Carryover of excessive vacation home depreciation

[FMES]

I need assistance with how Lacerte releases the carryover of excessive vacation home depreciation upon sale of the property and how it correlates with the recapture of allowed and and allowable depreciation on Form 4797.   Lacerte is including the excess depreciation as allowable on 4797  but not releasing the carryover as deduction in the current year.   Any thoughts?

[TaxGuyBill]

I'm not a Lacerte user so I can't comment on your actual question.  Hopefully a Lacerte user may be able to help you.  In ProSeries, you need to check a box that say it was sold in a "fully taxable transaction" in order to release PASSIVE losses.  But I'll comment on the tax-aspect of things.

If I remember correctly, whether or not you can 'use' Vacation Home carryovers upon the sale is a "gray area" and is an arguable thing, so you may want to research that to see if you thing it should be allowed.

If it is allowed, then as you say, the Basis of the property is reduced on Form 4797 by the carryover amount and the carryover losses should be able to be used.

If it is not allowed, then the Basis of the property should NOT be reduced by the carryover amount an the carryover losses should NOT be used.

It seems like Lacerte is combining it and doing it the worst way by reducing the Basis and not allowing the losses.

[FMES]

Thank you for your response, and yes I have clicked the Lacerte equivalent of the "fully taxable transaction" 

As for the researched, I can't find anything on point as to if excess vacation property depreciation is considered allowable or not for purpose of the Form 4797.  If does seem fair that it should be if you can't actually deduct it... then again life isn't fair.

On the Schedule E input screen, Lacerte keeps tabs of the excess vacation depreciation as a "carryover".   This is what makes me believe that their is some benefit in the year of sale either on current year Schedule E or Form 4797. 

I rarely have to deal with vacation homes.  I am hoping there is some out their that does on regular basis, and can enlighten me.   

[TaxGuyBill]

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@FMES wrote:

As for the researched, I can't find anything on point as to if excess vacation property depreciation is considered allowable or not for purpose of the Form 4797.  If does seem fair that it should be if you can't actually deduct it... then again life isn't fair.

On the Schedule E input screen, Lacerte keeps tabs of the excess vacation depreciation as a "carryover".   This is what makes me believe that their is some benefit in the year of sale either on current year Schedule E or Form 4797.  

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If the depreciation is not used, it does NOT reduce the Basis on 4797.  But the questionable thing is whether or not the unused amounts should be 'released' or not when the property is sold.  From what I remember, the 'leaning' is towards "yes", but that it is a "gray area".

So from what  you are saying, Lacerte is definitely showing it wrong for you, one way or the other.   

• *IF* the carryover losses ARE usable when it is sold, they should be used AND the Basis is reduced on 4797. 
• *IF* the carryover losses are NOT usable, then the Basis should NOT be reduced on 4797 by the unused amount.
• It seems like Lacerte is doing it wrong by not allowing the losses, but still reducing the Basis.

The "carryover" definitely CAN be used if there is a profit for the year on Schedule E.  The questionable thing is whether or not it can be used when the property is sold.  But as I said above, from what I remember the 'leaning' is towards "yes", they can be used, but that it is a "gray area".

[FMES]

Thanks again TaxGuyBill!

[Accountant-Man · Accepted solution]

For my three cents:

I have always considered that VH depreciation can only be deducted against rental income, so the income from the sale doesn't allow* it;

At the point of sale, since it is not allowed*, and the adjustment to basis is only for depreciation "allowed* or allowable*," I will not adjust the basis for it.

Effectively, since most, if not all, VH Schedules E defer the depreciation, NONE of it is ever allowed. How you get it to work that way on software is unknown to me.

I have no research to back this up, just my logic.

[PhoebeRoberts]

I agree with your conclusion, A-M. That's how I handle it, too.

[FMES]

Thanks A-M, and I am happy to report that was also my educated guess.  Making it work in Lacerte has been a trick though.