How to deduct carryover loss from previous year when rental property is sold

[newbiec]

I have a rental property that generated Passive Activity Loss (PAL) of 4k in 2017 (form 8582).  Since I'm not actively involved, it's unallowed loss and got carried over.

In 2018, I rented it for couple of month, then sold it.  The rental itself generate another PAL of $1k.  The sale generated gain of $4k (sale price - purchase price + depreciation - cost on form 4797).

I learned when filing 2018 tax return, I can deduct all carryover loss, but don't know how.   Is it on 8582 or 4797 or somewhere else?  Which line?  I tried using Worksheet 3 on 8582, it turned out disallowed.  Should I use worksheet 1 instead since this is related to sale of the property?  

Thanks for your help.

[Anonymous]

denote that you fully disposed of the property in a taxable disposition.  this changes the loss to non passive and you will not see this on form 8582.  box H on schedule E worksheet for this property needs to be checked

[Carl]

If the last occupant to move out of the house was a tenant, then you'll report the sale in the Rental & Royalty Income (SCH E) section of the program. Then everything is taken care of *for you* in the background, assuming you have been reporting things correctly with each passing year.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will ahve a selection on it for "I sold or otherwise disposed of this property in  2017". Select it. After you select the "I sold or otherwise disposed of this property in 2017" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically when working through an asset you select the option for "I stopped using this asset in 2017" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

[newbiec]

Thank you @Anonymous .  But Box H on Schedule E is "Passive Income from form K-1" (Part II on page 2), is that really what you meant?  There's no partnership in my case.

[newbiec]

Thank you @Carl .  I don't qualify "2 out of 5" - lived there couple of years, then rented afterwards until sold.  Maybe just "lived in 1 month out of 5 years".  In this case, I don't need to file 8582 at all?  Where can I find the "Sale of Assets/Depreciation" section?  couldn't find it on Schedule E.

[tagteam]

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@newbiec wrote:

Thank you @Anonymous .  But Box H on Schedule E is "Passive Income from form K-1" (Part II on page 2), is that really what you meant? 

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No. He is referring to Box H on the Schedule E Worksheet in TurboTax, not the actual Schedule E (see screenshot below). Unfortunately, if you are not using a desktop version of TurboTax, you cannot enter Forms Mode to view the worksheet.

[newbiec]

Thank you @tagteam  for the clarification.  I'm still using paper forms.

[Carl]

Apparently, you are not using the TurboTax program, or by following the guidance you wouldn't need to ask where to file the Sale of Assets/Depreciation section. Perhaps you're using paper forms or some other program. But if it's not the TurboTax program, I can't help you there.

[Critter]

This is nothing that you should be doing by hand on paper unless you know what you are doing and/or have read every IRS publication on the issue and the form instructions.   I highly recommend you seek professional assistance for this return.   

[tagteam]

I agree; this is not the kind of income tax return you should be attempting to prepare manually.

You can pick up a copy of TurboTax Premier for ~$80 at Amazon, which includes one  state return. It is well worth that price considering the time and aggravation it will save over manual preparation.