Rental Converted to Personal PAL Deduction

[geekgirldany]

Client converted rental to personal residence in 2017. It will revert to rental in 2018. Passive Activity Losses of around $40,000.
Am I correct that because it was converted to personal residence that the PAL is not deductible?

Drake is deducting $25,000 on 1040 and 8582 even though I marked it personal residence and put the number of personal use days.
I want to make sure I am correct that the $25,000 is not deductible.

[TaxGuyBill]

If it was a rental for part of the year, they should be allowable.

If it was a personal-use residence for the entire year, you are correct, no Passive Loss would be allowed. I'm not sure how Drake is set up, but it if was a personal residence for the entire year, you would probably want to delete it as a rental property.

[geekgirldany]

Thanks Bill.

It was principal residence until December. I told the client the were getting a big refund back...when reviewing the return it hit me about the conversion. I should have caught myself before calling as I felt like something wasn't right.

I've checked everything I can think of on Drake to try to get it off. So I guess I will just delete the Schedule E.

Does Form 8582 still need to be completed to continue carrying it forward? I don't think so...

[Rapid Robert]

I've checked everything I can think of on Drake to try to get it off. So I guess I will just delete the Schedule E.

Does Form 8582 still need to be completed to continue carrying it forward? I don't think so...

No, don't delete Schedule E and yes you will need 8582, if not every year then in some future year. I had to do this exact thing a few years ago. What you want to do is simply stop the rental activity as of the date of the change of use of property. If all the other rules are met (AGI below limit), yes there may be Special Allowance for passive loss up to $25K. Any other suspended passive losses cannot be used until a final "taxable" disposition of the property, no matter how many years it continues to be used a personal residence. (Sec 121 exclusion, if any, counts as a taxable disposition). So you need to freeze the suspended losses, accumulated depreciation, and any other carryovers as of the suspension of the rental activity, My software will allow me to mark assets out of service as of a given date without being disposed, and also to mark a Schedule E activity as "inactive", meaning it won't show up on return but remains in my data file.

Do NOT change any attributes of the rental to indicate personal residence or days of personal use. The personal-use residence is not being rented, so nothing about it belongs on Schedule E.

[TaxGuyBill]

If all the other rules are met (AGI below limit), yes there may be Special Allowance for passive loss up to $25K.

It think she said it was not available for rent at all in 2017. If that is the case, the Passive Losses are not allowed for 2017.

[geekgirldany]

It was not rented at all in 2017.
Since they did not actively participate in the rental then the $25,000 is not deductible.
I am researching active participation.... from TTB they did not actively participate.

[Rapid Robert]

It think she said it was not available for rent at all in 2017. If that is the case, the Passive Losses are not allowed for 2017.

Well like I said, " What you want to do is simply stop the rental activity as of the date of the change of use of property.". My advice was not dependent on which specific year. The OP wasn't very clear. Is it saying that a tenant was kicked out exactly on Dec 31 of one year and then a new tenant moved in exactly on Jan 1st of the 2nd following year? And the residence was used for personal purposes for exactly 365 days, from Jan 1 to Dec 31?

Some pro-ration for partial years might even be reasonable, I haven't researched it lately.

[geekgirldany]

Client used it for personal residence at the end of Dec 2016 to mid Dec 2017. This is a seasonal house so it is only rented out for the spring into the late fall.
I've got a email into Drake about this. There is nothing to mark on their Sch E to make it inactive unfortunately. The instructions for Form 8582 make it sound like it has to be filed but can't get Drake to do this.

[JohnH]

Sorry I can't check on this in more detail, but might you need to make some entries in the depreciation section to get Drake to handle it correctly? Seems like there's an option down in the lower left quadrant for marking the asset "taken out of service" as an income producing asset but no disposition.

[geekgirldany]

Thanks for the help everyone.

Basically Drake said it can not be done. To delete the Schedule E and make a note that will carry forward next year with the unallowed losses. I found someone else in the same situation in the Drake Forum a few years ago being told the same thing. Believe Drake should make a option of putting allowed and unallowed loss boxes.

[JohnH]

That's puzzling. Has me wondering why they have the "Date taken out of service IF NOT SOLD" box on the asset form. But if you've asked and they answered, I guess that's the end of it.

[geekgirldany]

They should have something setup. The thread on Drake forum asking about the exact same question was several years ago. I am going to put in a request with Drake with some way to continue tracking the unallowed PAL with making the Sche E unactive or something. I may be thinking of another form but I swear there use to be a active/inactive box on that screen.

[TaxGuyBill]

Thanks for the help everyone.
make a note that will carry forward next year with the unallowed losses.

I am going to put in a request with Drake with some way to continue tracking the unallowed PAL with making the Sche E unactive or something.

Point out to them that Form 8582 seems to be required each year to carry the losses.

https://www.irs.gov/instructions/i8582#idm139773141059312

[geekgirldany]

Not getting much help. Some folks on the Drake Forum are making suggestions but the fact remains the the $25,000 special allowance is still being calculated. The only way to remove it is to manually enter an amount on Form 8582 to up the Adjusted Gross Income to $150,000 so it does not calculate but the loss is still showing on the top portion to be carried forward.

[JohnH]

I'm wondering here. You have made some references to the Drake forum, but have you spoken directly with Drake customer support?

A couple of weeks ago I had a problem with the way the program was handling something on NC extensions - the first question I've had abut anything in Drake in a couple of years. In my case the question was simple, but the answer was not. So the rep had me send the return up to them and she called back within 15-20 minutes with the exact answer.