Returning Member

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

Level 6

Investors & landlords

The suspended passive losses cannot be used to offset depreciation recapture.

But you can fully deduct these suspended passive losses when you sell your rental property in a qualifying disposition.

Under IRC § 469(g), a “qualifying disposition” requires three criteria:

1. Disposition of an entire interest (or substantially all)

2. In a fully taxable event (where all gain/loss is realized and recognized).

3. To an unrelated party.

In order to release the suspended losses, there must be a complete disposition to an unrelated party in which all gain or loss realized is recognized. In other words, the gain or loss must be recognized, but not necessarily included in gross income.


**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

View solution in original post

Returning Member

Investors & landlords

Yes, the sale is a qualify disposition.    Can those released passive losses be used to offset ordinary income then?
Level 6

Investors & landlords

Yes, they are deducted from ordinary income.
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
Returning Member

Investors & landlords

Thank a lot for explaining TurboTaxMinhT.
New Member

Investors & landlords

How/where can I see that TT is deducting this from ordinary income? Do I need to pay first?
New Member

Investors & landlords

I second that. Where do you enter the suspended PALs?
Returning Member

Investors & landlords

So the 2 out of last 5 yrs rule applies to me and so I can exclude gains - ie it is no longer a qualifying event - then does it mean the passive losses are now post forever? The sale is done or they can keep carrying forward to a future sale?
New Member

Investors & landlords

Can anyone elaborate on those first two conditions? 1. Disposition of an entire interest (or substantially all) 2. In a fully taxable event (where all gain/loss is realized and recognized). Does the entire interest has to dispose in the same tax year? In other words, if I have grouped my rental properties in my tax returns, do I have to sell them all in the same year to be able to fully deduct the suspended passive loss? And can those loss to offset some of the description recapture taxes, not just capital gain?
New Member

Investors & landlords

Is there a MAGI limit/phase out to this? I have a large suspended PAL this year (sod the rental property), am seeing a large "gain" because of asset depreciation every year, and cannot seem to offset the gain with my PAL (TT reports a PAL, but no tax benefit) -- this doesn't seem right: without (or with less) depreciation, landing PAL to near 0, and reducing "gain" tax seems to be lower? Depreciation increasing tax at rental property sales time for high MAGI cases?
New Member

Investors & landlords

I have a partnership that liquidated.  I have told TT that is is a final K-1 and that the partnership was dissolved.  But it is still carrying over all of the passive losses instead of releasing them. How to I get TT to release the passive losses for this final year?