 Income tax 2022-2023, personal use of dwelling including vacation home tax software example. Let's do some wealth preservation with some tax preparation. Here we are in our example Form 1040 populated with LASERT tax software. You don't need tax software to follow along but it's a great tool to run scenarios with. You can also get access to the Form 1040 related forms and schedules at the IRS website iris.gov, iris.gov, starting point single filer Mr. Anderson 90210 Beverly Hills is where he lives. No W2 income to start off with because we're going to focus in on the rental property 100,000 flowing in from the Schedule E. Let's look at that flow through the Schedule E over here supplemental income and laws from rental real estate etc etc and we're going to start off with a situation where 100% of the rental property is used as rental property the most straightforward type of situation. We have in essence an income statement then for it and then we'll deviate from that to a situation where we have like a vacation home or a partial personal use of the property. So we've got the income statement income minus expenses 100,000 the net that's rolling into Schedule 1 there it is on Schedule 1 rolling into the Form 1040 and there it is on the Form 1040 12,950 support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Standard deduction gets us to the 87,050 taxable income page to calculate in the tax 14774 that's the total tax because we don't have any self-employment tax on the Schedule E. All right back to the Schedule E now remember there's a couple things we need to keep in mind with the Schedule E one is whether we actively participate or whether we're a real estate professional and those become important in the event that we have losses because if we have losses then we might be limited to the amount of losses that we've talked about in prior presentations so that's always the idea of when losses come up that's when some of the issues start to happen and then so we're going to assume we actively participate so as a general rule we would get you know the 25,000 of losses if we had losses as long as we're under the income limitation thresholds would be the general idea there and then we've got the personal use versus the rental use of the property in a sense business versus personal use of the property for the rental property do we have any personal use of it a couple ways that could happen one we could have a personal use situation where we have like our home and we rent a part of the home out we talked about that in a prior presentation the issues with that is that you have to break out between you know the part of the homes that's for personal use versus business two we can have a personal use situation where we converted the property in the middle of the year to rental property now we would have the whole property would be either personal or rental but the conversion happened in the middle of the year so you've got that first year conversion you have to deal with breaking bills out between personal and rental and then three we kind of a whole separate piece of property that is we're not isn't our principal residence or anything at least but we're we're use it from time to time possibly as a vacation vacation home or something like that and then we rent it so now we have a question of well there's some personal use to it even though it's maybe not our principal residence uh there's some they they uh some rental use of it and then there might be some vacant use of it especially during vacation kind of homes that are in a place where it's not as advantageous during certain parts of the year right so it's going to draw traction during certain parts of the year so if the vacation home was 100 percent I mean if the second if the property was 100 percent for rental property then we have a fairly more straightforward situation if we're trying to rent that property even if uh even if we don't rent it even if we can't get people in it the entire time but when we start using it personally then we've got this question of how are we going to be allocating between the personal and the rental so our start off situation we're going to say it was totally uh rental property here's our income statement I'm going to mirror that over here in an excel worksheet we got the income minus the insurance mortgage interest repairs real estate taxes depreciation etc to get down to uh the 100 000 of the net income in practice of course you'd get this information from your software or something like that you would calculate it and then you'd use the software of the tax software to calculate the depreciation but that's our starting point now let's say that we use it 30 days uh for for let's say we use it 100 days that we rent it and the personal use is 30 days so I'm going to sum this up like so and note that the total days in a year are around 365 days right so what's going to happen here is they're going to calculate it not on the total days in the year but generally comparing the the rental days versus the personal use days right so if I look at that comparison then if I used it I'm going to say 100 divided by the 130 use and then the 30 divided by the 130 I'm going to make these percentages and then I'm going to sum these up sum these up so so now we have a situation where we're going to say I have to use the 100 a rental days in general instead of like the 365 days and then the personal use days are going to be 30 for a total of 130 what I would like to be able to do note if I if I was able to make my own kind of ratio assumption I would like to say hey look I tried to have it as rental property for everything except those 30 days and therefore I would like the rental the rental use proportion of it to be 365 minus 100 right 265 right so if it was if it was 265 then it would be 90 percent rental third and 10 percent personal but no we we have to say the actual rental so that's where one of the big kind of restrictions come and play we have this kind of personal use of possibly a vacation home kind of property all right so if I put that into the software logistically in the software oftentimes Lasserte has this system where I have the direct and indirect items so if I have I can pull everything into the indirect here and imagine that everything is indirect 20 thousand 16 thousand and the taxes are 7000 I'm going to delete these items and then I'm going to and then I'm going to say we used it 100 days and then down here percent use of the dwelling number of personal use days owned I'm going to say 30 so there should do our ratio now so if I go back on over to our forms now you can see it modified our calculations here now I'm at 110 393 obviously the income is the same but the expenses have been modified and and the Lasserte system kind of helps us to do that tax software you got to think about how the tax software kind of functions and how you're going to do the data input into the tax software gives us our nice little worksheets here so the direct expenses indirect expenses these are the ones that are going to be split up depending on the ratio there's the ratio that was calculated 7692 which if I add a couple decimals here 7692 that's the calculation that got there indirect expenses and then the the total and then these are the indirect expenses that could go to the schedule a because if we have things like the mortgage interest and the real estate taxes if they're not deductible on the schedule e possibly they can pull on over to the schedule a so those expenses note if I jump over to a schedule a if if I'm able to take the schedule a expenses would be would be populated here so now it's pulling this number in here even though I didn't put a data input into the normal data input for a schedule a on the interest normally I would I would enter the interest here I already had I entered some of the interest here let's delete this and the real estate taxes delete that and then it pulls in the amount that was proportioned out to the schedule a so the data input gets a little bit messy because the software is trying to help you out but it also gets a little get confusing if you don't know how the software is trying to help you out right so now I'm going to go back on over to the schedule e now if I if I let's look at this one this is the vacation home this is the calculation worksheet for figure and rental for the dwelling unit as a home so you have our calculation here and we'll get back to that calculation later let's do the same thing in our excel worksheet and try to mirror this in the excel worksheet I'm going to say this is personal and rental so this is going to be my headers I'm going to have to adjust for this I'm going to say okay let's make this black and white let's center it the income there's no personal income we're going it's all rental income we don't have to break that out but the personal versus the business would be broken out here 800 times the personal which is 23.08 percent I'm going to say f4 to make that an absolute reference and copy it down so there's the personal side the ones that would matter on the personal side are of course this one and this one which might be able to pull over to the schedule a the other two aren't going to be deductible because it was possibly a vacation home and therefore personal use and you shouldn't you wouldn't get a deduction for it the other side it's going to be the 800 times the 76 f4 on the keyboard pull that down the sum of each of these will add up to the total line we can kind of double check that just to just to do a check calculation 800 and the 20 the 16 the 7000 so if I total this up equals the sum of these equals the sum of these underlines home tab font group underline and subtract out we should now have the the 110 394 so that's what we have here 110 394 so you can see how that parses out now you might have some expenses that are are just for the rental property like advertising wouldn't be personal use right so if I had advertising then I'd have to go okay advertising on the schedule e is going to be that's not the schedule e k posseau for crying out loud we're going to say advertising is a direct expense of a thousand if I had if I had that so if I go back on over now you've got the thousand it didn't break out the advertising in our worksheet because that would be direct for the rental property so we have the direct expenses indirect the ones that need to be broken out and then the total on the schedule e and the amount broken out to the schedule a so that's one thing that we need to be taking into consideration now of course problems happen when we have a loss and when we get into a loss we've got to have this question of is this a a personal home or is it or not is it mainly rental because there are going to be limitations remember there's a twenty five thousand if we're active participants if it's a normal kind of rental property that we might be able to take and then it goes into the passive activity rules but if we qualify for using it as a home then we're going to be we're going to be restricted further than that and the rules there are did we use it over fifteen days or over fourteen days fifteen or more or is it more than ten percent use for the personal use and we can see here if we just take a look at this weight ratio just for a quick check you can see here that we have according to this ratio twenty three percent for personal use so we we used it over fifteen days and we have uh or over fourteen days and we have over ten percent usage so so we have to um so would so if we had a loss then we wouldn't get the loss so in other words if i pull my loss over here and say okay let's take the advertising out and let's pretend that the mortgage interest i'm just going to make the mortgage interest ridiculously high just to put it in that category of like one hundred and fifty thousand of mortgage interest okay i'm going to go back on over and so now we can see that it limited the amount of the loss right so if i go back in here it's going to say disallowed home expense so you would think why don't i get like by twenty five thousand because it was a disallowed home expense because it's basically qualifying as a home and if you take a look at this calculation here's our calculation for the uh for the expenses and then we have our operating expenses to be carried over to next year so now we can't take it if we can't take it this year carry it over possibly to next year where you think it have to be income related to this property basically that you could net out against all right so now let's change it so it wouldn't qualify as a home so let's bring this one up to like like three hundred so if i say the fair rental days were three hundred and the personal use were thirty now we're under uh the ten percent so we used it over 15 days or 14 days and it's and under it would be under the ten percent let's make make it three ten just to make it well under the ten percent okay so we still haven't used it for the whole year it hasn't been in use whether personal or rented for the entire year but that's our calculation so we got three ten let's go back on over and say all right three ten then three ten then let's put the three ten so now we're going to say okay so so now it's given us our loss of the twenty five thousand so now i have a loss because we actively participate we're not getting hit with the rule of it being a home but we are getting we're still going to be limited to the losses with the passive activity rules which will cap it at the twenty five thousand and we can see that on form eight five eight two passive activity limitation so we had the thirty two thousand here and then uh we were we were limited to it to the twenty five thousand that ultimately pulls into page one twenty five thousand of the form ten forty and if we had other income we could take the other income against that twenty five thousand because we don't have other income in this case w two income then we run into an nol situation as well so now we've got the passive income that we weren't able to take or the passive loss we couldn't take which we would have to net out against passive income hopefully in the future and we have this nol which is like a normal you know net operating loss that could happen with like a schedule c type of situation also possibly being able to take advantage of that uh rolling forward but possibly not being subject to that same passive limitations therefore possibly being able to take it against other income like w two income next year whereas the stuff that got stuck on the passive side would need to be netted out against the passive income so that's the general idea of it so just a recap of this if you had a separate rental property and it was just rental property then it's a little bit more straightforward although we still have those limitations when in particular we have losses if you actively participate you might be able to get the twenty five thousand of losses however it could phase out if your income goes above above a certain threshold and if you're a real estate professional you may able be able to get the losses when we have personal use of the property it could be in the form of you live in a home or something like that and you rent part of it in which case you have to you would think allocate the expenses between the rental portion and the part that you own in particular the depreciation gets a little bit confusing the accounting for that gets a little bit confusing as well because then you have to take your expenses your bills and allocate them out you could have a situation where you uh convert the property from the uh personal use to the rental property in which case it's going to be just rental once the conversion happens but you're probably going to convert it at some point in the middle of a year which means at that one year you're going to have to break out expenses allocated between personal and the business using some kind of ratio analysis would make sense there as well and then a situation where you have more of a vacation home type of situation where you are having a separate rental property that isn't used exclusively for rental but to have some personal use in it and then you get into these complex situations in terms of what qualifies for personal use uh and if you if obviously if you're having people use it where they're basically not paying the fair market value rental price you would think that those would be the days you know that or you're yourself are using it they could qualify for the personal use and that's when we have to get into this ratio calculation of personal use versus rental use and that's when the iris gets a little bit a lot more restrictive in terms of how you're going to calculate that ratio because because now they want to say they want to be closer to the idea of you have to have someone actually renting the property to count it for fair rental days as opposed to having it available for rent or just you know you're not in it it could have been rented someone could have rented it kind of thing in order to calculate this ratio and then we have the idea of does it qualify as used as a home and that test if it qualifies as used as a home then again that limits the losses even further than the the the passive activity loss rules would limit the amount of the losses and then of course just logistically when you're doing this logistically you're going to have to get your income statement that will basically have your income and expenses and this last one is the most complicated because then you would think from year to year there might be different personal use to fair rental days usages so the ratio could change each year so hopefully the software as the cert here is structured so that you can put this into the software and the software can help you with that calculation but it's useful to actually do it in excel or something too so you can understand what the calculation is doing and of course breaking out between personal mortgage interest and real estate taxes on the schedule a is something that we want to make sure that we can pick up and you know obviously the calculation of the depreciation is something that typically the tax software will do so oftentimes if you're I would highly recommend trying to do an excel worksheet to kind of account for some somewhat what we did here with it to mirror the calculations that are happening in excel so you can understand them and explain them and make sure that everything is put together properly I would be a generally a good practice