Requirement to take rental loss on vacation home?

I think you already know the answer..... Vacant time is personal use time.

Alan, any citation?

From the comments for Pub 17;

What Is a Day of Personal Use

A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.

I'm not seeing how empty time for this type of rental makes it personal. I can easily have a run of bad luck, tenants leaving early on annual leases, and have 2 months empty. Never occurred to me that might disallow standard treatment.

I don't have the cite but if you think it through you would conclude to allow otherwise would mean there would never be any loss carryovers on vacation homes as it would be simple to just stop using your vacation home for a short period. My answer would have been different if the OP said that the home was offered for rent for that two month period.

Let's agree I don't understand. Rich called it a vacation home that these people rent out. I'd start from the other end, they have a rental property they use now and then. I am near Rich, and we are near Cape Cod, where there are houses that have no value in winter, but are rented for as long a summer as one can, say March through October. The same way people treat these as summer homes and close for winter, a landlord might find tenants year after year for 6-9 months and never actually set foot on his property. I'm trying to understand where you (well, not you, Alan, the IRS regs) draw the distinction.

Whether that two-month period ultimately counts as "personal use" is no doubt a question of facts and circumstances.

But, assuming for the moment that it DOESN'T, my understanding is that losses suspended under 280A can only be used to the extent of future rental income. So if you have a year of "full time" rental, you can't generate an operating loss as the result of applying the 280A carryover. Naturally, this means that you might have a complicated interplay between the 280A rules and passive loss rules. Good luck! :-)

-- Michael T. Wing, CPA Gig Harbor, WA

How about a real citation: IRC Section 280A. ;-)

The vacant time is NOT personal use, but as the carried-forward loss is accumulated under 280A, it requires a profit to offset. However, in the year not personally used, that year's depreciation may cause a loss (since

Sorry Joe, right answer.. wrong reason. I went back to my notes on the class I took and it's not that the house retains its character, it's that Section 280A(c) forces the accumulated losses to retain their character as vacation home losses. As such, until such time you have a Schedule E for the rental property that has a profit, you keep on carrying forward the losses.

Thank you very much! That's good to know. Especially since certain tax software (preparer-grade, mind you) automatically takes all the carried-over losses as a current year expense when you uncheck the "was there more than 14 days or 10% personal use time" box even though it creates a loss on the property (and even a NOL!). All the more egregious since its internal worksheet actually labels the lines "personal use expense carrover" so the software knows that those are personal use carryovers.

Though perhaps I shouldn't be too surprised -- a year or two ago (it blurs :) I found a bug where it wasn't calculating the carryovers right in the first place! (And hadn't been for at least a couple of years, too.)

Again, assuming [the 2-month vacancy] doesn't count [as personal use days], am I correct in taking you to mean that current year expenses and current year depreciation can still create a rental loss, but the

-- Rich Carreiro snipped-for-privacy@rlcarr.com

I'm not sure I've seen ANY software that could properly handle a wide range of scenarios under 280A. Most do a decent job of a "standard" situation, but quickly fall apart if anything gets weird.

In any event, I agree with Alan's last comments on the handling of your situation.

MTW

Basically, you have to apply the 280A limitations FIRST to see if any of the carryovers can be utilized. Note that the "operating" carryover and the "depreciation" carryover must be applied separately, and in sequence, under the 3-tier scheme. But if you only have a depreciation carryover to deal with, then "yes," it can only be applied if there is a profit after all CURRENT year operating expenses and depreciation have been deducted.

THEN you can apply the passive loss limitations/carryovers as appropriate. Might sound easy enough, but I seem to recall certain situations where the 280A limitations and 469 limitations appear to collide and then there is no obvious solution.

Anything can happen, but in my experience most 280A carryovers (especially depreciation) are never utilized - so in a practical sense, maybe the application of the carryovers isn't worth worrying about??? :-)

MTW

I would worry about it. The real-estate market won't be stagnant (or reverse) forever and will eventually grow. Even if no additional 280A items accumulate, what is there can still be applied against any net profit on sale of the property. Should the losses exceed the net sale, you will still have a carryforward which could still be used against some other future net profit where there's business use of home present.

I disagree. Unlike passive loss carryovers, it appears that 280A carryovers can ONLY be used with respect to future RENTAL INCOME (not sales proceeds). So unless rental income increases substantially in future years, it is unlikely that the 280A carryovers will ever be utilized.

MTW

I don't see where it's limited to rental income. It's limited to income generated by the use of the asset, and that includes the gain on sale.

For proof: Look at the instructions for Form 8829, line 8: "... plus any gain or loss on the sale of the home...." (paraphrased). Granted, Form

Oh come on! If you "don't see where it's limited to rental income" maybe you should look farther...

Here's where "it" is limited to rental income: In the IRC.

This is what Section 280A says about the limitation that we're talking about:

"...deductions allowed ... 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." [*emphasis* added]

And then the Code says that the same limitation applies in "carryover" years, too.

The "such use" referred to in the Code is, in this case, the *rental* use, and it's a real stretch to include the gain from the sale of the property in that definition, IMHO. Like, no way.

...and I'm sure this website will totally mess with the formatting of my quotation from the IRC. It never comes out right. I apologize for my absolute inability to cope with the myriads of different word- processing software that I encounter on the internet. There's not time enough, as it is...

And just to close the loop, what happens to the suspended 280A losses when the property owner dies? Can they be taken on the final return? Carry into any estate income tax return? Pass on to the heirs? Or do they simply expire with the taxpayer?

-- Rich Carreiro snipped-for-privacy@rlcarr.com

I agree.

This, then, begs the question as to why Form 8829 apparently allows it with respect to Schedule C (only). I haven't researched that point, but I believe it has to do with the handling of 1254 depreciation when the home is sold and the 121 exclusion is elected (and that scenario is far more likely to materialize with respect to a "home office" than a "vacation rental"). The pubs and related worksheets applicable to Schedule F, employee business expense, and rentals, together with the proposed regs under 280A, are completely silent on the issue of including sales proceeds in the mix.

MTW

That's an excellent question!

First, keep in mind my view that the deductions are forever limited to "rental" income. So if there is no income, there is no deduction. Beyond that, I suspect one would have to look for parallels on how other loss carryovers are handled with respect to decedents. If I had to quess, I'd say that such deductions could certainly be claimed on the final return (to the extent of related income) and MAYBE they could be claimed by the estate during the administration process. But I doubt they would pass along to the heirs, or result in some eventual basis adjustment to the asset (as do passive losses in some cases). Again, these are "guesses." :-)

MTW

Noted: However, section 183 is NOT silent on the matter. Appreciation of assets is one of that section's 9 points that weighs in the taxpayer's favor against 183's presumption. Granted, 183 and 280A don't normally work together -- as a property subject to 280A doesn't have a loss that 183 would apply to (280A tier 1 expenses don't contribute to such a loss as they're otherwise allowable, plus 280A(f)(3)). Furthermore, once depreciation is allowed, as it is under 280A even if limited, then recapture of such is automatically an offsetting issue -- and such deprecation recapture only occurs at sale of the asset. Both of these indicate to me that the gain upon sale is part of "income derived from usage" of the asset which [carried, or current,] expenses may offset. I see nothing that says that capital gain upon sale is excluded from gross income (for 280A purposes) based on the type of usage (e.g. rental vs. business) of the residence expenses so limited. Therefore, since the IRS thinks that the capital gain is offsetable for Schedule C (cf. Form 8829), in the absence of any contravening authority being cited and upheld, I see no reason why the capital gain shouldn't also offset any other type of usage, including Schedule E - rental.