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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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When I research vacation property i find at least two methods

Customer Question

When I research vacation property i find at least two methods of writing it off.
As a rental property with a less than 14days or 10% of personal use, i use schedule E
for 100% of the expenses. the second method, called the vacation home method, is when use is over the limit for personal use, and limits the expenses to the amount of income received, with some items such as property tax in excess carried to the sch A.

My tax software apparently allows a third method of write of. For example, if I rent this 231 days and use it 43 myself (out of the 134 left) total 365, I can use a method called
ie a rental unit used as a home, I can allocate the expenses such as interest and property tax between the A and the E sch's. without limitation! that is, I am not sure why anyone would use the limitation on rental property ( tax court method or not) when they can write off all of the property taxes and interest and even pro-rated depreciation using this rental/home allocation! If i use the property 144 days and rent it 231 days I write off on the sch e 63% of the interest and property tax on the e, (231 days/365 days) Therefore 37% of the interest and property taxes goes on the A, and the balance o0f expenses gets allocated 63% to the E without limitation. All I lose is the 37% of some of the items I cannot wirte of ( ie insurance, 37% of repairs etc)

My question is,why woulod anyone limit there write-off to income on the E, when they can use this % aloocation method?

John
Submitted: 3 years ago.
Category: Tax
Expert:  jgordosea replied 3 years ago.

Greetings,

 

Since residential rental income is, by definition, passive activity income there is allowed in the current year only up to 25,000 of passive loss when modified adjusted gross income (MAGI) is less than 150,000 (75,000 for married filing separate). The balance of passive loss is carried forward to be offset against future passive income or claimed upon complete disposition of the passive activity in a taxable transaction.

 

For taxpayers that have MAGI such that no loss is allowed in the current year using the limit to income on Schedule E will still result in zero income on the current Schedule E; but can result in less total current tax since more of the expenses (such as property taxes and mortgage interest) will be allowed on Schedule A.

 

For some, the current reduction in income tax is worth foregoing the additional deductions that may only be claimed later when the passive losses are allowed.

 

Best regards.

 

 

 

 

Customer: replied 3 years ago.

SO, BASICALLY WHAT YOU ARE SAYING, IS IT IS OKAY TO USE PERCENTAGE OF USE BETWEEN HOME AND RENTAL ( IN MY EXAMPLE 63% RENTAL). ESPECIALLY IF YOU WANT TO TAKE THE MOST OFF ( ASSUMING PASSIVE LOSS LIMITATION) ON A CURRENT BASIS. AM I TO UNDERSTAND THAT YOU HAVE A CHOICE THEN NOT TO USE THE RENTAL FORMULA WHICH IS BASED ON THE NUMBER OF DAYS OF RENTAL, VERSUS THE NUMBER OF DAYS OF PERSONAL USE? I FURTHER ASSUME THAT THE PASSIVE LOSS CARRY OVER IS ADDED TO THE BASIS UPON SALE, THEREBY REDUCING ANY CAPIATAL GAIN UPON TIME OF SALE?

 

JOHN

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