See if this helps
Passive loses (such as rental) can only offset passive gains. Once those passive losses get your taxable passive gains to zero, that's it. Any excess loss is carried forward to the next year. So it is "very" common for rental property have ever increasing passive losses that are carried forward with each passing year. Those passive losses are not "realized" until the year you sell or otherwise dispose of the rental property. So when you sell the rental property your losses are taken in the year you sell as follows:
- First, the passive losses are deducted from the passive income.
- Any remaining losses are then deducted from your taxable gain on the sale of the rental property.
- If there are any remaining losses, then they are deducted from other ordinary income (such as W-2 earned income) up to a maximum allowed limit of $3,000 (or less, depending on the overall AGI).
Then if you "still" have remaining losses to deduct, they are carried over to the next year where they continue to be deducted from other ordinary income up to a maximum of $3,000. The carry over continues year to year until all losses have been claimed and realized.
