In the following circumstance, real estate taxes for a rental property are incorrectly reported on 1040 Schedule E:
- Real estate tax on primary residence is over $10,000.
- Rental property is classified as a vacation home.
- Rental property expenses (including depreciation, etc.) exceed rental income.
The issue is that real estate tax for the rental property should be reported as an "allowable" expense (since the $10k deduction for SALT has been exhausted), but TurboTax classifies it as a "fully deductible" expense.
How this is reflected on forms:
- On Schedule E Worksheet line 16a, the full amount of the rental portion of real estate taxes is in column (c).
- This also appears on Schedule E line 16.
What should happen:
- Schedule E Worksheet line 16a should have column (d) [vacation home loss limitation] enabled (not shaded).
- Amounts for line 16a columns (c) and (d) should be calculated as for lines like Repairs (14), Utilities (17), and Other taxes (16b).
Two things of note:
- The form is filled correctly if the amount is entered in TurboTax as "Other tax" for the rental property; this is the workaround, but incorrectly represents the nature of the taxes.
- This issue arose after the tax change in 2018 that capped the deduction of state and local taxes at $10,000. It appears that TurboTax has not been updated to reflect this change.
Reference: IRS Publication 527, Worksheet 5-1, instructions for lines 2b and 4c clearly document that real estate taxes over $10k belong on 4c, which is included in "allowable" expenses.
We're using TurboTax Desktop, Home and Business edition, on macOS.
