Vacation home carryovers

[dhawkcpa]

Prior years have been mixed use. Vacation home limits have generated some substantial operating expense and depreciation carryovers. In 2020 property becomes basic rental property as personal use drops to 9 days. Rented days are 116. If I input the carryovers, it generates a $25K loss and passive loss carryovers on Form 8582. Does this sound right. Don't do enough vacation properties to be good at it. Thanks.

[TaxGuyBill]

Rented days are 116. If I input the carryovers, it generates a $25K loss and passive loss carryovers on Form 8582.

It sounds like you are entering it in the wrong spot. You need to enter it as a "vacation home" carryover, NOT as a Passive Loss Carryover.

If you tell us what software you are using, perhaps somebody can help you figure out where the input for "vacation home" carryovers is.

[dhawkcpa]

The ATX Schedule E input sheet has lines for these carryovers.

[Rapid Robert]

It sounds right to me.

As a test, I created a Schedule E rental as an ordinary single family rental (Type 1) , not vacation home (Type 3). Income, $5K, expenses, $10K.

My software has specific fields for entering carryover vacation home items, so I also entered test amounts as follows:

Carryover of disallowed vacation home operating expenses to 2020: $10K
Carryover of disallowed vacation home casualty and depreciation expenses to 2020: $12K

As a result, my software fills in Schedule E Line 20 with a total of $32K expense ($10K + 10K +12K), Line 21 with $27K loss ($5K - 32K), and Line 22 with $25K deductible rental real estate loss. Form 8852 Part II shows $25K special allowance for rental real estate activities with active participation, and $2K passive loss carryforward.

[TaxGuyBill]

Ah, I misread your post (I read it as $25,000 was coming FROM 8582, rather than going TO 8582).

But I'm still thinking that is not right. Here is the pertinent part of the code, then below broken up by me (and my thoughts are in brackets):



(5) Limitation on deductions

In the case of a use described in paragraph (1), (2), or (4), and in the case of a use described in paragraph (3) where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of—
(A)the gross income derived from such use for the taxable year, over

(B) the sum of—(i)the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used, and

(ii)the deductions allocable to the trade or business (or rental activity) in which such use occurs (but which are not allocable to such use) for such taxable year.

Any amount not allowable as a deduction under this chapter by reason of the preceding sentence shall be taken into account as a deduction (allocable to such use) under this chapter for the succeeding taxable year. Any amount taken into account for any taxable year under the preceding sentence shall be subject to the limitation of the 1st sentence of this paragraph whether or not the dwelling unit is used as a residence during such taxable year.

.


Any amount not allowable as a deduction under this chapter by reason of the preceding sentence shall be taken into account as a deduction (allocable to such use) under this chapter for the succeeding taxable year. [includes Vacation Home Carryover]

Any amount taken into account for any taxable year under the preceding sentence [including Vacation Home Carryover]shall be subject to the limitation of the 1st sentence of this paragraph [can NOT create a loss] whether or not the dwelling unit is used as a residence during such taxable year.

[Rapid Robert]

After poking around some more, I think TaxGuyBill is correct. My software, it turns out, specifically states in their instructions that they are not going to automatically adjust for vacation home limitations in this case. (see below) They can be allowed in future years as a non-personal use rental only to the extent they don't create a loss.

Which raises some follow up questions: if there is never a rental profit in the future, are the carryforward expenses ever allowed, even when there is a fully taxable disposition of the property? And if the depreciation is never allowed as an expense, is it necessary to adjust the basis? (or partially adjust it, if the depreciation ends up only being partially allowed)

"Note: If a rental is no longer being used as a vacation home, UltraTax CS will not limit the vacation home carryover loss to the rental income on Schedule E. An adjustment will be needed to limit the vacation home carryover loss."

[TaxGuyBill]

if there is never a rental profit in the future, are the carryforward expenses ever allowed, even when there is a fully taxable disposition of the property?

And if the depreciation is never allowed as an expense, is it necessary to adjust the basis? (or partially adjust it, if the depreciation ends up only being partially allowed)

The first one is debatable. I was taught they disappear when it is sold. But after reading some people's thoughts that they should be treated similar to Passive Losses (usable when sold), I think that is a good argument. There is a good discussion (or maybe more than one) somewhere on TaxProTalk (or maybe it goes back to TaxAlmanac) about it. I would need to look it up, but I seem to recall it was Dave Fogel that gave sound reasoning and basis for allowing them.

Basis is NOT reduced by depreciation that is never allowed.

[dhawkcpa]

Form 8582 calculates a deductable $25K and there is about $17K left headed to 2021.

[DoubleO]

The first one is debatable. I was taught they disappear when it is sold. But after reading some people's thoughts that they should be treated similar to Passive Losses (usable when sold), I think that is a good argument. There is a good discussion (or maybe more than one) somewhere on TaxProTalk (or maybe it goes back to TaxAlmanac) about it. I would need to look it up, but I seem to recall it was Dave Fogel that gave sound reasoning and basis for allowing them.

Basis is NOT reduced by depreciation that is never allowed.

I seem to remember that Dave said vacation home carryover losses are NOT passive losses and s/ not be treated as such. 280A(c)(5) seems to support this. I don't want to talk for Dave, though. He is very generous with his knowledge, and a quick search of his site might reveal some articles.

For some reason, I thought these losses could only be used to offset gains from this particular property, and if sold, these losses are "not released." I will have to do some digging into my resources.

[TaxGuyBill]

Maybe I had it reversed! I may need to look that up later.

[TAXNJ]

Prior years have been mixed use. Vacation home limits have generated some substantial operating expense and depreciation carryovers. In 2020 property becomes basic rental property as personal use drops to 9 days. Rented days are 116. If I input the carryovers, it generates a $25K loss and passive loss carryovers on Form 8582. Does this sound right. Don't do enough vacation properties to be good at it. Thanks.

See if TheTaxBook starting at tab 7-5. “Passive Activity Loss Limits” & “Sale of Rental Property” helps.

also, tab 7-8 (NOTE: if applicable to your scenario)

Passive Activity Loss Limits

A taxpayer cannot deduct losses from passive activities in excess of income from passive activities in any given tax year. Losses that are not allowed under these rules are allocated among the taxpayer’s passive activities and carried over to future years.

Taxpayers subject to passive activity rules. Passive activity rules apply to individuals, estates, trusts (other than grantor trusts), personal service corporations, and closely-held corporations. Although the rules do not apply directly to grantor trusts, partnerships, and S corporations, they do apply to the owners of those entities.

Disposition of a passive activity. Suspended losses are allowed as a deduction in the year the activity is fully disposed of in a taxable transaction. If the sale of a passive activity results in a gain that exceeds that activity’s current and suspended losses, the excess gain is passive income which will allow the deduction of losses from other passive activities. The activity must be passive in the year of sale. See Form 8582 , Passive Activity Loss Limitations, page 7-11, for information about allocating and reporting passive losses.

Allowable passive loss carryovers are reported on the same form or schedule that contains passive activity expenses.

[TaxGuyBill]

See if TheTaxBook starting at tab 7-5. “Passive Activity Loss Limits

But this question is dealing with the "vacation home" limits, not the "passive loss" limits.

[TAXNJ]

But this question is dealing with the "vacation home" limits, not the "passive loss" limits.

Yes, but Section 7 has quite a lot of information and since did not read it all, maybe the OP would like to see if any applies or not. There must be a section in TTB if not section 7 that may address the scenario.