Rental Property Loss

[Dani1989]

My husband and I own a condo in Colorado that we use personally and rent thru Airbnb.  The time is split as 184 days Short Term Rental & 129 Days for personal use.  We filled out the Passive Income Section as follows

Answered No to Being a Real Estate Professional

Answered No to rented all year - Entered the Days (personal usage and rented as above)

Entered all the Utilities, Property Tax etc into the appropriate lines.

Turbo Tax did the approriate allocation of the Utilities etc betwen the personal and rental usage. This loss is shown as a carryforward loss on 8582.

We have a loss (not including the above expense) of $8,772. (Form 8582 Line 1B)

We are retired with 0 Active Income.  All our income is from IRA Distribution, Pensions and Social Security.

Turbo Tax is recording the passive loss of $8,772 on Form 1040 Line 8 and Schedule 1 Line 10 thus deducting it from our other income (IRA distributions, Pensions & Social Security)

My research is showing that a non real estate professional should not be able to record a loss for passive income.  However, Turbo Tax is recording this as a loss.  Is there additional IRS rules that I am not aware of that would allow this deduction?

[ReneV4]

You are correct. Generally, passive losses don't offset other income. However, the reason TurboTax is allowing the $8,772 loss to offset your other income without being a Real Estate Professional (REP), is due to the special $25,000 allowance for active participation. Read more about Passive Activity Loss Limitations here.

The active participation exception is set at a lower bar than being a REP and only applies if your Modified Adjusted Gross Income is under $100,000. It begins to phase out between $100K-$150K.

TurboTax calculated your allowable expenses based on a 365-day year and it appears that they exceeded your income, so you were allowed a loss up to the limit of $25,000.

The loss flows from Schedule E to Schedule 1, Line 5 to Form 1040, Line 8. By showing up there, it acts as a "negative income" that cancels out $8,772 of your taxable pension or IRA distributions.