Turbo Tax 2019 Home and Business Strange Behavior Rental Property

[analog808]

I have been using Turbo Tax for years, and this is the first time I have observed this behavior.  I don't think the tax laws would have changed to do this.

I noticed this when entering rental income and expenses.  When I entered my rental income, my net federal tax refund increased.  When I entered in my expenses, the federal tax refund decreased.  Isn't this opposite of the expected behavior?  I played around with this and added an additional $10k of rental income, and my refund increased an additional $400.  What kind of tax law madness is this?

[VictoriaD75 · Accepted solution]

You may have carryover passive losses. Tax law only allows you to deduct up to $25,000 in passive losses (such as from rental activities). However, there is a phaseout beginning at AGI of $100,000. 

If you have net rental income in subsequent years, the passive losses can offset that income. That is likely what is happening here. When  you only have the rental income reported, it is being reduced by the carryover losses. As you add expenses, you are using less of those carryover losses to offset the income. Eventually, you could have additional passive loss carryovers.

Any unused carryover losses can be used in their entirety in the year of sale of the property.

A passive carryover loss will show on your prior year return. These losses are created from any passive activity found on Schedule E. They will appear on your Schedule E Worksheets - Carryforward, which is a TurboTax worksheet and not an IRS form.

You can review the passive loss information in the link below:

Rental Properties