Rented residental real estate used for personal purposes
Does FreeTaxUSA handle the case where a rental property is also used for personal purposes? It is my understanding that income and losses from a rental unit that is also used for personal purposes more than 14 days aren't passive. Is this correct and does FreeTax handle it? I don't see a way to indicate that the rental is also used for personal purposes when filling out the tax return.
Answers
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@David_Smith, yes, we do support reporting this in our software.
If you use your property as a residence and rent it for 15 days or more, then you will want to report the rental income on Schedule E.
As you work through the basic rental information screens, the software will ask "Did you or your family use this rental during 2024 for personal purposes?" Selecting Yes to this question will trigger the software to ask about the number of rental days and personal use days.
Enter all your rental expenses, including for personal and rental use on the Rental Expenses screen.
The software will allocate the following rental expenses between personal use and rental use based on the number of days your rental property was rented:- Cleaning and Maintenance
- Insurance
- Mortgage Interest Paid to Banks
- Repairs
- Supplies
- Real Estate Taxes
- Utilities
- Other Interest Paid
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I don't think I explained my situation clearly enough. The rental property is owned by an LLC of which I am a partner. As a partner I receive a K-1 form from the LLC with losses from the LLC. These losses are reported on Schedule E of my personal return. IRS Publication 925 states
Activities That Aren’t Passive Activities
The following aren’t passive activities.
The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental.
When I fill out my FreeTaxUSA return how do I get the loss to show up as a nonpassive loss on Schedule E line 28 column (i)?
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Thanks for responding with that information. As you fill out the K-1 information in the software, you will be asked "Did you actively participate in managing the rental real estate activity related to this partnership?"
If your answer is Yes, you may be able to deduct up to $25,000 in losses using the special allowance for rental real estate activities with active participation.
If your answer is No, it will be treated as a passive loss on your return.
You can read more about the special allowance beginning on Page 4 of the Form 8582 instructions.0 -
Thanks Keri for the response.
I understand the special allowance for active members. Under this allowance the loss is considered passive. However, Publication 925 seems to indicate that rentals that are used for personal use are not considered "passive rental real estate". That the income and losses should be considered nonpassive.
Am I incorrect in this understanding?
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I can see what you are referring to in Pub 925 where it says the following isn't a passive activity: "The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental."
In researching this further, the IRS means that this type of rental is treated differently, meaning you generally can’t deduct rental losses beyond rental income. If you personally use it for more than 14 days, the rental is not a passive activity under IRS rules. Your deductions will be limited to the amount of rental income earned but cannot be used to create a loss.
Pub 927 may be a better source under the "Used as a home and rented 15 days or more" section beginning on Page 28. It states, "If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. You don’t need to use Worksheet 5-1.
"However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. To figure your deductible rental expenses and any carryover to next year, use Worksheet 5-1."
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Hi Keri,
Thanks for researching the issue. I will look at Pub 527 "Residential Rental Property".
David
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