Taxpayer rents a portion of his house out and allocates a pro-rated portion of his mortgage and property taxes to the rental. The rest of his property tax and mortgage goes on schedule A with his itemized deductions. With the pro-rated mortgage and property tax included, the rental results in a net loss. But if you take out the mortgage and property tax allocation (which he would have reported in full on schedule A in the absence of the rental), the rental results in positive income. Does the IRS consider this rental to be profitable?
How does IRS decide if rental is a loss?
Mar 25, 2014
3 Replies
The IRS uses what you report on Schedule E that feeds Line 17 of the
1040. This should include an allocation of your qualified mortgage interest and real property taxes.
Unless the "portion" constitutes a complete, separate dwelling unit, such a rental is probably subject to the IRC 280A so-called "vacation home" rules. As such, any loss in excess of interest and taxes would be limited to zero.
MTW
To put it another way.... You can't increase a loss or create a loss by deducting business use of your home except for expenses that would have been deductible on Schedule A: qualified mortgage interest, taxes, thefts and casualties. Any excess gets carried over to the next year.
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