But that article seems to say that you can deduct the rental loss against other forms of passive activity income - unless my public school education is failing me again.
So what happens to the loss if it's not treated as a business rental loss? It falls into the passive activity loss rules of §469 of the Internal Revenue Code. Those rules prohibit deducting such losses except against other passive activity income. Such income is narrowly defined and doesn't include, for example, dividends, interest or other investment income.
Thus, you're pretty much stuck with carrying over such losses to use against positive taxable income from your rental activities in future years. You can also deduct any carryover losses related to a rental property in the year you sell that timeshare.
It’s because you are ignoring the section regarding short term rentals. In this case, NO loss is attributable to that property, so there is no passive activity loss to offset other passive income.
I will provide two illustrative cases. Case A is for someone who owns two normal rental properties (in other words, the rental periods exceed the 7 day threshold). Case B is for someone who has a timeshare (short-term) rental with a net loss and another rental (it doesn’t matter if it is short or long term) with a net profit.
Case A:
— Property 1 has $2000 income and $3000 expenses for a net loss of $1000
— Property 2 has $2000 income but only $1250 in expenses for a net income of $750
— Schedule E adds up the value for both properties, which results in an overall net loss of $250.
— Normally this passive activity loss would have to be held over until the sale of one or more properties, but if the filer has “active participation” in the management and upkeep of the properties, they can actually use up to $25,000 in passive activity losses to offset regular income (i.e., salary, interest income, etc.).
Case B:
— Let’s use the exact same numbers, but change Property 1 to a short term rental
— Property 1 has $2000 income and $3000 expenses for a net loss of $1000. However, because this is a short term rental, the loss is disallowed (zeroed out).
— Property 2 has $2000 income but only $1250 in expenses for a net income of $750
— Schedule E adds up the value for both properties, which results in an overall net income of $750.
Another twist:
There is an additional issue to consider with timeshares. Let’s say the rentals were all long-term. Remember in Case A when I said someone with active participation could use the net passive activity loss to offset regular income? If you rent out a timeshare, by definition you cannot be an active participant since the timeshare management company is in charge of the day-to-day operations and maintenance of the property. So you would be stuck with the passive activity loss carry-over.
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