Losses when renting a room in your own home

Forum|Forum|5 years ago
March 29, 2021
2 replies
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I rent a room in my own home. I bought the house in September 2020 and my expenses for that room/portion of the house are higher than my passive income/rent mainly because I had some repairs and it was rented for 3 months only. However, TurboTax does not appear to properly deal with losses when renting a room in your own home and let me offset my active income/wages with my passive income. The software is allowing me to claim a loss from my rental activity (room in house), to reduce my active income/wages using the losses, which does not seem to meet IRC section 280A(c)(5) , which precludes deduction for loss when renting a room in house.

The software should allocate losses in sequence with first portion of mortgage interest and property taxes; second, allocated amounts of indirect expenses other than depreciation (but only to the extent of remaining income); and last, allowable depreciation and should allow the excess to be carried forward for next year, but it does not seem it is working like that at this point and all the losses are offsetting wages.

TurboTax Premier Online

ColeenD3

You neither have a vacation home nor a home office. Your portion of the home that is rental is completely separate from the potion of the house that is your residence.

Expenses are prorated according to square footage and for the amount of time, if any, that there was also personal use. Making repairs is not personal use.

You need to indicate that you have a multi-family situation.

jcphilAuthor

Thank you. That's what I am doing. The issue is I should not be able to use the losses from that property to offset anything else than passive income. The software is letting me offset my wages with the losses from that property, which is not allowed. I should have the option to carry forward the excess losses/expenses to next year instead of having to do it myself manually and not including all my expenses.

ColeenD3

There is a special provision for rentals.

As a general rule, rental properties are, by definition, passive activities and are subject to the passive activity loss rules. These rules are quite complex. In general, the passive activity rules limit your ability to offset other types of income with net passive losses.

But the good news is there is an exception: If you actively participate in a rental real estate activity, you can deduct up to $25,000 of your rental loss even though it’s passive. To actively participate means that you own at least 10% of the property, and you make major management decisions, such as approving new tenants, setting rental terms, approving improvements and so forth.

But this exception phases out as your income rises . If you have modified Adjusted Gross Income over $100,000, the $25,000 rental real estate exception decreases by $0.50 for every dollar over $100,000. The exception is completely phased out when your modified adjusted gross income reaches $150,000

Carl11_2

Employee

It just is not common for residential rental real estate to actually show a profit "on paper" each year, at tax filing time. It's more common for the SCH E to show a loss. The "General" rule of thumb is that passive losses in excess of the passive income get carried over to the next year. Therefore, those carry over losses will just continue to increase with each passing year.

One exception is that if you are "actively involved" in the passive activity in a tax year, then you can deduct a maximum of $25K against other ordinary income, if specific conditions are met.

- You were actively involved in the activity (renting a room in your house, most likely you were.)

- You have the taxable "other" ordinary income to deduct it from.

- Your MAGI does not exceed specified thresholds, determined by your filing status. For details (to see if the program is applying things correctly) see IRS Pub 925 page 4 starting at the bottom of the first column, "Special $25,000 Allowance". Then check that you don't exceed the MAGI threshold as applies to your filing status on that same page, 3rd column, "Phaseout rule".

jcphilAuthor

@Carl11_2 Based on the discussion above with @ColeenD3 it seems that deduction does not apply for renting portion of you residence including room in your house. Do you have a different interpretation of IRC section 280A that would let this deduction be used when renting portion of your residence?

Also, does TurboTax has a way to figure out excess losses and depreciation to be carried over to next year similar to IRS worksheet 5-1?

Carl11_2

Employee

Based on the discussion above with @ColeenD3 it seems that deduction does not apply for renting portion of you residence including room in your house.

That is correct. For some reason I wasn't keeping in mind that the rental was a portion of your residence.

Also, does TurboTax has a way to figure out excess losses and depreciation to be carried over to next year

Not sure how the program works in your case. But I do know that on my rentals my excess losses were carried over by the program up until a few years after I had paid off one of my rentals. It only took 2-3 years after the payoff year for me to "use up" all my carry over losses, and I've not had any since.

If you have any losses to be carried over say from 2020 to 2021, a form 8582 will be generated and the carry over loss for residential rental property will be shown as a negative number on line 1d of that form, and possibly on line 4 if you have nothing for 2 and 3.