Yes, your first question. The gain from the sale of the property is considered passive. Gains on the sale, exchange, or other disposition of property used in an activity is characterized in the same way as the activity itself. If the activity is passive, the gain is passive. This also applies to an interest held through a pass-through entity, (e.g., a partnership or S corporation). Therefore, losses from passive activities can offset this income.
Yes, you can deduct your suspended losses from total profit when you sell your rental property, as long as you meet certain IRS rules.
- First, when selling your rental property, you must sell “substantially all” of the rental activity. For example, if you own a single rental property and sell it, you have disposed of your entire interest and can take the full deduction.
- You must trigger a tax event, meaning that you must sell your interest for value in a fully taxable transaction
- And you must sell your interest to an unrelated third party, no family or close affiliates
However, if you have more than one rental property, deducting your suspended losses depends on how your properties are structured.
You may also offset other PAL carryovers by following the steps below:
When you sell the property you must follow these steps:
- Apply current and suspended losses against your gains from this sale. Or, if you took a loss on this sale, you can add this loss to your total current and suspended losses from the activity
- If you have remaining gains from selling your passive activity after step one, you can apply any losses from any other passive activities.
- If you still have losses after step one, meaning that if your passive losses exceeded the sale value of your passive activity, you can first apply those losses to any other passive gains you had this year.
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