How is Rental Loss Treated After Selling My Primary Residence (Rented for One Year)?

[sgk00a]

Hi all — I’m looking for some clarity on how the IRS treats suspended rental losses in a specific situation.

Here’s my scenario:

• I sold my primary residence in California in 2024.

• I lived in it for 4 years, then rented it out for 1 year, and then sold it.

• I qualified for the Section 121 capital gains exclusion, so no gain was taxed except for $7K depreciation recapture (which I’m accounting for).

• During the 1 year I rented it, I reported a $10,000 rental loss on my tax return (Schedule E), mostly from depreciation and expenses.

• My AGI is over $150K, so the $10K passive loss is currently suspended due to the passive activity loss (PAL) rules.

My question is:

👉 Can I deduct the entire $10K rental loss in the year of sale, since I’ve disposed of the property in a fully taxable transaction? Or does the IRS not consider this a "disposition of a passive activity" since it was only rented for one year and mostly a primary residence?

Would love to hear from anyone who’s had a similar case or has insight into how this is treated. I’ve read the regs and looked at Form 8582, but it seems like this case sits in a bit of a gray area. Thanks in advance!

[AmyC]

Yes. Any accumulated losses go with the rental house when sold. Those losses will be added by the program. Long explanation but the net effect is reducing your gain by the accumulated loss.

IRS Publication 925 states that if you dispose of your entire interest in a rental property in a taxable transaction, all suspended passive losses associated with that property become fully deductible.