We rented our vacation property for 100 days and used it for 21 days. The loss should not be deductible but turbo tax is deducting it. Did I answer a question wrong?

[PatriciaV]

Was your average stay less than 7 days? Did you claim material participation (which makes you a real estate professional?)

Does this rental have a net loss or are the expenses offsetting the income with the balance reported as passive losses that are carried forward? 

To resolve this, you might return to the Rental Property topic and work through the interview from the beginning. Be sure to read all the questions, including the blue links to learn more.

[taxmodern]

The section 469 tax code passive activity rules don't apply to this situation, so things like material participation and less than 7 days average stay don't apply at all in this situation because instead 280A of the tax code determines how the tax loss is treated. 

The 280A tax code limits the deductions you can take on the property if your personal use of the property is more than 14 days in a year, and your personal use is also more than 10% of the number of days it was rented that year.   This is what is called a "mixed-use" property, which in this case refers to a property that is a mix of personal and rental use where the personal use exceeds those limits above.  This is when the section 469 passive activity loss limits no longer apply, and the 280A tax code limits apply instead.

If your personal use is over that 14 days and also that 10% line, then certain types of expenses are limited only to your amount of rental income.  And TurboTax will, in that case, correctly reduce expenses like depreciation, property taxes, and mortgage interest if your expenses exceed the amount of rental income.   

But there are other types of expenses that are considered to be "direct" expenses that don't get reduced based on the amount of personal use.   These would be expenses that have to do with the business of owning the rental and not expenses for the property itself, such as advertising, legal fees, and property management fees.  If you have a significant amount of those types of fees, those actually can still exceed your rental income and you can still end up with a rental loss to report. 

What's really interesting is in this situation where you have a "mixed-use" property with a significant amount of personal use, the passive activity losses of section 469 of the tax code no longer apply and section 280A of the tax code applies instead.  And so you can actually have situations where your personal use of the property allows expenses to offset your other income that normally would be limited by the passive activity rules.  It sounds like that may be happening in your situation.

[AmeliesUncle]

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@taxmodern wrote:

property taxes, and mortgage interest

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Unfortunately, I think TurboTax handles those incorrectly.

The last I checked, when there is enough personal use, the program allows the full rental portion of the deduction, regardless if those expenses are "otherwise allowable" or not.  While those can allow a loss if a taxpayer is Itemizing and those amounts would be a deduction (under any limits) - aka "otherwise allowable", TurboTax allows the loss regardless if the taxpayer Itemizes or if they would have been deductible or not.