Can previous year losses on rental property with no other CA based income be used to reduce CA taxable capital gain on sale when property is sold?

California tax law generally conforms with federal law in this area and the deferred passive losses are recognized in full in the year of disposition:

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For both Federal and California purposes, current and suspended passive losses are fully deductible on the disposition of a passive activity; when a taxpayer sells his or her entire interest in a rental property, for instance. However, three criteria must be met before losses are deductible against non-passive income:

• It requires that the taxpayer dispose of an entire interest in a fully taxable transaction to an unrelated party.
• All gain realized must be recognized.
• Therefore, in an exchange of the taxpayer's interest, such as a 1031 exchange in which no gain or loss is recognized, suspended passive losses are not deductible.

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Tom Young

Thanks for the response. For Federal purposes I was able to use the passive losses against ordinary income, I am a non-resident of CA, from 2010 forward. Does that affect my ability to use the deferred passive losses in CA? There was no other CA based income that the passive losses could be used in the past.

Then that means your California suspended loss amount is larger than the federal amount. You need to keep track of it since none of it has ever been allowed. Everything else is as Tom describes.
Technically, if you had active participation in the Calif rental, then any special allowance allowed would generate a net operating loss each year that you could carry forward on Calif Form 3805V just like the suspended losses. So you would have two things to keep track of. I would skip that, especially since it seems you haven't been filing nonresident Calif returns like you were supposed to.

Actually I have been filing California returns.

Thanks Terry for your help. I filed CA returns but not the Form 3805V. Sounds like I should not bother with trying to apply net operating losses to the taxable sale proceeds.