Some rental loss on a vacation property defined as personal residence is being allowed on 1040 by TT. How can this be correct?

[ladylake]

For 2021 my vacation rental property is considered a mixed-use property and meets the definition of a personal residence per tax law based on the fact that personal use was >14 days and >10% of the rental days. 

There were no loss carry forwards from prior years involved.  I have correctly entered the details into TT.

Per the Schedule E worksheet the expenses were allocated to Columns (c), (d) and (e).  In spite of some of the expenses being limited as "Vacation Home Loss Limitation" TT is still allowing a rental loss on Form 1040 based on a definition of a non passive activity found in Pub 925. (page 5).  Because of this designation no Form 8582 was prepared.  I do not qualify for the special loss deduction.  I would like to be able to use the loss I just want to be assured this return is correct.

 According to everything I have read about this issue no matter what the property is called, rental or residential,

passive or non passive, you can only deduct expenses until all the rental revenue is used up.  The remaining expenses MUST be suspended and carried forward to subsequent years to be applied against appropriate rental income or until the property is sold. 

[AmyC]

You are correct. The business portion of income and losses go on sch E. A gain would transfer to your 1040 while a loss would not. A loss would be carried over.  I am running into the same problem as you. I would like to investigate this. You can send us a “diagnostic” file that has your “numbers” but not your personal information.  If you would like to do this, here are the instructions: 

If you are online, go to tax tools>tools > share file with agent > 6 digit number pops up.

If on desktop, go to online >send tax file to agent > number pops.

Reply with # here and @AmyC please

All limitations and issues:

 Chapter 5 of Publication 527, Residential Rental Property (Including Rental of Vacation Homes) states:

You must also determine if the dwelling unit is considered a home. The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use.

Limit on deductions.

Renting a dwelling unit that is considered a home isn’t a passive activity. Instead, if your rental expenses are more than your rental income, some or all of the excess expenses can’t be used to offset income from other sources. The excess expenses that can’t be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Any expenses carried forward to the next year will be subject to any limits that apply for that year. This limitation will apply to expenses carried forward to another year even if you don’t use the property as your home for that subsequent year.

To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 5-1.

[ladylake]

Thank you.  You are the first person at TT that understands what I am questioning.  I have sent the file.  The token number is 975231.  The property is considered a mixed-use property.  This year it is considered a "residence" for tax purposes.  What I disagree with is that after taking the allowed deductions, TT is allowing additional deductions in excess of my income therefore creating a loss.  The loss is then carried over to the 1040 and is being deducted from my income.  I think this is an error and I don't know how to fix it.  Whatever the definition of the property for 2021, I don't think I can ever take a loss.

I have been using TT since 2010 and have had the same scenario on a former vacation rental which I sold in 2020.  A Form 8582 was created then and the losses were carried forward and freed up when the property was sold.

FYI: I am using Family & Business CD as I always have.

[AmyC]

I can see how it all comes together now. Let's look at limitations and issues from above. Chapter 5 of Publication 527, Residential Rental Property (Including Rental of Vacation Homes) states: ...some or all of the excess expenses can’t be used to offset income from other sources. The excess expenses that can’t be used to offset income from other sources are carried forward to the next year....To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 5-1.

If you open the worksheet, you see the rental portion of mortgage interest, taxes, and direct rental are allowed and fully deductible expenses.

When I look at your sch E Wks, the first column has your total expenses, the third column has what is showing on your sch E, the 4th shows the disallowed amounts and the 5th is your personal use related amounts. I see real estate tax- rental portion, commissions paid, and advertising that would definitely be allowable.  Then you have expenses listed under Other Expenses, line 19, that are all xxxx to me so I can't see them to know what should be allowed. The program is taking all of line 19 as allowable expenses. Line 19 adds up to $54,678 which creates the allowed loss. You have multiples of the same number.

You need to move the line 19 "Other" expenses that are not allowable into the proper categories for them to be discounted.

[ladylake]

Thanks for looking at this.  What you say makes sense.  The issue on Line 19 other expenses is that I have added approximately a total of $30,000+ furniture, etc. as de minimis safe harbor expenditures.  Line 20 on my printout is $54,678 which includes the de minimis safe harbor purchases from Line 19 and all the other expenses.  They don't fit into any other category.  I would normally depreciate them but since they meet the requirements for the safe harbor election I wanted to take the expense in the year they were paid.   Instead of taking the asset additions as direct expenses should I just depreciate them since I will lose them otherwise?  What is the best plan to preserve the asset expenditure? And why was the system still allowing the loss since the expenses had exceeded the income?  

[DianeW777]

Please clarify the state so I am able to review your return.  Thank you.

[DianeW777]

I was able to identify the state return.  It appears you have made changes to the return and the losses are being limited appropriately.  

Please update here if you have more questions.

[Anonymous_]

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@ladylake wrote:

Per the Schedule E worksheet the expenses were allocated to Columns (c), (d) and (e).  In spite of some of the expenses being limited as "Vacation Home Loss Limitation" TT is still allowing a rental loss on Form 1040 based on a definition of a non passive activity found in Pub 925. (page 5). 

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That would be because the expenses allocated to rental use are not limited by the passive activity rules.

An example (a very crude example) would be as follows:

Rental income: $10,000

Commissions: $5,000

Advertising: $5,000

Management fees: $5,000

Supplies strictly for rental use: $5,000

Loss: -$10,000

The net loss is considered to be nonpassive (and deductible from all other income) since the expenses listed are allocated exclusively to rental use. 

[ladylake]

Thank you for clarifying the issue for me.  I appreciated the input for the TT staff.  The largest portion of Line 19 ($35,000+) is due to new furnishings, appliances, etc. since a total renovation was done to the property.   This is mostly what creates the loss. I chose to take the de minimis safe harbor election rather than depreciate the assets since they meet the requirements of the election.  If I am allowed to take this election then I will proceed to finish up the return and file it.  I just assumed that any rental loss was not allowed but based on your reply, the non passive activity designation will allow the loss.  I just didn't want to be audited in the future for taking a loss that was not correct. Will the disallowed depreciation from the building and improvements be available to be carried forward to be used in future years or at time of sale?

[Anonymous_]

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@ladylake wrote:

Will the disallowed depreciation from the building and improvements be available to be carried forward to be used in future years or at time of sale?

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Yes, those (suspended) expenses should be carried forward.

[yangyingtina]

I have exactly the same problem and can't seem to solve it. After reading the post, I am still confused. My AGI is also higher than the threshold, that I think it should not have rental loss carried to the 1040. 

So, should the rental loss be carried to 1040?

If not, what's the fix? 

[Anonymous_]

@yangyingtina 

Your post was tacked on to an older thread. Please start a new thread with additional details.

[Mike9241]

was the property rented less than 15 days? if no the rule is to prorate expenses between personal and rental use.  rental portion of interest, taxes is not limited to rental income. other expenses are limited to any remaining income from the property