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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.
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?