How do I enter prior year passive income losses exceeding 25k on a rental property I sold last year?

[Jennda500]

How do I enter prior year passive income losses exceeding 25k on a rental property I sold last year against capital gains from stock sales this year?

I sold my rental property last year and sustained losses of $32,300. I totaled up expenses and entered the $32,300 loss on my schedule E last year (2019 taxes) . This year I have income consisting of unemployment benefits and short term capital gains from the sale of stocks along with interest in the amount of 24k. How can I take advantage of this carryover to offset the $3-4K in taxes Turbo tax is showing I owe for 2020?

[Anonymous_]

Just as a general proposition, passive losses cannot be used to offset capital gains with the exception of the $25,000 special allowance (if you do not exceed the income thresholds).

Specifically, if you sold a rental property to an unrelated third party in a fully taxable transaction in 2019 at a loss, that loss might have created a net operating loss (NOL), but you would not have a passive activity loss carryover as a result of the sale.

You should use the worksheet at the IRS web site (link  below) to determine if you have an NOL and the amount.'

https://www.irs.gov/publications/p536#en_US_2019_publink1000177330

[Jennda500]

Oh? And what about this?

"But the good news is there is an exception: If you actively participate in a rental real estate activity, you can deduct up to $25,000 of your rental loss even though it’s passive. To actively participate means that you own at least 10% of the property, and you make major management decisions, such as approving new tenants, setting rental terms, approving improvements and so forth.

But this exception phases out as your income rises . If you have modified Adjusted Gross Income over $100,000, the $25,000 rental real estate exception decreases by $0.50 for every dollar over $100,000. The exception is completely phased out when your modified adjusted gross income reaches $150,000.

Example:

Phil and Mary have modified Adjusted Gross Income of $90,000 and a rental loss for the year of $21,000. They actively participated in the rental. Since their modified Adjusted Gross Income is below the  $100,000 phase-out threshold, their entire rental loss is deductible even though it is a passive loss. If their loss had risen to $28,000, they would have been limited to a deductible loss of $25,000 for the  year—the nondeductible balance of $3,000 is  a passive loss that is carried over to future years until the passive loss tax rules allow it to be deducted"

I've seen other members answered with yes as an active participant landlord-ie: I handle all business activities associated with my rental property you can deduct up to 25k a year on losses against other capital gains and carry over the rest forward?

[AmeliesUncle · Accepted solution]

You sold the property in 2019, so you were able to completely use ALL of the Passive Losses.  The $25,000 limit does not apply, they were all used.

When you used all of the losses on your 2019 tax return, did that create a 'net' negative income on your tax return?  In other words, did you have at least $32,000-ish of other income on your tax return for the loss to offset (which would have resulted in a 'net' positive amount of income), or was your other income less than $32,000-ish (which would have resulted in a 'net' negative amount of income)?

[Jennda500]

For 2019 my AGI showed a negative at: -$14,334

Filing Single with no dependents.

No W2 income

Rental Income: $5904

Savings Interest: $6610

Capital Gains from Sale of rental house: $11,364

Total: $23,878

Rental Property Losses: $32,308

For 2020 I have:

$18367 in Short Term Capital Gains

$5505 in Interest

$264 in Dividends

$27,962 in Pandemic Unemployment  Benefits.

[AmeliesUncle]

That means in 2019, you had a "Net Operating Loss".  TurboTax does not calculate NOLs, so you need to either manually calculate it or go to a tax professional.

By default, your 2019 NOL would be carried BACK to 2014, and you would amend your 2014 tax return to use it.  Or you could file an election to "waive the carryback", so it would be carried forward.  However, I don't think that TurboTax is capable of filing a "waive the carryback" election for 2019, so you would either need to manually add it and MAIL your tax return, or go to a tax professional.

It sounds like going to a tax professional would be a good idea.

[Jennda500]

Oh boy, I was hoping this wasn't going to be so complicated. :(

Why do I need to go back to my 2014 tax return?

Thank you for taking the time to answer my questions.