California tax law generally conforms with federal law in this area and the deferred passive losses are recognized in full in the year of disposition:
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For both Federal and California purposes, current and suspended passive
losses are fully deductible on the disposition of a passive activity;
when a taxpayer sells his or her entire interest in a rental property,
for instance. However, three criteria must be met before losses are
deductible against non-passive income:
- It requires that the taxpayer dispose of an entire interest in a fully taxable transaction to an unrelated party.
- All gain realized must be recognized.
- Therefore, in an exchange of the taxpayer's interest, such as a 1031
exchange in which no gain or loss is recognized, suspended passive
losses are not deductible.
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Tom Young
