Are all passive carryover losses on a rental property can be used in the year of the sale ONLY to offset the income of the last year?

[ttlongtimeuser]

I did not have income in the year of sale. I paid for repairs to prepare the property for sale. So, in 2018 I had -$20,000 losses and $-160,000 carryover passive losses from the prior years.

After entering the date and sale prices (building and land) form 8582 worksheet 1 in column (d) calculated Overall Gain/Loss taking $-180,000 passive carryover losses into the consideration. 

However, form 4797 calculated gain by subtracting the adjusted basis of the property from the sale price and adding accumulated depreciation.

The basis of the property was not lowered by passive carryover losses.

Schedule D used that 4797 calculated gain to calculate a capital gain, without consideration of that $-180,000 carryover passive loss. 

So, if I had no income from the rental in the year of the sale, my carryover losses are useless? Do not benefit me at all?

[TaxGuyBill]

The suspended passive losses do not affect the gain/loss calculation.  The allowance of the suspended losses are separate.  They will show up on Schedule E, which will flow to Line 17 of Schedule 1.

Does Line 17 of Schedule 1 reflect the passive loss carryover?

[ttlongtimeuser]

I have 3 rental properties but sold only one this year. Correct. Schedule 1 line 17 is equal to  Sched.E line 26 which is a difference between total Income Sched E line 24 (all 3 properties) minus losses (from all 3 properties Sched E line 25).  Than, that Schedule 1 line 17 is used to calculate the positive adjustment to income on 1040 line 6 in order to calculate AGI.

I see your point..Schedule 1 line 17 = Capital Gain (Sched D line 16 Short term + Long term)  minus total losses from Sched E, including my carryover passive loses for the property I've sold) . I expected those passive carryover losses to increase the adjusted basis of rental which would lower the capital gain.    

However what puzzles me, Sched. 1 line 17 included the carried over passive losses on rentals I haven't sold yet.  That doesn't seem right.      

[Zbucklyo]

All your suspended passive losses are released upon sale of the rental, not just those for the property you sold, assuming you have sufficient gain from the sale.  And since passive losses are ordinary income equivalents (they would have been treated as a reduction in ordinary income if they hadn't been suspended), they are treated as a reduction in ordinary income when released.  They are not treated as a cost basis adjustment.

[TaxGuyBill]

You are right, only the suspended losses for the property that you sold are released.

However, the other passive losses can be used if you have passive income.  If you sold the property at a gain, you now have passive income that can use the passive losses from the other properties.

[ttlongtimeuser]

As I mentioned earlier, I have 3 rentals.
Rental 1 (not sold) has $50K carryover passive losses.
Rental 2 (not sold) has $0 carryover passive losses.
Rental 3 (sold in 2018) had $160K carryover losses).   
Schedule E line 26 equals $160K + $50K= $210K
 Schedule 1 line 17  equals $210,000
So, the question is, if I sell Rental 1 in 2019, I will not have any passive carryover losses to offset my ordinary income?   

And, one more question - what is 8582  worksheet 1 col. (d) is good for by showing "OVERALL GAIN or LOSS"?   I don't see that calculated value reflecting basis by taking into consideration carryover losses, used anywhere in the program.
Thank you all for helping me understand how it works.

[ttlongtimeuser]

As I mentioned earlier, I have 3 rentals.
Rental 1 (not sold) has $50K carryover passive losses.
Rental 2 (not sold) has $0 carryover passive losses.
Rental 3 (sold in 2018) had $160K carryover losses).   
Schedule E line 26 equals $160K + $50K= $210K
 Schedule 1 line 17  equals $210,000
So, the question is, if I sell Rental 1 in 2019, I will not have any passive carryover losses to offset my ordinary income?   

And, one more question - what is 8582  worksheet 1 col. (d) is good for by showing "OVERALL GAIN or LOSS"?   I don't see that calculated value reflecting basis by taking into consideration carryover losses, used anywhere in the program.
Thank you all for helping me understand how it works.

[Zbucklyo]

Does Schedule E Line 26 = 201K or -201K?.  Does Schedule 1 Line 17 equal -210K or 210K.  If it is negative, then it appears all the passive losses have been released upon the sale of Rental 3, and there will be no more passive loss carryovers. Check Form 8582, Worksheet 5 for any unallowed losses.  These are the losses that would be carried over to 2019.

[pk · Accepted solution]

Are you saying that you had suspended losses from rental on this property and this amount did not reduce your  gain?   Or is the  carry over passive losses from other sources or from another rental property?

Generally what happens is that -- your basis in the property is first reduced by accumulated depreciation -- this is your adjusted basis  at he time of disposal.

The sales proceeds are reduced by sales expenses ( sales commission, transfer taxes, sales prep expenses-- like your $20,000 ) and then reduced by suspended losses on the property ). This adjusted sales proceeds is used to compute gain/loss

Your gain/loss therefore is  Adjusted Sales Proceeds LESS Adjusted Basis.

Is this not what you are seeing. ?

[ttlongtimeuser]

PK, per my answer to TAXGUYBILL, the carryover passive loss on one of the rentals I've sold, DID NOT adjust the SALES PROCEEDS used to calculate capital gain (form 4797). Instead, Schedule 1 line 17 adjusted 1040 Adjusted Gross Income. However, Schedule D tax worksheet calculated tax based on the sales proceeds NOT-adjusted by carryover passive losses.

[pk]

Yep -- I stand corrected -- @Zbucklyo , @TaxGuyBill  @ttlongtimeuser

[wt61]

ttlongtimeuser,

I have a situation similar to what you described in your post when selling rental property. I have 2 rental properties, sold one in 2019. Have carryover passive losses for both properties.  Schedule 1 line 17 included the carryover passive losses from both rental properties. 

What was your final conclusion here, is turbo tax computing this situation correctly?

Thanks!!

[Carl]

I did not have income in the year of sale.

That in no ways means you did not sell at a gain. Upon closing the sale, the absolute first thing that was done with "ANY" proceeds from the sale, was to pay off "your" existing mortgage on the sale. That payoff amount is taxable income (initially) to you the seller. There is absolutely no deduction for the mortgage principle payoff - only the interest paid at the time of the payoff was deductible. That's it.

When you sell you are required by law to recapture depreciation (I know you know this already). The typical way of looking at it is so say that your cost basis is reduced by the depreciation amount. But "typical" doesn't work for everyone.

form 4797 calculated gain by subtracting the adjusted basis of the property from the sale price and adding accumulated depreciation.

That tells me that you total tax bracket for the tax year does not exceed 25%. Remember, recaptured depreciation is taxed anywhere from 0% to a maximum of 25%. A different calculation for that recaptured depreciation would have occurred if your AGI was to put you in a tax bracket above 25%, so as not to tax the recaptured depreciation at more than 25%. (I might be backwards on this, and the calculation performed for you by the program, was because your AGI *does* put you in a higher tax bracket.)

[Carl]

Just re-read the question. Let me try again.

In the year of sale (assuming you sold at a gain)

First, your gain is increased by the recapture of all prior depreciation.

Next, the taxable gain is reduced by your passive carry overs.

If those passive carry over's get your taxable sales gain to zero and you still have losses left over;

The remaining losses are then deducted from "other" ordinary income (such as W-2 income) up to a maximum of $3000. Then if you still have carry over losses left;

They are carried forward to the next year where you can deduct a maximum of $3000 from your other ordinary income. This will continue each year until all of your losses are "used up".

[tagteam]

I agree, generally, except that a loss from the sale of a rental property can actually generate a net operating loss (NOL), which must be calculated (TurboTax does not support the calculation of NOLs) and carried forward to subsequent tax years.