How does TurboTax determine the vacation home loss limitation on schedule E?

[wmjohnson]

I have a mixed use vacation rental property that I rent for more than 14 days per year.  My expenses always exceed my income so I have carryover losses from prior years.  How does TurboTax determine the vacation loss limitation numbers on Schedule E.  It appears to use some but not all of my prior years losses and allocates the rest to the limitation column.

[Carl]

It gets complicated. Basically, it's covered in chapter 5 of IRS Publication 527 at https://www.irs.gov/pub/irs-pdf/p527.pdf.  Take note that in one of the examples provided (beginning on page 17), it "does" include personal use days that are outside of the "classified as a rental" period. Those personal use days do invoke loss limitations.

[wmjohnson]

After working backwards on the TurboTax Schedule E worksheet, I think I finally figured it out.   There seem to be 3 categories of operating expenses on the Schedule E worksheet:

- Items that are 100% allocated to 2022 business (ie advertising, management expenses, other expenses)

- Items that are allocated in a split manner between business/personal with business portion 100% allocated to 2022 (ie taxes and mortgage interest).

- Items that are allocated in a split manner between business/personal with business portion only partially allocated to 2022 and the remaining put in column D as a "loss limitation" ultimately becoming a carryover loss for next year.  Previous carryover losses appear to be included in this category.

It appears TurboTax solves to offset 100% of income by first using all of the first 2 categories above and then takes a percentage of the last category (including previous carryover losses) to exactly offset income and arrive at zero net income.  Whatever remains from category 3 above  becomes an operating carryover loss for next year (total of column D) .

Is the above method of allocating operating expenses determined by the IRS or is somewhat arbitrary and determined by TurboTax?  I'm referring to the business allocation of 2022 expenses versus loss limitation expenses (columnb D), not business vs personal expenses.  

[Critter-3]

If you save the PDF with all the worksheets you should get one that shows the limitations and they are 3 tiered. 

[AnnetteB6]

The IRS determines the method of allocating allowable rental expenses for a vacation property.  

There is a worksheet in IRS Publication 527 Residential Rental Property which is duplicated by TurboTax to determine the allocation of expenses and carryover losses.  

Chapter 5 of the IRS document will give you further examples and explanations regarding the Worksheet 5-1 included in that chapter.   The following link will take you to Worksheet 5-1 to learn more.

@wmjohnson

[wmjohnson]

Hi.  I’m still wondering how/why TurboTax allocates some of the operating expenses 100% to 2022 and splits other operating expenses between 2022 and loss limitation for carryover.  I don’t see anything in the IRS publications that specifically defines which items should be 100% allocated to the current tax year and which should be split between current year and carryover.

[CatinaT1]

Pursuant to Prop. Treas. Reg. § 1.280A-3, deductions  are allowed in the following order and to the following extent:

Tier 1.

The taxpayer’s allocable deductions that are allowed without regard to rental use, such as the deductions for property taxes and mortgage interest, are deductible as rental expenses to the extent of the gross rental income from the unit.

Tier 2.

Allocable operating costs such as insurance, repairs, and utilities are deductible to the extent that they exceed gross rental income reduced by the first-tier expenses.

Tier 3.

Allocable depreciation and other amounts that result in an adjustment to basis are allowed to the extent that they exceed gross rental income reduced by the first- and second-tier expenses.

[AmeliesUncle]

---

@wmjohnson wrote:

Hi.  I’m still wondering how/why TurboTax allocates some of the operating expenses 100% to 2022 and splits other operating expenses between 2022 and loss limitation for carryover. 

---

It automatically divides things between rental and personal because most things are for both rental and personal.  But (1) advertising, (2) commissions, (3) management fees and (4) other rental expenses ONLY apply to rental, so it allocates it 100%.   There is no personal component of those items.