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Vacation Home depreciation limitation

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Level 1

I have a second "home" that I rented for 83 days and used personally for 12 days. The depreciation is not being limited to the business use, but is allowing all the depreciation on Schedule E. When I did a search in ProConnect it said if the number of days of personal use is less than 14 days, or 10% or less of the Number of days rented, depreciation will be allowed in full. This is not my understanding and not consistent with other tax software I have used, which limits depreciation to the business use percentage. Any thoughts?

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Level 15

You're right that §208A(e)(1) mandates that only expenses attributable to rental at fair market value may be deductible where "the taxpayer...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)".  In other words, depreciation allowance must still be allocated between rental and personal use even though the taxpayer used the property for less than the thresholds defined under subsection (d)(1) and the deductions would not be subject to the subsection limitation under subsection (c)(5).

PTO does optimize the allocation of mortgage interest and real estate taxes between Sch A and Sch E so long as the number of days owned is entered.  However, I do see two technical problems in PTO's computation when the taxpayer did not use the property for more than the greater of 14 days or 10% of the days rented at FMV (i.e. when the property does not qualify as a residence/vacation home) -

  1. Mortgage Interest: PTO allocates mortgage interest to Sch A even though the property does not qualify as a residence and the interest paid would not constitute deductible qualified residence interest as defined under §163(h)(4)(A);
  2. Depreciation: PTO does not prorate for rental use but allows full depreciation allowance.  As explained above, there is no technical basis for taking this position.
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Level 12
You are right, it is limited to business use.  I suspect that message in the software is trying to say it is not subject to the 'vacation home' limitations.

As for how to get it to use the business percentage, I can't help you there (I use ProSeries, not PTO).  It is possible that you need to manually enter the business percentage on the asset.
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Level 15

You're right that §208A(e)(1) mandates that only expenses attributable to rental at fair market value may be deductible where "the taxpayer...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)".  In other words, depreciation allowance must still be allocated between rental and personal use even though the taxpayer used the property for less than the thresholds defined under subsection (d)(1) and the deductions would not be subject to the subsection limitation under subsection (c)(5).

PTO does optimize the allocation of mortgage interest and real estate taxes between Sch A and Sch E so long as the number of days owned is entered.  However, I do see two technical problems in PTO's computation when the taxpayer did not use the property for more than the greater of 14 days or 10% of the days rented at FMV (i.e. when the property does not qualify as a residence/vacation home) -

  1. Mortgage Interest: PTO allocates mortgage interest to Sch A even though the property does not qualify as a residence and the interest paid would not constitute deductible qualified residence interest as defined under §163(h)(4)(A);
  2. Depreciation: PTO does not prorate for rental use but allows full depreciation allowance.  As explained above, there is no technical basis for taking this position.
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Level 15
@Intuit Austin @Kathi_at_Intuit Hi, Austin and Kathi, could you please take a look at this as it doesn't seem right?  Thanks!
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@itonewbie Let me check on this. It will take a bit.
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Thanks, @Kathi_at_Intuit!
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I am still checking. It sounds like this is the knowledge base that you are talking about:

Depreciation not limited for Schedule E Vacation Home
https://accountants-community.intuit.com/articles/1741007-depreciation-not-limited-for-schedule-e-va...

I see topic 415 https://www.irs.gov/taxtopics/tc415 that states:

Rental Property / Personal Use

If you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct. You're considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of:

    14 days, or
    10% of the total days you rent it to others at a fair rental price.

(the above states limitation MAY apply)

and

List publication 527 https://www.irs.gov/pub/irs-pdf/p527.pdf which I did not necessarily see state you could take the depreciation in full.

I also see this, which is from Lacerte, but would still apply to ProConnect Tax Online:

Number of Days Personal Use
Personal Use of Dwelling Unit

Enter the number of days the taxpayer used this property for personal use. Leave this field blank if the taxpayer did not use the property.

If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses depends on whether you are considered to be using the dwelling unit as a home.

You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of:

1. 14 days, or

2. 10% of the total days it is rented to others at a fair rental price

Note: You must enter at least 15 days personal use, or more than 10% of the days rented, for the program to calculate vacation home expenses. If the taxpayer used the home for fewer than 15 days personal use, or less than 10% of the rental days, enter applicable taxes and interest on Screen 25, Itemized Deductions. See IRS Publication 527 for more information on the rules for vacation homes.

I will see if I am able to find anything else.

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Level 15
In this case, the OP's client did use the property, just not for the number of days that exceeded the thresholds for the property to be considered a residence.  That's where the program seems to have a disconnect.
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Thanks, @Kathi_at_Intuit!
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@itonewbie @Intuit Austin is reporting this to development. After we are updated, we will update you. Thank you all very much for your patience.
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Will wait to hear back from @Intuit Austin.  Goodnight!
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Sorry for the delay on this @itonewbie. It appears that this is inherently a program limitation. The program, as you had described, does not prorate the depreciation amount if the taxpayer did not use the property for more than the greater of 14 days or 10% of the days rented at FMV. Depreciation and any interest that flows to the Sch A would need an overridden in this case.

While I realize program limitations are not ideal, I've submitted some feedback to our development team, so perhaps this feature/calculation can be improved upon.

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But @Intuit Austin, this is not a system limitation but a misapplication of tax law and regulations.  Where there are limitations, you'd expect, at the very least, that a notation of some sort or a diagnostic would be produced (in this case, critical) because the return would be wrong, unless manual adjustments are made.  Furthermore, there's nothing complicated about the tax logics involved with this particular code section.

Please do escalate this with your developer and let us know when a diagnostic will be provided, especially if a fix may not be deployed until the next filing season.

Thanks!
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I will definitely see what I can do! Thank you for the elaboration @itonewbie!

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Thanks, Austin!
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Level 1

Has anyone found a solution regarding how to get Lacerte to properly allocate depreciation for a vacation home rental that was used for personal use the greater of more that 14 days or 10% of business use?

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I've encountered the same issue.  After searching many screens and the forums, I decided to contact support and have resolved the issue.  Make sure you have the asset properly coded in screen 22 under the "form" column.  It needs to be listed as 11 (schedule e vacation home) and not 3 (schedule e rental).  Make sure you have the correct activity tagged as well.