Sale of Vacation/Short-Term Rental

[taxprepp]

I have clients who sold their Vacation/Short-Term Rental after 20 years of ownership. This is their first year with me. So I am using numbers from a Form 4562 Depreciation and Amortization Report and a Carryforward to 2021 Smart Worksheet for Schedule E from previous tax preparer. On this Carryforward to 2021 Smart Worksheet there are numbers for Regular Tax & AMT for L Vacation home operating expenses as well as for M Vacation home depreciation. In PTO you enter them on (I believe) the Schedule E tab for Personal Use of Property under Carryover. The rental property had a loss for 2021 for the time that it was rented before being sold. And there is a profit for the sale of the rental property.

When I review the tax return, the Vacation home operating expenses C/O is showing on a PTO prepared Statements as a positive number and then as a negative number for Disallowed Vac. Home Exp. All for Schedule E Line 19 Other Expenses. So it is zeroed out. Correct? Or is there another entry I need to make?

The Vacation home depreciation carryforward is nowhere. PTO is correctly handling all depreciation issues for Unrecaptured Section 1250 Gain and Section 1245 depreciation recapture for assets shown on the Form 4562 Depreciation and Amortization Report. Should the Vacation home depreciation carryforward be somewhere? Or is it a duplicate of other?

First time to have these carryforward numbers as shown on the Smart Worksheet for Schedule E. Appreciate any help. Thank you!

[George4Tacks · Accepted solution]

Schedule E input "General Information" last enter use 2=delete next year.

I assume you entered the sales information in the depreciation input. In the Sale of Asset - Miscellaneous -  enter 1=complete disposition of passive activity.

Hopefully this will do it.. 

[taxprepp]

Thank you for your response! Yes, I did enter 1=complete disposition of passive activity. And I just added the 2=delete next year.

Does it sound correct that my entries for the Carryover Vacation home expenses and Vacation home depreciation entered on Personal Use of Property of Schedule E for this asset really have no effect on entries for Schedule E and 4797?

[sjrcpa]

Yes it does. The vacation home rules of Section 280A apply in the year of sale, too. Expenses are only deductible to the extent of the rental income. Gain on sale does not free up excess vacation home deductions.

[taxprepp]

2021 expenses were more than 2021 income. So negative. So the carryforward of expenses have no affect since clients spent more than the rental income they received. Correct? 

[sjrcpa]

Correct.

[taxprepp]

Thank you! Appreciate the help!

[sjrcpa]

You're welcome.

[TaxGuyBill]

---

@sjrcpa wrote:

Gain on sale does not free up excess vacation home deductions.

---

I think that is a "gray area".

Although I was taught that way (the excess vacation home expenses disappear), I think Dave from TaxProTalk leaned towards that they ARE deductible just like Passive Loss carryovers.  And it is hard to disagree with Dave.

[abctax55]

@TaxGuyBill 

Bill - is the the "Dave" you are referring to ? 

https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=2884&p=32815&hilit=Dave+vacation#p32815

Seems to me he is saying that those excess vacation home deductions are NOT deductible upon sale of the property.   And that's what I've been taught too.

[sjrcpa]

I agree with Dave. 

[taxprepp]

Thank you for the help. Any thoughts regarding the other item listed on the Carryforward to 2021 Smart Worksheet for Schedule E:

The 'M Vacation home depreciation' carryforward is nowhere. PTO is correctly handling all depreciation issues for Unrecaptured Section 1250 Gain and Section 1245 depreciation recapture for assets shown on the Form 4562 Depreciation and Amortization Report. Should the Vacation home depreciation carryforward be somewhere? Or is it a duplicate of other?

[TaxGuyBill]

Apparently my memory isn't that great.   🤣

That was the Dave I was referring to (in my opinion, if he asserts a position, it is almost certainly correct).  However, it I guess it was a different Dave that pointed out some sound logic in this thread in post #28.

https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=6838

But I haven't had a chance to process the counter-arguement in post #29, so that could affect how to look at things.

[taxprepp]

Thank you everyone for your assistance!

[taxprepp]

I believe I have resolution for this return. Thank you for the provided links to review prior discussions on these topics. PTO appears to be matching those discussions by not allowing either issue to affect the net results for Schedule E and 4797 entries. Some details that help with conclusion. My clients did not use the rental personally at all in 2021. Their rental expenses in 2021 were greater than their rental income resulting in an overall loss. So no carryforward expenses were allowed since no positive rental income to offset. Determining if any of the carryforward depreciation would possibly increase the basis of the asset (which appears to be questionable) is not considered at all since there was an overall loss for rental activity in 2021. Thank you so much. I learned a lot.

[TaxGuyBill]

As you pointed out, *IF* you determine that the carryover Vacation losses disappear when sold, then the unused depreciation does NOT lower Basis.  That part of it is clear.