Vacation Home Rental Loss Limitation -

[ladylake]

I have a vacation home rental that has an $8,000 loss.  TurboTax is allowing the loss to flow to the 1040 WITHOUT limitation therefore reducing my taxable income by that amount.  It has coded the loss as NPA - non passive activity.  The NPA designation is technically correct but based on my research I believe the loss still has to be suspended due to the fact that the amount of my AGI does not allow any of the special $25,000 allowance to be used.  According to the IRS, operating expenses for vacation homes in excess of allowable deductions cannot create a loss and are carried forward.  Because of the NPA designation TT did not prepare a Form 8582  - Passive Activity Loss Limitation to carry forward the loss. What is the correct answer?  

For several prior years I had another vacation rental and the losses were always suspended until I sold the unit in 2020.  Each year a Form 8582 was included with my return.  The essential facts this year are the same as the prior years.  I used TT each of those years to prepare my taxes.

[DianeW777]

That's correct if you did NOT sell the property yet. If you rental is reported on Schedule E, then TurboTax does know that the activity is passive and will suspend the loss with Form 8582.  Double check your assets to be sure you did not select that they were removed or disposed of. Also check your property general info to be sure you have not selected that you were a real estate professional.

There is no suspension in the year of disposition.  The full loss is allowed to be used against all other income when the rental activity is sold or disposed of.  The carryover is done in the year of sale.

Please update here is you need further assistance and one of our tax experts will help.

[ladylake]

I did not sell the property and I am not a real estate professional.  The only assets I depreciated were the building and improvements.  I used the de minimis safe harbor election for all other new additions.  The rental is reported on Schedule E.  TT added the initials NPA on line 26 of the Schedule and then carried the loss to the 1040.  I have had several conversations with TT concerning this issue.  They all say there is nothing wrong with my input and since the system used the NPA designation the return is correct.  I totally disagree but don't know how to fix it. They only other option they offered is that I purchase the audit protection in case it is incorrect!  What do you suggest?

[RaifH]

You are not allowed to take losses on a rental property that has a mixture of personal and business use. 

However, this only applies if you use it for personal purposes more than the greater of:

• 14 days, or

• 10% of the total days it is rented to others at a fair rental price.

If your personal use did not exceed that amount in 2021, TurboTax was correct in not applying the limitation to the loss on your rental property. On the other hand, if your personal use exceeded that amount of time, then you should not be allowed to take a loss on the property. You may want to check the personal and rental days you entered to make sure those are accurate for 2021. The type of property on Line 1b of Schedule E should be 3 for a vacation rental and the fair rental and personal use days will be listed next to it. If those are not correct, you will need to edit the general information of your rental property.

[ladylake]

For 2021 my personal use days was 22 days and the rental days was 87.   Therefore both conditions apply and the loss should be suspended.  The reason that there were so few day allocated is because the property was also being renovated during 2021.  I have every thing correct on the input screens and the Line 1b is "3" and the fair rental and personal days are as indicated above.  How do I get the return correct when the TT agents keep saying it is correct?  I think I am dealing with a software issue and no one at TT seems to agree with me.   I can't file it the way it is.  What do you think can do now?

[AmyC]

We need to get your rental to be a passive activity. Follow along in your rental property:

1. I know that you said you are not a real estate professional so that section is "None of the Above". 
2. When you go into the property profile section, go through until you reach "Do Any of These Situations Apply to this Property" 
   • do you have any passive activity losses carried over from a prior year checked? You mentioned prior years had losses you carried over on another property.
   • Passive activities are limited to a $25k loss. However, you stated non-passive is showing with a greater loss.
3. Continue through questions about office in home, maybe deductions, until you reach Let's Find Out if You're an Active Participant in This Property. Be sure the No is selected.

Side note: Days used for repairing the property are not considered personal use days. 

@ladylake

[ladylake]

The prior years suspended losses were used when the related property was sold in 2020.  I have no other losses to be carried to 2021.

My MAGI is in excess of the amount that can be used for the $25,000 special loss allowance so the allowance is phased out and cannot be used.  Therefore the vacation rental loss should not be allowed.  I am an active participant in this rental but do not materially participate.

I believe IRC Section 280 says that I cannot take a loss for this activity but the limited expenses are carried forward and suspended until I dispose of the property.  That was my experience when I had the former property and TT carried the loss forward until I sold the property. The Family and Business program for my desktop does not limit the loss, instead says it is a NPA and reduces my income by the $8,000 loss which I believe is in error.

[DianeW777]

There is a token for this return in your other post.  It will be reviewed so look for a response in that post.

@ladylake

[Edited: 03/31/2022 | 6:09a PST]

[jmartineau]

I sold rental reasl estate in 2021 for a loss and I have several years of suspended passive activity losses, which TT is including but is not generating Form 8582. How do I solve this?

[swyman100]

I'm having a similar problem.  On schedule E my passive losses are being totaled into deductible rental real estate losses on line 22 and then being pulled onto schedule 1 line 5 and ultimately 1040 line 8.  This reduces my AGI incorrectly.  The passive losses have been carried forward each of the past few years on form 8582.   I believe this is an error in TT and have read another article as such. 

What's the resolution???

[AmyC]

Since there is no limitation in the year sold, no 8582 is needed. In the year the home is sold, all of the losses are used and everything related to the rental house is closed out on your return, all gain and loss come together so the rental is done. This allows you to dispose of your rental records from purchase forward after 3 more years.

Reference About Schedule E (Form 1040), Supplemental Income and Loss  & Publication 527 (2020), Residential Rental Property - IRS

@jmartineau

@swyman100

[swyman100]

@AmyC Thanks so much for the reply.  So to be clear there are a couple issues I need to reconcile.

1. I have TWO condos as rental properties.  I sold only ONE of them, however TT is using the passive loss carryover amount of the combined condos as a real estate loss and pulling into 1040 

2. to be super clear....in the year I sell a property, I am able to claim all passive losses against my AGI as an "Other Income" schedule 1 loss??

What I need first is to figure out how to separate the two condos so that only the loss from condo 1 is used if #2 above is correct.

Thanks!!

[swyman100]

Also what is a bit strange is from what I've read there are restrictions such as AGI limits ($150,000 filing jointly), $25,000  loss limitations etc.   My issue falls into neither of these.  I have just over $31,000 in passive losses and make more than $150,000.  The entire passive loss is being applied directly to affect my AGI.  This is for both a sold property and an unsold property still being rented.

Thanks again.

[swyman100]

The Answer is in Item #2:

https://www.therealestatecpa.com/blog/strategies-suspended-passive-losses-rental-real-estate

[ragaei]

I have a question related to this thread.  We have a house we rent out short term and we use it for personal use more than 14 days a year. We make more than $150K (W2) per year and we have losses that was deducted from our AGI (Only $8000 or so deducted) Although the losses are much more than that. It won't show any passive loss to be carried over on form 8582. I understand using the house for personal use might have to do with this, but I don't understand why if I use 14 days or more, I get to pay less taxes and zero losses to carry over, but if I use it for personal use less than 14 days or less than 10% of the days rented, I get to carry over more than $50K in losses.