1065 - tax basis capital and vacation home rental

Vacation home rental, used personally during the year in an LLC. When you record accumulated depreciation on the balance sheet, would you book the entire depreciation amount for the year, including the nondeductible personal depreciation portion and M-1 the personal depreciation? This doesn't seem right to me since then the personal depreciation will reduce the partners tax basis capital as a nondeductible expense. It doesn't seem right to me that non-allowable depreciation would reduce the partners' tax basis capital accounts. Is it more proper to record only the computed rental portion depreciation as accumulated depreciation on the balance sheet with no depreciation M-1?

What you might think about doing is posting the 280A carryovers, that carryover to 2021, as an asset on the 12/31/20 Balance Sheet. More or less a holding account, that would solve your problem, and with the future ramification T/B/D.

Now, for the portion of the expenses that are outright non-deductible, owing to personal use, those would in fact be ND and should be recorded as such.

Agreed on the other ND expenses. I understand those should flow like non-deductible expenses on the M-1 and reduce the partners' capital accounts.

I'm not understanding how this holding account would work. How would that come into play in the future? Do you think it's a bad idea to just book the rental portion of the depreciation calculated? I use profx and it can be coded in such a way to only allow the rental depreciation as a deduction, with no personal depreciation M-1.

I'm not understanding how this holding account would work. How would that come into play in the future?

It’s an asset, it carries a debit balance…a debit balance that sticks around (where it’s easy to remember and easy to track), as opposed to a debit balance that runs through the P&L, like an ND Expense or a Deductible Expense, that goes away when your year comes to a close.

So, let’s say you’ve done your personal vs. rental calc. In the rental column you have a loss and, let’s say, you’re in a situation where you can’t claim the loss at the partnership level b/c of 280A. Let’s say the loss is $69,601, partly from operating expenses (say $10,157) and partly from depreciation (say $59,444).

Debit Asset – 280A C/F – Operating - $10,157;
Debit Asset – 280A C/F – Depr - $59,444;
Credit an Expense Account (which is really a contra-Expense account) titled “Unallowed Expenses – 280A” - $69,601.

You see, now your Form 8825 will net to $0 (if that is the situation you’re in) and you have the 2 asset accounts to track your 280A carryforwards. Next year, if you have more excess loss that’s not allowed, you do the same thing [debit Assets, credit the (contra) Expense Account] and the Asset balances increase. If you can actually use some of the loss carryforward in 2021, then it’s a debit to an Expense account titled “Allowed Sec 280A Carryforward” and a credit to the Asset account.

If you dispose of the property and have a 280A carrforward sitting in the “280A C/F – Depr” account, which represents depreciation expense that was never allowed, then debit basis and credit off the 280A Depr asset. Or, if you want, on Schedule L, combine your A/D account (credit balance) with the “280A C/F – Depr” account (debit balance)…this will net out such that the final A/D presented is only what has heretofore been allowed. I don’t think that’s necessary, but whatever.

Basically, you’re just running your debits here, associated with the unallowed, excess 280A loss through the Balance Sheet instead of the P&L. This allows for easy tracking, for one thing. And for another thing, the unallowed 280A losses don’t get run through capital accounts, which solves your problem. And another thing is that the rules hold up the deductions at the entity level.

You run into a similar thing when you have an Uppter-tier partnership with an investment in a Lower-tier partnership and there’s a basis issue. Whatever loss that come through on the K1 from LT to UT, that gets suspended on UT’s tax return b/c of a lack of basis, just record the Loss as if it’s allowed. And then make a second entry for the lack of basis issue.

In other words, if UT gets a K1 from LT with a $100k loss, go ahead and debit Loss on UT’s books and credit the Investment account. If there is no basis, the Investment account will carry a negative $100k balance. Fine. Debit “Suspended Loss” asset for $100k and credit Loss for $100k. Do you see? The actual loss that gets deducted is $0. While you recorded it, you also eliminated it with the second entry. And, you end up with a negative $100k in the Investment account (credit balance) and a positive $100k (debit balance) in the “Suspended Loss” asset account. You net these 2 accounts together on Sch L, so that the “Investment” is properly presented as $0. Why do all this? Because now, on your books, you have recorded a suspended loss such that you’ll always be able to see/track it and you’ll never forget about it.

Similar situation with a Sec 277 issue.

You’re a CPA, so you know your debits and credits…so the above shouldn’t seem too nutty.

Wow. Thanks so much for all this. I do follow what you're saying now. Thank you!