@cmg1
It appears there are two situations taking place and it does get confusing.
- Depreciation: The depreciation deduction for the vacation rental will be recaptured and reportable Section 1250 gain if and when the property is sold. It is considered as a deductible expense every year.
- Passive Loss: In a year when a rental is disposed of by sale the unallowed passive losses are fully deductible. They are not lost, therefore TurboTax knows exactly what to do with the sale if you answer the questions about sale in your tax return. You tell TurboTax that each asset is sold and for how much, as well as the expense of sale. The sale tells TurboTax that your full passive loss (current year and any prior year unallowed losses) is allowed to be deducted as well.
Both are used correctly and when they should be, depreciation each year of the rental; and passive losses completely used up in the year of sale.
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