Discussion:Vacation home carryover of expenses

Taxpayer owns second home, rented out say 100 days one year, used personally 30 days same year. Disallowed operating expenses and depreciation carried over to the next year. In the next year they use the home personally only 5 days and rent it out for 100 days again, so it is not a "dwelling used as a home" now but a "rental property" with personal use. Do you basically ignore the carryover of expenses until it is a "dwelling used as a home" again? Or do you bring in the carryover in the current year? My associates and I disagree as to how to apply the limitations of Section 280A(c)(5) in this situation.

"Any amount taken into account for any taxable year under the preceding sentence shall be subject to the limitation of the 1st sentence of this paragraph whether or not the dwelling unit is used as a residence during such taxable year."

There are actually several possibilities here. If the personal days were 30, e.g., but were the first 30 days of the year, you might have two distinct properties: a rental property (assuming the rent continued into the next year) and a personal property....i.e., the property was converted to rental. The same could happen had it been rental in the prior years and was rented for 60 days in the tax year, then converted to 100% personal use.

But my attempts to sidetrack us do not answer the question. I think Harry is on the right track.

You do not allocate personal vs. rental when you have 100 rental days and 5 personal. That was my point. Read in conjunction with the other thread started by Night will clarify the point I am trying to make.

So the situation seems to me that in year one, there was a 280A vacation rental where there was an unused loss, and in year two there is a 469 Passive Income/Loss situation and N wants to know what to do with that unused Year 1 loss from the rules of 280A(c).

The question is interesting, especially if in Year two, where he has a passive income situation as you have noted, he has a profit....can he take that loss from the vacation property?

Hey Doug have I been misreading 280A(e) for the past thirty years?

(e) Expenses attributable to rental (1) In general

       In any case where a taxpayer who is an individual or an S
     corporation uses a dwelling unit for personal purposes on any day
     during the taxable year (whether or not he is treated under this
     section as using such unit as a residence), the amount deductible
     under this chapter with respect to expenses attributable to the
     rental of the unit (or portion thereof) for the taxable year
     shall not exceed an amount which bears the same relationship to
     such expenses as the number of days during each year that the
     unit (or portion thereof) is rented at a fair rental bears to the
     total number of days during such year that the unit (or portion
     thereof) is used.
     (2) Exception for deductions otherwise allowable
       This subsection shall not apply with respect to deductions
     which would be allowable under this chapter for the taxable year
     whether or not such unit (or portion thereof) was rented.

When personal usage is 14 days or less, my understanding is that it is not a vacation home, and 280A does not apply.

D&T--I am sorry for my post. My position and original reply to Night involves a DIFFERENT issue. This issue involves Bolton method vs. IRS method in allocating expenses. We have a difference in understanding the law when Bolton/IRS method is used, and which is better.

My position is that 100 rental days and 5 personal days, neither method is used. The deductions are 100% to Schedule E. No pro-ration required as the property is not subject to 280A.

My position is also that when you have 100 rental days and 30 personal days, 280A is invoked, and now a decision of needs to be made, Bolton or IRS method.

Night stated that they use IRS method because deductions are falling through the hole on Schedule A due to AMT. I am stating that the interest expense should NOT fall through the hole for AMT. He stated that since personal use was NOT 14 days, no deduction. Again, not 280A property when personal use is only 5 days.

And, if you used the Bolton method, you may very little operating expense carryover.

Am I all wet??

Here is my take on it: We know that Sec 280A limits the deductions to the "gross rental income" of the property. The first quirk here is that "gross rental income" is reduced by (a) deductible personal expenses (e.g., mortgage interest, casualty and theft loses, and real estate taxes) allocable to the rental use of the unit [i.e. those expenses that could be deducted anyway whether or not the unit was rented] and further reduced by (b) direct rental expenses (such as rental agent fees, office supplies, advertising expenses, and depreciation on office equipment used solely in the rental business).

In Year 2, we need to see if the Sec 280A loss carryforward from Year 1 exceeds or does not exceed Year 2's "gross rental income," as defined above. This is because, as Harry points out, the Sec 280A loss carryforward from Year 1 is subject to the "gross rental income" limitation in Year 2.

If the Sec 280A loss carryforward from Year 1 does not exceed Year 2's "gross rental income," the loss carryforward passes muster. That is, if Year 2 is a Section 469 year, the Sec 280A loss carryover from Year 1 will be allowed as a deductible item, subject to the passive loss rules. If Year 2 is another Sec 280A year, the Sec 280A loss carryover from Year 1 will retain its character as a Sec 280A loss (with the result that the Sec 280A carryover from Year 1 plus the rental portion of Year 2 expenses will be subject to the "gross rental income" limitation in Year 2). In other words, there is no "ordering rule" whereby one type of loss carryforward (469 vs. 280A) is claimed before or after the other type.

Also, I decided to post two threads as these are different questions, although along the same lines. FYI, these are also different clients with different scenarios.

Thanks Ckenefick & Harry for standing up for me, I was starting to doubt myself when I saw more than one poster suggest that you don't have to worry about allocation if personal use is under 14 days.

D&T, you obviously know exactly what I am looking for "So the situation seems to me that in year one, there was a 280A vacation rental where there was an unused loss, and in year two there is a 469 Passive Income/Loss situation and N wants to know what to do with that unused Year 1 loss from the rules of 280A(c)"

Will the 280A loss from year one carryover into year 2 as an expense as it normally would if personal use stayed the same? Or should it be carried over indefinately until the property becomes a "dwelling used as a home" again?

The paragraph that precedes and the one that includes this final sentence are models of succinctness and worthy of saving. Now to see if the software correctly applies these instructions!

This sure doesn't seem like the intent of the limitations.

I especially liked the parenthetical ["(whether or not he is treated under this section as using such unit as a residence)" emphasis added], also found in 280A(e). Not only is it a flagrant violation of the gender-neutrality that everybody espouses these days, it *also* seems to address Doug's interpretation of the law that "you don't have to allocate with less than 14 15 days personal use" like a laser-guided cruise missile.

Enough with these metaphors already. Let's drink! There's refrigpbrerator.

It looks to me like you lose it. See the phrase "gross income derived from such use" in Section 280A(c)(5)(A). Section 469 gives the opposite result for a PAL, I think.

I have a hard time wrapping my head around the seemingly unfair conclusion that results from the application of 280A(c)(5)(A). After all, any 280A carryforward would indeed represent valid rental deductions, since the personal/rental allocation of expenses has already been performed. And doesn't the Code, in general, allow rental (and business) deductions to actually be deducted at some point in time? Moreover, under Section 469 there is a clear and definitive rule relating to the (complete) disposition of the property. No such rule exists under Sec 280A. So how do we interpret this inconsistency/lack of a tax law - That the 280A carryforward is indeed lost forever since no such disposition rule exists under Sec 280A (which leads us back to 280A(c)(5)(A))? Or do we apply a more taxpayer-favorable interpretation by taking the position that since no 280A disposition rule exists, the matter is unclear and unresolved, leaving the taxpayer to decide how best to the handle the 280A carryover upon disposition?

When people with incomes well above 150K ask about buying vacation homes as rentals, in most cases I tell them not to be afraid to use the homes themselves.

About a hundred years ago I wrote a "Memo to Tax Department" that said, in effect, that Section 280A limited your deduction to your home office or rental or whatever income, one year at a time, and also overall. I guess, now, that I was guessing, then, but I'll stand on that guess. If I can stand up at all, I'll stand on that guess, I guess.