Vacation Home Rental Loss Limitation -

Forum|Forum|4 years ago
March 22, 2022
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I have a vacation home rental that has an $8,000 loss. TurboTax is allowing the loss to flow to the 1040 WITHOUT limitation therefore reducing my taxable income by that amount. It has coded the loss as NPA - non passive activity. The NPA designation is technically correct but based on my research I believe the loss still has to be suspended due to the fact that the amount of my AGI does not allow any of the special $25,000 allowance to be used. According to the IRS, operating expenses for vacation homes in excess of allowable deductions cannot create a loss and are carried forward. Because of the NPA designation TT did not prepare a Form 8582 - Passive Activity Loss Limitation to carry forward the loss. What is the correct answer?

For several prior years I had another vacation rental and the losses were always suspended until I sold the unit in 2020. Each year a Form 8582 was included with my return. The essential facts this year are the same as the prior years. I used TT each of those years to prepare my taxes.

Best answer by RaifH

The Answer is in Item #2:

https://www.therealestatecpa.com/blog/strategies-suspended-passive-losses-rental-real-estate

Owning a rental property is considered a passive activity and subject to most of those rules (except for the ability to deduct $25,000 of losses from your other income if you actively participate.) However, renting a dwelling unit that you use as a home is not considered a passive activity and therefore not subject to those restrictions.

It is subject to other restrictions, namely, that you can only deduct the portion of your expenses directly related to the rental and some of your operating expenses and depreciation may be carried over to subsequent years rather than deducted in full.

@ragaei

DianeW777

That's correct if you did NOT sell the property yet. If you rental is reported on Schedule E, then TurboTax does know that the activity is passive and will suspend the loss with Form 8582. Double check your assets to be sure you did not select that they were removed or disposed of. Also check your property general info to be sure you have not selected that you were a real estate professional.

There is no suspension in the year of disposition. The full loss is allowed to be used against all other income when the rental activity is sold or disposed of. The carryover is done in the year of sale.

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ladylakeAuthor

I did not sell the property and I am not a real estate professional. The only assets I depreciated were the building and improvements. I used the de minimis safe harbor election for all other new additions. The rental is reported on Schedule E. TT added the initials NPA on line 26 of the Schedule and then carried the loss to the 1040. I have had several conversations with TT concerning this issue. They all say there is nothing wrong with my input and since the system used the NPA designation the return is correct. I totally disagree but don't know how to fix it. They only other option they offered is that I purchase the audit protection in case it is incorrect! What do you suggest?

RaifH

You are not allowed to take losses on a rental property that has a mixture of personal and business use.

However, this only applies if you use it for personal purposes more than the greater of:

14 days, or
10% of the total days it is rented to others at a fair rental price.

If your personal use did not exceed that amount in 2021, TurboTax was correct in not applying the limitation to the loss on your rental property. On the other hand, if your personal use exceeded that amount of time, then you should not be allowed to take a loss on the property. You may want to check the personal and rental days you entered to make sure those are accurate for 2021. The type of property on Line 1b of Schedule E should be 3 for a vacation rental and the fair rental and personal use days will be listed next to it. If those are not correct, you will need to edit the general information of your rental property.

cmg1

I have three properties with similar issues. It appears as TTAX codes it as NPA because I (maybe you) had this situation.

Rental income from a personal residence may be active if the home is occupied as a personal residence for more than 14 days or 10% of the days the home is rented out.

This does say personal residence, but TTAX seems tonot ask or care, it just assumes if you exceed 10% or 14 days, it is NPA.