that flows to Line 8 of my 1040.

[AmeliesUncle]

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@keith-l-bundy wrote:

  Rental income is $6500 so my understanding is I cannot get a loss that flows to Line 8 of my 1040.

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It depends.  Do you Itemize your personal deductions on Schedule A, rather than taking the Standard Deduction?

On another note, is the "cleaning and maintenance" all 'shared' things, like maintaining the building?  Or is any of that specifically and solely for cleaning after tenants?

[keith-l-bundy]

No I am taking the standard deduction as it is higher than my itemized expenses.  

[AmeliesUncle]

Then you are correct and the program is wrong.

The IRS revised the Instruction in 2018, based on a Tax Court case.  TurboTax never revised the program and is giving the incorrect result that you see.  

This is the 8th year since the change, so it seems unlikely that TurboTax will correct things anytime soon.  You may want to look for other methods to prepare your tax returns (such as other software or going to a good tax professional) that can do it correctly.

[user17748177281]

I agree with AmeliesUncle - the program is wrong - in that it's not picking up the fact that you're taking the Standard Deduction.

Ignoring casualty losses to make it easier to grasp, IRC Sec 280A requires an ordering of expenses related to vacation home into 3 tiers. Tier 1 expenses can result in reporting a loss on Sch E. Tier 2 expenses are limited to remaining income after deducting Tier 1, and Tier 3 expenses are then limited to remaining income after deduction Tier 2 expenses. Carryovers of nondeductible expenses are available for those that were limited to offset any future profit from the rental activity.

Tier 1 expenses include (1) expenses directly related to the rental income produced, such as those management fees (assuming those  are solely related to bookings, etc.), and (2) mortgage interest and real estate taxes THAT ARE OTHERWISE DEDUCTIBLE. This means you'd be itemizing your deductions and any mortgage interest and real estate taxes would be deducted there even if you were not using the property as a vacation home with rental income. Tier 1 expenses are fully deductible on Sch E (see Worksheet 5-1 of IRS Publication 527 Personal Use of Dwelling Unit (Including Vacation Home), which means a loss could be reported.

Tier 2 expenses are all the other common expenses that are allocated between rental and personal use, OTHER THAN DEPRECIATION. Pub 527 Worksheet 5-1 specifically directs you to NOT include those real estate taxes on Line 2b of the worksheet IF YOUR ARE TAKING THE STANDARD DEDUCTION. Thus, when taking the standard deduction, real estate taxes move from Tier 1 (line 2b) to Tier 2 (line 4c). This means that the rental portion of your real estate taxes would be limited in the same manner as those other common expenses.

Tier 3 is depreciation on the rental portion of the property. Since this is already a lengthy discussion and not relevant to your question at hand, I'll pass on further elaboration.

So, here are a couple possible outcomes: (1) maybe the TurboTax calculation is waiting until you've clearly indicated that you are taking the Standard Deduction (not itemizing) and it will magically go back and correct the numbers on Sch E to not produce a loss; or (2) the program has an error. If (2), in theory it's an easy fix for the techies - simply include a question in the Sch E worksheet asking if you'll be taking the standard deduction or itemizing. (TurboTax - you owe me a fee for that ;-)).

[AmeliesUncle]

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@user17748177281 wrote:

(1) maybe the TurboTax calculation is waiting until you've clearly indicated that you are taking the Standard Deduction (not itemizing) and it will magically go back and correct the numbers on Sch E to not produce a loss

 If (2), in theory it's an easy fix for the techies - simply include a question in the Sch E worksheet asking if you'll be taking the standard deduction or itemizing. (TurboTax - you owe me a fee for that ;-)).

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Unfortunately, TurboTax doesn't do that, so it is an error.

Unfortunately, it isn't that easy of a fix.  Just because a person Itemizes doesn't necessarily mean the loss would be allowable.  As you said, it needs to be 'otherwise deductible'.  It might not be 'otherwise deductible' if the real estate tax is in excess of the SALT limit or if the mortgage interest wouldn't be fully deductible due to the $750,000/$1,000,000 loan limit.  And starting in 2026, there is another Itemized limit/reduction for high-income taxpayers that might affect things (although I would need to think about that one).

[user17748177281]

Right you are on those limits and the new provision for high income folks. Makes me glad I retired.