Hi all — I’m looking for some clarity on how the IRS treats suspended rental losses in a specific situation.
Here’s my scenario:
I sold my primary residence in California in 2024.
I lived in it for 4 years, then rented it out for 1 year, and then sold it.
I qualified for the Section 121 capital gains exclusion, so no gain was taxed except for $7K depreciation recapture (which I’m accounting for).
During the 1 year I rented it, I reported a $10,000 rental loss on my tax return (Schedule E), mostly from depreciation and expenses.
My AGI is over $150K, so the $10K passive loss is currently suspended due to the passive activity loss (PAL) rules.
My question is:
👉 Can I deduct the entire $10K rental loss in the year of sale, since I’ve disposed of the property in a fully taxable transaction? Or does the IRS not consider this a "disposition of a passive activity" since it was only rented for one year and mostly a primary residence?
Would love to hear from anyone who’s had a similar case or has insight into how this is treated. I’ve read the regs and looked at Form 8582, but it seems like this case sits in a bit of a gray area. Thanks in advance!
