Prior Year non-deductible rental property expenses

[drdesaulniers]

Since I have to breakdown my non-deductible rental property expenses into operating expenses and depreciation, do I need to do this proportionally based on the percentage of losses I was not able to claim?  For example, using round numbers, assume I had 60K  prior year expenses and 40k revenue.  Because my MAGI exceeded 150 K I was only able to deduct  the equivalent of my rental income, (i.e.,40K ).  I understand that to mean I have 20k in non-deductible expenses from that prior year.  To determine how much of that 20k is attributed to operating expense vs depreciation I would divide my 20K non deductible loss by my total 60K expenses to get a loss percentage of  33%.  I would then multiple my total operating expenses by 33% to get my non-deductible operating expenses and do the same for my depreciation to calculate my non-deductible depreciation.  Is this method correct?

[DianeW777]

No, you don't do any calculation for the passive loss carryover.  There is no breakdown between operating expense and depreciation. Report the income and expenses in the current yea as usual.  Be sure your passive loss carryover is recorded in the 2024 tax return.  If your income is over the threshold again this year, any amount of passive loss will continue to carryover until you can use it up or until the property is sold.

1. Any passive activity loss (PAL) carryforwards allowed would be listed on your Form 8582, Worksheet 5 or 6, in your 2023 tax return as 'unallowed loss'.  If you have a PAL and it does not seem to be populated in your 2024 tax return you can take the following steps to enter it.
   • Use the magnifying glass to Search (upper right) > Type rentals > Jump to Rentals > Select Edit beside your Rental Activity  > Under Less Common Situations > Review Carryovers, limitations, at risk info, etc. > Continue to enter your passive loss carryover. 

[drdesaulniers]

Thank you for the reply but now it appears I have conflicting answers from Turbotax experts.  I initially questioned whether I had to breakdown my non-deductible expenses because in Turbotax Premier for Windows 2024  I have a screen titled  "Enter Nondeductible Expenses From Prior Years."  The screen provides 4 separate input fields for operating expenses, depreciation expenses, AMT operating expenses and AMT depreciation.  I questioned whether I could just input my total non-deductible expenses in one of these fields but PatriciaV answered in part "Basically, you need to break down the loss into operating expenses and depreciation."  That response caused me to ask the question in this thread about how to properly attribute the totals I am seeing in Part IV of my 8582 into operating expenses and depreciation.  I am inferring from your response that the 4 input fields are just prompts for values that simply get totaled and not used separately by Turbotax for other calculations.  Is that correct?

[PatriciaV]

For nondeductible expenses relating to a mixed used residence, look at the Carryovers Smart Worksheet on the Schedule E worksheet for the rental property. This section appears after Line 22 and the QBI sections. The area of the table you need is called "Vacation Home Carryover." Line L shows operating expenses and Line M is depreciation. There are columns for Regular Tax and AMT.

Note that these non-deductible expenses are different from a passive loss carryover. Passive loss carryovers are generally reported in aggregate as Regular, Alternative Minimum Tax (AMT), and QBI.

@drdesaulniers 

[drdesaulniers]

For nondeductible expenses relating to a mixed used residence, look at the Carryovers Smart Worksheet on the Schedule E worksheet for the rental property. This section appears after Line 22 and the QBI sections. The area of the table you need is called "Vacation Home Carryover." Line L shows operating expenses and Line M is depreciation. There are columns for Regular Tax and AMT.

Note that these non-deductible expenses are different from a passive loss carryover. Passive loss carryovers are generally reported in aggregate as Regular, Alternative Minimum Tax (AMT), and QBI.

I'm now more confused.  I'm working off a pdf of my 2023 schedule E worksheet.  I'm not seeing a Line L except on page 1 which asks if the property was located in a qualified disaster area. Line 22 is the last line of the schedule E worksheet.  Nothing follows it.  Is this carryovers smart worksheet something that doesn't print?

[PatriciaV]

The referenced Smart Worksheet should be on page 4 of the Schedule E Worksheet included in your complete PDF from TurboTax. You may need to open your prior year return in the 2023 version of TurboTax and print just the Schedule E Wks to get all the pages.

Unfortunately, the breakdown doesn't appear on any other form or schedule.

[drdesaulniers]

I was able to pull up the referenced worksheet using the software as it was not part of my printed files.  There are no entries as carryovers for regular tax, QBI, or AMT so now I'm understanding that I have nothing to enter on the screen asking for my nondeductible prior year expenses.  But it would help me if you could explain how these Schedule E worksheet items differ from the passive activity losses that appear in section IV of the 8582.  When it comes time to sell the property, I want to make sure I am able to reduce my capital gains  by deducting any previously non-deductible expenses that I may be entitled to deduct at that time.

[MarilynG1]

Yes, you can deduct your suspended Passive Activity Loss from the sale proceeds.  If you sell a rental property with suspended PALs, you may be able to deduct them on top of deducting any Section 1231 loss from the sale. Like Section 1231 losses, deductible PALs can offset other income and also create or increase an NOL that you can carry backward or forward.  They are added to the Cost Basis at time of sale. 

TurboTax carries over you PAL from year to year, so you don't have to calculate this. 

Here's more info on Selling Rental Property at a Loss. 

@drdesaulniers 

[drdesaulniers]

Thanks for the reply but my interest was in understanding how the PAL differs from the Schedule E worksheet items referenced in this thread (i.e., the vacation home carry over operating expenses and depreciation identified on Lines L and M.  Can someone please explain the difference in what they are and their implications at time of property sale?

[AmyC]

PAL explained:

Look at form 8582, page 2, part VII. You see a line item there. The first column shows name of activity and the second column shows form or schedule.

If you have first column, second column, last column:

• Rental, schedule E, unallowed loss - put that number in your Sch E regular tax carryover box
• Rental, Form 6251  (the AMT form), unallowed loss - that would be the AMT number to use. 
• Rental, Form 8995, unallowed loss - that is the number for QBI carryover

You may not have any or all of these lines. You may not have any carryover. If you form is blank like the one shown here, there is nothing to enter.

As you can see, PAL include Sch E, AMT, and QBI. 

• Your unallowed Sch E loss is added to the basis when you sell. You can call that part of PAL or just Sch E unallowed loss.
• When you sell, you will be asked about AMT basis. Since you are higher income, you may have different numbers to use and will need to look at the AMT part of PAL - your 6251 from last year.
• Finally, QBI income or loss is carried over to compute this year's QBI.

Reference: About Form 8582, Passive Activity Loss Limitations