Directly edit forms to correct TurboTax error

I strongly advise against manually applying the losses against your nonpassive income by editing the forms directly. In doing so, you risk the possibility of the “Accuracy Guarantee” being voided.

 

Using TurboTax Home and Business following the steps below, the non-passive losses were applied against other non-passive income.

 

1. Open TurboTax.
2. Go to the Business Tab > Business income and Expenses
3. Select “I’ll choose what I work on”
4. Rental Properties and Royalties > Update
5. Select “Yes” on the screen,” Income from Rentals or Royalty Property You Own”
6. On the screen, “So far You’re not a Real Estate Professional,” put a check in the first two boxes.
7. Continue
8. The following screen should say, “Let’s Determine Your Real Estate Professional Deductions”
9. Continue answering the questions.

Thanks, @ShirlynW. I can confirm that marking the boxes to indicate that I'm a Real Estate Professional does indeed have the intended effect of allowing me to apply my loss against my ordinary income. Unfortunately, this designation is inaccurate in my case, and I don't feel comfortable making such a designation in my tax return. In any case, such a designation should be unnecessary because the IRS specifies that I can also qualify to apply the loss against my ordinary income on a different basis. From Publication 925:

 

Rental Activities
A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional...

 

Exceptions. Your activity isn’t a rental activity if any of the following apply.
1. The average period of customer use of the property is 7 days or less...

 

If you meet any of the exceptions listed above, see the Instructions for Form 8582 for information about how to report any income or loss from the activity.

 

Form 8582 says:

 

If an activity meets [the 7-day exception above (or others)], it’s not a rental activity. You must then determine:
1. Whether your rental of the property is a trade or business activity...and, if so,
2. Whether you materially participated in the activity for the tax year...

If the activity is a trade or business activity in which you did materially participate, report any income or loss from the activity on the forms or schedules normally used. If the rental activity didn’t meet any of the five exceptions, it’s generally a passive activity.

 

In my case, my length of stay was less than 7 days on average, the rental is a trade or business activity, and I did materially participate. 

 

Unfortunately, TurboTax does not ask any questions to this end. It seems to be completely unaware of the 7-day rental period exception (and others I omitted). 

I was able to find a solution that didn't involve designating myself as a Real Estate Professional (as I'm not one) by following @AmeliesUncle's advice here. In short, as soon as I clicked "Other passive exceptions," my refund amount immediately adjusted, indicating that the losses were applied against my ordinary income. Note that I also had to manually check the box indicating material participation.

 

What's strange is that TurboTax has obviously programmed TurboTax to be able to apply these losses against ordinary income by clicking the "Other passive exceptions" box on the form, and yet the software has no way of completing the same by going through the step-by-step walkthrough. There are no questions about length-of-stay exceptions, and no questions about material participation (other than for those who designate themselves as Real Estate Professionals). 

 

Huge thanks to @AmeliesUncle for finding a solution!

Your statement "In my case, my length of stay was less than 7 days on average, the rental is a trade or business activity, and I did materially participate." means you are self-employed and you should be reporting the activities of your business on a Schedule C not a Schedule E.

 

To remove your Schedule E entries and re-enter your self-employment income and expenses in TurboTax Home & Business you can follow these steps:

1. Within your return, click on the Forms icon in the upper right of the screen to switch to Forms mode.
2. Scroll down in the menu bar on the left and select your Form Schedule E.
3. Click the Delete Form button at the bottom left of the preview screen.
4. Confirm the deletion then click the Step-by-Step icon in the upper right of the screen.
5. Click on the Business tab and enter the information about your business, including all your rental income and expenses.

See Am I considered self-employed? for more details.

 

@gmyoung

Thank you for your reply, @AliciaP1. I believe the activity should still be reported on Schedule E, per the discussion here. 

 

My understanding is I would only report on Schedule C if I also provide "substantial services," which I do not.