Vacation Home Loss Deduction

Unless the taxpayer is a RE professional, then the passive loss should not flow through to offset other income due to passive loss limitations. I would recheck the input on the Sch E as to why the loss is being allowed.

Mortgage interest and property tax not used on Sch E should be deducted on Sch A (subject to mortgage limits and AMT of course) if there is not another "second home" already deducted.

I would agree. Nothing is checked in the Lacerte program to indicate real estate professional. However, the info diagnostics state that vacation home losses do not follow the passive loss rules. This is verified in Pub 527. THe worksheet used in the pub is the same as Lacerte uses.

As a matter of fact, the taxpayer has another rental where the losses are being limited.

This is why I am confused. The Pub seems to be giving conflicting info. I believe it is page 15 that it states that vac homes are not subject to passive loss rules.

I sincerely aprreciate your response because I am confused. I am in your camp, but do not know why the program is allowing it.

Thanks

Did you enter the # days used personal vs total days held for rental in the input screen?

If so see the Lacerte help explanation for vacation rental, it explains the treatment

Yes the days are entered. The explanation is "when rental property is used as a homeduring the year, the passive activity loss limitations do not apply to that home, instead the vacation home limits are applied." And then it refers to pub 527.

I think the deduction you are getting is the net (the amount not allocated to Schedule A) mortgage interest and real estate tax that the taxpayer would have gotten anyway, See if that answers your question

No but good thought. The loss is coming through on page one. The loss is bigger that mort and taxes.

I did question the IRS and will let you know if they ever get back to me.

I hope I can help a little. If the home is a vacation home under Sec 280 A, then the expenses allocated to the portion that is rented are limited to the income. In other words, if those expenses exceed the income, there can be no loss. The extra expenses are deferred until next year and are allowable to the extent of next year's income(including next year's expenses).

The exception to this is that the r/e taxes and mortgage interest as allocated are deductible against the income, even if they generate a loss, and then all of the other allocated expenses are deferred.

As a rental, any loss is then exempted from the PAL rules. The loss can only be deductible if the T&I create the loss, since the other expenses cannot create a loss.

I tested this many ways, making the wages below $100K or above $150K, so those rules had no effect. In many examples, the amount of the T&I exceeding the income created a loss which was allowed, but if any other expenses were allowed, meaning the T&I left some income to be sheltered, then there was zero loss.

Don't feel bad about the vacation home loss issue. I had a client audited and you must be very careful the way the information is entered into Lacerte or it does not catch the $150K limitation.

Just a follow up on the note below.My auditor informed me that the property taxes and Interest can be moved over to the schedule A as decribed in the other emails. She also warned me that not all circuit courts agree with the interest and property taxes being moved over to the Schedule A. I am in Texas and this holds true. BE sure to double check in your neck of the woods.