For the intent, if everything was allowed when a person filed Separately, there would be many situations that a family could save taxes by filing Separately. That was not the intent of Congress to have the option to file Separately, so they restrict a bunch of credits and deductions.
Yes, your the Passive Loss will carry to next year, when it can hopefully be used. Another option is to amend her return now and file Jointly. If your wife is agreeable to it, that has the potential to save additional taxes.
If your sold property has a "gain", yes, the losses from your other rental can be used to offset that. However, if you truly have a tax "loss" (which factors in the lowered Basis due to depreciation), no, there is no tax on the depreciation.
For example, let's say you bought the home for $100,000 and were able to claim $20,000 of depreciation. The "basis" for gain/loss is now $80,000.
- If you sell it for less than $80,000, there is NO tax, and can claim a deductible loss.
- If you were to sell it for $90,000, you would pay tax on $10,000 of the depreciation.
- If you were to sell it for $110,000, you would pay tax on the on the $20,000 of depreciation plus $10,000 of long-term capital gain.
