How to handle built up vacation home carryover expenses when no more personal use?

[Rich]

Taxpayer has had a vacation home for many years, living it during the summer and renting it the rest of the time, so the vacation expense limitation applies and over the years a hefty carryover has built up.

In 2017, due to advancing age, the taxpayer rented it out the entire year.

So my question is how does one deal with the carryover? From questions I've asked here in the past, the answer as I remember it that even in a year where the vacation home limitations do not apply, the vacation home expense carryover still cannot cannot be used to create or increase a loss. So if current rental expenses exceed current rental income, none of the carryover can actually be used. Am I recalling correctly? (However, unlike the situation where vacation home limits apply you can at least show the current year loss rather than having to accumulate it into the carryover.)

This situation appears to not be addressed in Pub 527, though perhaps I missed it.

(And note -- if you happen to be using TaxACT, watch out! If I am remembering correctly about this then TaxACT is doing it horribly wrong -- it decides to use enough carryover expenses to exactly offset income, resulting in a loss exactly equal to current rental expenses.)

--
Rich Carreiro

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[Arthur Rubin]

On Monday, April 16, 2018 at 7:07:42 PM UTC-7, Rich wrote:
> Taxpayer has had a vacation home for many years, living it during the summer and renting it the rest of the time, so the vacation expense limitation applies and over the years a hefty carryover has built up.
>
> In 2017, due to advancing age, the taxpayer rented it out the entire year.
>
> So my question is how does one deal with the carryover? From questions I've asked here in the past, the answer as I remember it that even in a year where the vacation home limitations do not apply, the vacation home expense carryover still cannot cannot be used to create or increase a loss. So if current rental expenses exceed current rental income, none of the carryover can actually be used. Am I recalling correctly? (However, unlike the situation where vacation home limits apply you can at least show the current year loss rather than having to accumulate it into the carryover.)
>
> This situation appears to not be addressed in Pub 527, though perhaps I missed it.
>

I thought "vacation home" losses were just disallowed -- no carryover.

--
Arthur Rubin, AFSP, CRTP, Brea, CA

[Taxed and Spent]

On 4/17/2018 10:49 AM, Arthur Rubin wrote:
> On Monday, April 16, 2018 at 7:07:42 PM UTC-7, Rich wrote:
>> Taxpayer has had a vacation home for many years, living it during the summer and renting it the rest of the time, so the vacation expense limitation applies and over the years a hefty carryover has built up.
>>
>> In 2017, due to advancing age, the taxpayer rented it out the entire year.
>>
>> So my question is how does one deal with the carryover? From questions I've asked here in the past, the answer as I remember it that even in a year where the vacation home limitations do not apply, the vacation home expense carryover still cannot cannot be used to create or increase a loss. So if current rental expenses exceed current rental income, none of the carryover can actually be used. Am I recalling correctly? (However, unlike the situation where vacation home limits apply you can at least show the current year loss rather than having to accumulate it into the carryover.)
>>
>> This situation appears to not be addressed in Pub 527, though perhaps I missed it.
>>
> I thought "vacation home" losses were just disallowed -- no carryover.
>
> --
> Arthur Rubin, AFSP, CRTP, Brea, CA
>

As far as I can see, the vacation home issue is deciding what portion of
expenses are to be treated as rental expenses. Once that is done, you
have rental income, rental expenses, and rental losses. When the
vacation rental become a non-vacation rental, just add the new losses to
the old losses and carry it all forward - they are all rental losses.

[MTW]

On Tuesday, April 17, 2018 at 10:53:44 AM UTC-7, Arthur Rubin wrote:
> I thought "vacation home" losses were just disallowed -- no carryover.

Well, some tax software programs treat it that way...they just limit the loss to zero and "forget" about any loss carryover. ;-)

But, in fact, the suspended losses under 280A CAN be carried forward, but they are forever subject to the 280A income limitations. So you can't create or increase a loss in a future year by applying the carryovers.

And I wouldn't combine "vacation home" loss carryovers with "passive" loss carryovers incurred in non-vacation home years. The two categories of losses must be separately tracked and applied. And the exact interaction between the two has never been defined as far as I know. :-(

[Taxed and Spent]

On 4/16/2018 7:03 PM, Rich wrote:
> Taxpayer has had a vacation home for many years, living it during the summer and renting it the rest of the time, so the vacation expense limitation applies and over the years a hefty carryover has built up.
>
> In 2017, due to advancing age, the taxpayer rented it out the entire year.
>
> So my question is how does one deal with the carryover? From questions I've asked here in the past, the answer as I remember it that even in a year where the vacation home limitations do not apply, the vacation home expense carryover still cannot cannot be used to create or increase a loss. So if current rental expenses exceed current rental income, none of the carryover can actually be used. Am I recalling correctly? (However, unlike the situation where vacation home limits apply you can at least show the current year loss rather than having to accumulate it into the carryover.)
>
> This situation appears to not be addressed in Pub 527, though perhaps I missed it.
>
> (And note -- if you happen to be using TaxACT, watch out! If I am remembering correctly about this then TaxACT is doing it horribly wrong -- it decides to use enough carryover expenses to exactly offset income, resulting in a loss exactly equal to current rental expenses.)
>
> --
> Rich Carreiro
>

Three completely different answers. We could be the IRS help desk Dream
Team!

And I am not certain what is the correct answer.

[Alan]

I will add mine. There are two rules in play. One is the passive
activity loss limitation that contains an exception for up to $25,000 of
losses and the passive activity loss limitation for mixed use property
(expenses can not exceed income). I have always treated the passive
activity loss limitation as the primary reason that the loss can not be
used to offset ordinary income. The mixed use rule, merely disallows the
exception for the $25,000 write-off. The question is whether suspended
losses that were limited by both rules can be used to generate a $25,000
exception because the property is no longer mixed-use. I can't find
anything in the law that changes these suspended losses to something
other than a passive activity loss. I see no reason why the loss can not
be combined with any additional losses on the the rental property and
fall subject to the $25,000 exception. I do not believe there is such a
thing as a mixed-use disallowed passive activity loss that can only be
used against mixed-use property.

[MTW]

On Wednesday, April 18, 2018 at 3:45:58 PM UTC-7, Alan wrote:

> I can't find
> anything in the law that changes these suspended losses to something
> other than a passive activity loss. I see no reason why the loss can not
> be combined with any additional losses on the the rental property and
> fall subject to the $25,000 exception. I do not believe there is such a
> thing as a mixed-use disallowed passive activity loss that can only be
> used against mixed-use property.

See IRC 469(j)(10) which, in so many words, appears to define 280A items as non-passive.

See also the final sentence of IRC 280A(c)(5) which, while allowing carryovers of suspended 280A items to future non-280A years, nevertheless states that the use of same is still subject to the 280A loss limitation regime (which differs from the passive rules).

So my conclusion is that the 280A losses and passive losses must be tracked and applied separately. In relatively simple situations this probably won't present a problem. However, from studying this years ago, I recall seeing some more complex situations where the two sets of rules became seemingly incompatible with each other.

[Alan]

On 4/19/18 8:31 AM, MTW wrote:
> On Wednesday, April 18, 2018 at 3:45:58 PM UTC-7, Alan wrote:
>
>> I can't find
>> anything in the law that changes these suspended losses to something
>> other than a passive activity loss. I see no reason why the loss can not
>> be combined with any additional losses on the the rental property and
>> fall subject to the $25,000 exception. I do not believe there is such a
>> thing as a mixed-use disallowed passive activity loss that can only be
>> used against mixed-use property.
>
> See IRC 469(j)(10) which, in so many words, appears to define 280A items as non-passive.
>
> See also the final sentence of IRC 280A(c)(5) which, while allowing carryovers of suspended 280A items to future non-280A years, nevertheless states that the use of same is still subject to the 280A loss limitation regime (which differs from the passive rules).
>
> So my conclusion is that the 280A losses and passive losses must be tracked and applied separately. In relatively simple situations this probably won't present a problem. However, from studying this years ago, I recall seeing some more complex situations where the two sets of rules became seemingly incompatible with each other.
>

I'll agree with this. One has to use Worksheet III rather than Worksheet
I on the Form 8582 even after the property is no longer mixed use.

[Rich Carreiro]

MTW <mtwi...@yahoo.com> writes:

>On Wednesday, April 18, 2018 at 3:45:58 PM UTC-7, Alan wrote:
>
>So my conclusion is that the 280A losses and passive losses
>must be tracked and applied separately. In relatively
>simple situations this probably won't present a
>problem. However, from studying this years ago, I recall
>seeing some more complex situations where the two sets of
>rules became seemingly incompatible with each other.

In this case as the taxpayer only has about $25,000 of AGI
each year they are thankfully well below the threshold that blocks
taking passive losses against other income, so there is no
passive loss carryover as I understand it.

--
Rich Carreiro rlc-...@rlcarr.com