Form 8582, which is used to calculate passive activity loss limitations.are carry forward until either the activity is disposed of, or passive gains arise to be offset.
Passive losses are generally deductible only to the extent of passive income. However, current and suspended losses are fully deductible if there is a “qualifying disposition.” Under IRC § 469(g), a “qualifying disposition” requires three criteria:
1. Disposition of an entire interest (or substantially all[1])
2. In a fully taxable event (where all gain/loss is realized and recognized).
3. To an unrelated party.
If these three tests are met, losses are fully deductible against non-passive income (unless the taxpayer has basis limitations). Thus, in the year of disposition, losses allocable to the passive activity may offset portfolio and other investment income or may become part of a net operating loss."
Depreciation recapture comes from the Taxpayer Relief Act of 1997, which imposed the higher tax rate for all IRC Section 1250 gains, which for means all rental property investments. When you sell the property, you must “recapture” any depreciation you've taken “allowed” (or could have taken “allowable”). ( The IRS will TAKE IT even if you had not claimed the depreciation in earlier years)
