It depends.Turning a rental into your personal home is a “suspension event” for your tax benefits. You don’t lose them, but the timing of when you can use them will change. Here is the breakdown of what happens to those carryforward losses and how the 2026 sale will look.
The losses you’ve been carrying forward since 2017 are called Suspended Passive Activity Losses (PALs). When you convert a rental to personal use, these losses remain "frozen" or suspended. You cannot use them to offset your salary or other income while the house is a personal residence (unless you have other passive income from different rentals).
- These losses are fully "unlocked" only when you dispose of your entire interest in the property in a fully taxable transaction to an unrelated party in 2026.
- When you sell the house in 2026, all those carryforward losses from 2017–2024 will finally be released. They will first pay off any money you made from selling it. If there are any further losses, they can then pay off your other income.
Yes, you will need to pay capital gains on the property once it is sold.
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