TurboTax Depreciation changes once expenses change

[desert_researcher]

Hi, I just observed that Turbo Tax will reduce the depreciation expense when I add more expenses for my rental property and my total rental income is never positive and always -1 or 0 because the depreciation total + expenses will always be over the rental income. Why is it always -1 or 0? 

Example with numbers: total rental income $30000, when expenses are $20000, depreciation is $10000; when expenses are $21000, depreciation is $9000. The calculated depreciation is actually like $13000.

thanks!

[AliciaP1]

Your deductions from rental income are considered passive deductions.  Passive deductions are limited to your passive income for the year.  It will, however, be calculated as a passive loss carryforward to be used in the future when/if you have additional passive income.

See Passive Activity Limits for more information.

@desert_researcher 

[desert_researcher]

@AliciaP1 Thanks for the reply and the reference. I read the page for Publication 527 and did find limit on expense which is $1,080,000 for 2022. My depreciation deduction is only slightly above $10,000 like how it's in my example. I don't see the connection with that limit.

Is it because the software try to not to create much loss so to report only portion of it? 

[DianeW777]

It depends. The rules for rental real estate have a special allowance which exceeds the rental income and other passive income.  When you are in the PropertyInfo (TurboTax Online) or in the Property Profile (TurboTax Desktop) you must answer the active participation question with a 'Yes'..

Active participation is a requirement to be allowed to reduce other income by the loss on your rental property.  There is also an income limit that begins to reduce that amount.

Phaseout Rule: The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that’s more than $100,000 ($50,000 if you’re married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you’re married filing separately), you generally can’t use the special allowance. This is because the special allowance is reduced to $0 since the modified adjusted gross income is over the $100,000 amount.

• Sign into your TurboTax return > Search (upper right) > Type rentals > Press enter > Click on the Jump to... link > Edit next to the Rental Activity  > Edit next to the Property Profile or General Info > Continue to the question about active participation
• Continue to the end of the section for TurboTax to save your changes.

If you do not have income above the limits shown and you are being limited on your rental loss please consider sending a diagnostic file. Please @DianeW777 when you place the token here.

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: 

TurboTax Online:

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.  

TurboTax CD/Download:

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.
5. Please also tell us any states included in the return. 

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution. 

[desert_researcher]

I didn't belong to active participation for the rental.

@DianeW777 Thanks for the instruction on how to generate the de-identified copies!

Here is the token #1097666 with -1 as the rental income loss.

I have another token #1097670 with 0 as the total rental income. This is done after reducing other rental expense. In this version, depreciation reported on Schedule E gets lower.

These are just confusing because I'd like to know how it determines how much I report the depreciation on Schedule E. The percentage day for rental is 83.84% of 2022. But neither of the reported depreciation in the two versions is that portion of the MACRS depreciation number. It changes along with the change of other rental expense I reported.

[DianeW777]

For the property with 0 income or loss, first you need to make some changes.  I notice you have selected 'active participation' which should be correct if you make all the final decisions about the tenants and property.

Once the property was converted to a rental and if it was no longer used for personal purposes after the day it became available for rent you need to say the following in the Property Profile or Property Info:

1. Yes - this property was rented all year.
2. Yes - it was rented at fair rental value (assuming it is and not at an extreme lesser rate to a relative).
3. Continue to enter any other information requested as you finish this section.

TurboTax knows how to handle the depreciation by the date placed in service for rent when you enter your property under assets.

• Again, you must indicate: Yes - this property was rented all year and Yes - it was rented at fair rental value (assuming it is and not at an extreme lesser rate to a relative).
• You have the right date placed in service as the date you first began to rent it.
• TurboTax will calculate the correct depreciation for the period of the year it was rented and/or available for rent.

I didn't review the second return because this seems to sum it up.  If you make the necessary changes you will be allowed your loss and all depreciation will be applied as it should on your return.  When passive activity rules come into play any unallowed loss is carried to Form 8582 and carried forward to 2023.  

As long as there is no personal use after it is converted to a rental property there is no need to alter your information by personal days of use.  You do need to enter only rental period expenses under the 'Expenses' section.  Do not enter any expenses for the period it was not available for rent in 2022, instead manually calculate the appropriate amounts.

@desert_researcher 

[AmeliesUncle]

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@desert_researcher wrote:

Example with numbers: total rental income $30000, when expenses are $20000, depreciation is $10000; when expenses are $21000, depreciation is $9000. The calculated depreciation is actually like $13000.

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Did you enter "personal days" of use?

[desert_researcher]

Yes. The percentage day for rental is 83.84% of 2022. The rest is personal. The two versions have the same input of this percentage but the reported depreciation are different and neither of them is about this number. One is 67% of the total depreciation reported on Schedule E and the other is 77% when less other expenses were input. 

I'm talking about Schedule E Worksheet > row 5 to 20 for Expenses. There are all empty cells under the column (b), which seems against how it says: "Enter % if not 100.00", because columns (c) Reported On Schedule E has different numbers form column (a) Total. All other (c) numbers are 83.84% consistent with the percentage of rental except for the depreciation row.

[AmeliesUncle]

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@desert_researcher wrote:

Yes. The percentage day for rental is 83.84% of 2022. The rest is personal.

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This is what is triggering it.

Was this back-and-forth between personal use and rental use? Or was it is 100% personal, then converted to 100% rental (over one year)?

If it was a back-and-forth, you are using the home over 10% of the rental days (and over 14 total personal days), and that triggers the "Vacation Home" limits.  That essentially means that in most cases you can't claim a loss, but the unallowed amounts will be carried to future years if/when there is a profit.

[Carl]

Yes. The percentage day for rental is 83.84% of 2022. The rest is personal.

If there is no personal use "AFTER" you converted it to a rental, then it's zero days of personal use. What you used the property for before converting it to a rental, *do* *not* *count* for anything.

If you just select that it was rented "the whole year" then the program (not you) will correctly figure depreciation based on the conversion/in-service date you entered.

Unless you pay a management company to make all management decisions for you, you *do* actively participate, and should select that option when presented.

[desert_researcher]

@AmeliesUncle, what you said seems closer to the truth...

There is no back-and-forth. The property was used as primary residence until certain date (more than 14 days) and it's all rental for the rest (sorry I described not accurately enough in previous post as the order seems important). Because it's the first time it was rented out in 2022, I guess it's not used 100% as rental for 2022? 

In this case, can I claim loss or not? 

[AmeliesUncle]

Go back to the screen and read it carefully.  If there will not be more personal use, you should be entering ZERO personal days because there were no personal days AFTER it became a rental.

Then you need to MANUALLY prorate and enter the full-year expenses, such as mortgage interest, real estate taxes, insurance, etc.

That should fix your problem.

With that being said, even though the depreciation will show the proper amount, there are still situations that you may not be able to deduct the loss this year (Passive Loss rules).  But it depends on  your circumstances, including your total income on your tax return.

[Carl]

I guess it's not used 100% as rental for 2022?

Read the small print. It matters. Business use percentage is based on, and counted from, the date you convert the property to a rental. So if there was no personal use *after* you converted the property to a rental, then it's 100% (one hundred percent) business use.

[desert_researcher]

@Carl Your comments made me realize that I did enter as "active participant" and I didn't use any management company. Sorry for the wrong information before. I meant I'm not real estate professional (obviously...) 

I tried how I understand what you say -- I set "I've always used this item 100% of the time for this business". It then calculated depreciation based on the whole year. There seems no limit on the loss but there is no proportional calculation on those expenses including depreciation. All are treated as "whole year" business.

Were you trying to say that there shouldn't be a loss limit for my case and there may be a way to adjust it in Turbo Tax? 

[Carl]

For the first year, depreciation is figured based on the month you place the property in service. The mid-month convention is used, regardless of what day of that month is the in-service date.

There is a difference between active participation and material participation. So don't confuse the two.

If you are the one who makes the management decisions, then you are an active participant.

While I won't rule it out, I find it hard to accept that the program is not figuring depreciation based on your in-service date, with 100% business use.  So I ran a test scenario using the CD/Desktop version of Home & Business on my Windows computer.

When offered the option to let the program do the math for me automatically, using an in-service date of 4/1/2022 with a structure value of $100,000 I get a first year depreciation amount of $2,576. I double-checked this using Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf with the MACRS worksheet on page 36 and table A-6 on page 71. Manually I got $2,576. Spot on perfect.

When I did this in the program, on the last screen of the asset entry I clicked the "show details" option and pasted it below for you to see. As you can see, the in service date is 4/1/2022 with 100% business use.