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@TaxGuyBill wrote:However, I suspect you are misunderstanding what it means by "excess" in this context.  It is not referring to deductions that can't be taken, it has to do with the interaction between Schedule E and the Standard Deduction or Itemized Deductions. 

Although it is mentioned on the Instructions of that worksheet in Publication 527, in my opinion it is a bit easier to understand what "excess" means if you look at the Instructions for Form 8829 (lines 10 and 11 versus lines 16 and 17).

EDIT:  As a side note, does this property really have over $31,000 of real estate tax?

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Thanks @TaxGuyBill  for reply! Yes, I agree that excess has to do with the interaction between Schedule E and the Standard Deduction or Itemized Deductions, but do they interact? The IRS has given the formulas, but I was trying to provide an insight what it is. I will make a correction:

It is the deductions that cannot be taken on personal side if we disregard the business. For example, if the taxpayers takes the standard deduction, he cannot use either mortgage interest nor the property taxes, so the deductions allocated to the business cannot be taken otherwise without the business, so they are excess deductions. The formula becomes more complicated in itemized deductions as both of mortgage interest nor the property taxes have limits, but the concept is the same: the amounts that cannot be used as personal deductions without the business are excess deductions.

The excess deductions can be deducted up to the business income after the non excess, allowed deductions taken. After carryover to future years, they can be only used to offset the business income, but not any other types of income even on the disposition of the property.

Are we at the same page now?

I do not think vacation home rental uses form 8829 (expenses for business use of your home), but Schedule E, however the concept is the same.

The real estate taxes shown in the image is a test. No matter what number I put in, the software does not produce an excess real estate tax. I understand that you do not use proconnect, but if you can find a way to produce an excess real estate tax, I most likely apply the concept to proconnect and get it to work.