Obliged to take RE tax on Sched E?

Not all losses are disallowed.

I don't understand why "carryovers from previous years" have anything to do with it. Only operating expenses and depreciation need to be carried over if they exceed rental income after deducting the fully allowed expenses such as mortgage interest and property tax.

See worksheet 5.1 from Pub 527. The real estate property tax is fully deductible on Schedule E, which seems to me would be better than Schedule A.

Is it the case that in the days of personal use, the property tax is allowed as a Schedule A deduction?

Do note that if the rental loss causes your AGI to drop to below zero you can claim a NOL, though I don't think that applies here.

If your software is working correctly, you should nevertheless be able to claim a "loss" on Schedule E for RE taxes and mortgage interest even though everything else is suspended.

MTW

I'll put in some sample numbers to better illustrate what I'm talking about. Creating a loss isn't an issue, it's getting no benefit from claiming RE tax on Sched E because of past carried over expenses.

Situation ignoring carryover Business use %age is 5/6ths (83.3%) Rent: $9000 Total RE tax: $6000, so $5000 business, $1000 personal Other current year expenses: $3000

So ignoring carryovers there is a $1000 profit:

$9000 (rent) ($5000) (business part of RE tax) ($3000) (other deductible expenses) ------- $1000

But in actuality there are carrovers -- $6000 of carried-in opex and $20000 of carried-in depreciation.

So in this situation $1000 of the carryover will be used up to bring the net income to zero:

$9000 (rent) ($5000) (business part of RE tax) ($3000) (other deductible expenses) ($1000) (carried-in expenses) ------- $ 0 and a $1000 Sched A RE tax deduction

And that's why there's no (current year) benefit from claiming the RE tax on Sched E. If it were not claimed then more of the carryover would be used, so you could still have $0 net rental income but be able to deduct all the RE tax (on sched A):

$9000 (rent) ($3000) (other deductible expenses) ($6000) (carried-in expenses) ------- $ 0 and a $6000 Sched A RE tax deduction

Obviously, on a current-year basis this leaves the taxpayer is a better-off position. Both approaches give zero net rental income, but the latter approach does so with a bigger Sched A deduction (with the tradeoff being that more of the carried-in expenses are used up).

Thus the question of whether or not it is permissible to forego claiming the business portion of the RE tax and taking it all as a Sched A itemized deduction instead.

OK, I see, let me try again. :-)

I think what you want to do is use the so-called "Tax Court Method" (also known as the Bolton Method) for allocating RE taxes and mortgage interest. This will result in a lower amount of those items being allocated, and therefore a higher deduction for the balance of same on Schedule A. It will also result in more of the carryovers being utilized.

Rather than allocating these items based on a ratio of rental days to total DAYS OF USE, you allocate based on a ratio of rental days to total DAYS IN THE YEAR. This method is allowed only for interest and taxes. All other items must be allocated in the usual way. And note that your software may or may not support this method directly, so manual calculations and overrides might be necessary.

MTW

...and I should add here, I don't think there is an option to simply ignore RE taxes in the 280A calculation because your allowable deductions for operating expenses and (eventually) depreciation are limited to the amount of income remain AFTER "absorbing" the amount of allocated interest and taxes. So IMO you can't choose to simply allocate nothing for these items.

MTW

ignore RE taxes in the 280A calculation because your allowable deductions for operating expenses and (eventually) depreciation are limited to the amount of income remain AFTER "absorbing" the amount of allocated interest and taxes. So IMO you can't choose to simply allocate nothing for these items.

I agree, you first allocate mortgage and taxes to Schedule E income before the other categories (op. exp. and depreciation). I guess the question is whether being a "vacation rental" makes the treatment different, just because there are limits on some other deductions? I don't see anything that treats prop tax deduction for vacation rental any different from a prop tax deduction for any other kind of rental.

Because of depreciation and opex carryovers from previous years (due to the loss limitation) the taxpayer gets no benefit from claiming the business percentage of real-estate taxes as a rental expense and in fact comes out better if the real estate taxes are not claimed at all on Sched E but are instead taken in their entirety as a Sched A itemized deduction.

Is taxpayer allowed to do that, or must taxpayer claim the business percentage of the RE tax on Sched E (and get no benefit from it) and claim only the non-business part of the RE tax on Sched A? ================== I don't see anywhere in the IRC where the taxpayer is given a choice, interpretative or otherwise.

The carry-over accumulates, and is taken either when AGI is below $150K (the phaseout is $100K-$125) or when the property is sold.

Over the years, I accumulated over $100K in the carry bucket. Now that I'm semi-retired, a chunk of that is going to be used each year to offset income.

I believe what you are referring to are the "passive loss" rules. However, what's under discussion here are the so-called "vacation home" rules. A carryover of disallowed vacation home losses is not a passive loss. Different rules, different results. :-)

MTW

Speaking of which, am I correct in believing that the carryover of disallowed vacation home losses cannot (on their own) create a loss?

In other words, say the home stops being a vacation home (for example, owner starts renting it to a non-related 3rd party/parties year-round). Now the vacation home rules no longer apply and losses are no longer disallowed (leaving aside passive loss rules, which wouldn't apply to the person in question because their income is well below the limit).

But losses can only be generated by current-year expenses and current year depreciation, correct? All those carryovers can do is reduce any profit to zero, not be taken to create a loss?

It's been a while since I've had to deal with this. But as I recall, vacation home carryover losses can only be applied in future years to which the vacation home rules apply, in other words, future years where you have a mix of personal and rental use. If the home is converted to a full-time rental, the vacation home carryovers would be suspended indefinitely. But, of course, the passive loss rules would apply during the full rental years.

Obviously, it is quite possible that you might end up with BOTH passive loss carryovers and vacation home carryovers on the same home, and keeping the two rules straight would be a definite challenge. Fortunately, that specific situation never came up in my practice. :-) To restate, only ONE set of carryover rules is applied to the home in any particular year.

Another challenging issue is what to do when the property is sold. Presumably a sale in a taxable transaction will free-up any suspended passive losses. But the same does not appear to be true with vacation home losses. It appears that the latter are forever limited by the amount of rental income collected in mixed-use years (although some people argue that the VH losses can be applied to the extent of a business-related GAIN on the property in question).

MTW

can you cite some support for this treatment of suspended VH losses upon sale?

As I recall, IRC 280A states that deductions are limited to the "gross income" from the property. So the issue turns on how you define that term for this purpose. Some people argue it would include net gains (but not losses) from the property. Others argue that it is limited to the rental income. In any event, it would not support the deduction of an unlimited amount (in excess of "gross income," however defined) of carryover losses upon sale.

MTW

1040EZ) until that carry forward gets used. The carry forward need not be used by the same business activity which generated it.

Note the strange effect this has when the sale doesn't cover the depreciation component: It never converts depreciation recapture gain from capital to ordinary because as long as it's present in the carry forward, the lesser of "allowed or allowable" was less than the total depreciation generated (perhaps even zero). Claiming depreciation carried forward to a year after sale will not retroactively change the recapture gain.

can you cite some support for this treatment of suspended VH losses upon sale? =========== There's simply no provision for the loss carried forward to be taken, short of offsetting income. See 26 U.S.C. 280A. Passive losses specifically permit the unused loss upon disposition of the activity. Section 469.

interesting. However isn't form 8829 used for Schedule C business use of the home, and vacation home loss carryforwards simply maintained by the taxpayer on the worksheet in Pub. 527?

Are VH losses generated by a property lost when that property is sold? Or are they suspended but can be used if a new VH home is purchased and mixed-use rented?

I don't recall ever seeing anything truly "authoritative" on that issue one way or the other. Clearly, Stussy believes the answer is "yes," but I'm not so sure.

My own view has been that you could PROBABLY carry over such unused losses to a new property, but only if acquired within a relatively short time frame, let's say up to 2 years. But I'm not saying this is a bright line rule. I'm simply suggesting it as an approach that could be taken on a "facts and circumstances" basis.

MTW