Investors & landlords

You have a fairly complicated transaction here so I will provide some guidance:

1. If you have suspended passive activity losses,  these losses will only be deductible when a taxpayer has a fully taxable transaction / disposition.
2. A gift of property is not a fully taxable disposition and as such, does not allow you to free up your suspended losses.
3. If the taxpayer transfers his interest in a passive activity by gift, any suspended passive losses generally increase the recipient's basis in the activity. This basis increase is deemed to occur immediately before the gift.
4. When property that is acquired by gift is ultimately disposed, the FMV limitation rule comes into play.
5. The donee's adjusted basis for computing loss on the sale is the lesser of carryover basis (which would include the suspended losses) from the donor, or FMV at the time of the gift.  In this case, if the property was sold at a loss any suspended losses added to the basis that exceeded the FMV at the time of the gift will be lost.
6. To eliminate the asset from your records, just record this as a sale with no gain or loss; selling price equal to your adjusted basis at the time of the gift.
7. What I am not sure of is how to avoid the suspended losses from being triggered in TT and to eliminate them from your return.  Hopefully one of the TT individuals following this post will be able to provide assistance in this area.