My wife and I (married filing jointly) purchased a condo in 2015 and used as primary residence for 2.5 years. In January 2018 this was converted to a rental and rented all of 2018 and 2019. During those 2 years the condo was depreciated by a total of $36,000. Also in each of those 2 years I had a $10,000 suspended loss on the rental ($20,000 total suspended loss). In early 2020 I sold the condo for a total gain of $80,000. Now I understand that $44,000 of that gain is not-taxable due to the sale of primary residence exemption. The $36,000 is taxable as depreciation recapture. This is where I am up to and agree with on my current filing with TT. Now I see the $36,000 gain on my Schedule D, which is flowing to line 7 on my 1040. However I also see the the carryover passive loss of $20,000 from Schedule 1 being carried over onto line 8 of my 1040 lowering my taxable income.
I thought that carryover rental passive loss should not lower depreciation recapture, so I am worried that I should not be getting this $20,000 subtraction from my taxable income. Everywhere that I've researched it states that carrover passive loss cannot offset depreciation recapture. Should this carryover passive rental loss by on my 1040 and thus lowering my taxable income?
