I have carry over losses on my rental property ~ will they ever expire?

[DianeW777]

It can be confusing so I will try to break it down in an easier explanation.  When a rental property is sold or disposed of, then the full unallowed losses are captured and incorporated into the tax return that year.  You no longer have a passive loss carryforward after 2019. 

What did occur in 2019, because your passive  losses were fully included, your overall income resulted in a net operating loss (NOL).  This is separate and distinct from the prior year passive losses. 2019 is an NOL year.

What is an NOL?

If your deductions for the year are more than your income for the year, you may have a net operating loss (NOL). An NOL year is the year in which an NOL occurs. You can use an NOL by deducting it from your income in another year or years.

If you filed your return with TurboTax in 2019, then you should have a NOL carryover worksheet as indicated. If you do not have that or cannot locate it, then you must complete the worksheet manually.  You can find the worksheet in IRS Publication 536-2019.  

Your math is understood but does not actually calculate the allowed NOL carryforward for 2020.  It must come from the worksheet so I have included the 2019 publication so that, if needed, you have the correct NOL carryforward worksheet for 2020.

If you would like more assistance with your return you can check out TurboTax Live to see if that's something you might be interested in.

[Kay9]

I sold a property in 2019 and it reduced my capital loss carryover amount by the gain in the sale.

fine sofar. But it also reduced my passive loss carryover amounts for both the sold condo (entire amount) and other rental condos by large amounts. Why? Shouldn't the deduction for the unsold condos be restricted to $25K?

[Critter-3]

Look again ... the loss on the sale is only part of the story ... the passive losses were also freed on the final Sch E which then in turn lowered your income and the freed up other passive losses.  You really need to print the entire return and follow the bread crumbs to see the trail ... I use different color highlighters  to match the like numbers to see the entire picture.  

[Kay9]

I did try to understand what was going on, but worksheet 4 is the one I can't figure out - how it takes the losses and uses the ratios to come up with unallowed losses. What is the calculation is goes thru?

[maroneymt]

Thanks for all the input.

This now focuses on one topic for me. 

All Schedule E’s (Supplemental Income and Loss) have up through 2019 directed me to Form 8582 {Passive Activity Loss Limitations), which due to income restrictions have limited all past losses to zero (0).

While these past limited losses have carried over, now in 2020 when the property was sold, it is my understanding, through Turbo Tax and this Forum, that these cumulative past losses that were limited now all become allowable.

Past losses were composed of yearly expenses and depreciation (Total Expenses) subtracted from Rental Income on Sch E.  These have been all losses.

In reporting the sale of my vacation rental house in 2020 on Form 4797 (sale of Business Property), Part I, Line 2(e) indicates “Depreciation allowed or allowable since acquisition”.  My question then becomes do I add up all my past years depreciation that was not accepted, or do I put zero (0) for Depreciation?

Thanks

[Kay9]

You have to add all the depreciation you've taken so far and enter that number (recap the depreciation used).

We had to use a CPA to do our taxes when we sold a vacation rental because TT couldn't create a NOL, and she used all the depreciation taken in previous years.

[AmyC]

@maroneymt  No. Two issues to address.

1. The accumulated losses that were not allowed are added to the basis of the house.

2. The depreciation allowed or allowable is the amount that was listed on your tax return each year. This total must be listed, whether you took it or not.

Basis = Cost of home + improvements while not a rental + expenses to sell + unallowed losses - depreciation allowable

[Dmarc]

Have 2 rental properties shown separately on Schedule E over the years. Sold 1 property this year at a gain. Turbo tax applied previous years loss carryover from this property to offset part of the gain. Turbo tax then took  part of the second properties loss carryover to offset the remaining gain on property 1. Does this make sense? I wouldn't think property 2's loss carryover could offset property 1's remaining gain.

[AmyC]

Yes, it is a question of terminology and application of tax law. You have passive activity losses, PAL, carried forward. The sold property A uses all of its PAL to try and eliminate gain. If there is still a gain, other PAL may be used. The other PAL could be from multiple sources, including property B. Any PAL not used will be carried forward.

Here is a case study if interested.

[Kay9]

Thank you Amy for the last two posts - you've clarified a couple questions I had in mind too.

One question which so far no one has been able to answer for me:

1) If I have capital loss carryovers as well as passive loss carryovers for multiple condos

    - when I sold condo for a gain, it reduced my capital loss carryover (agree)

    - but why did it also reduce my passive loss carryovers, not only for the sold condo but by large amounts for the other unsold condos too. I would think the unsold condos will just get the additional special allowancess upto 25K? 

    - In the 3801 forms (for CA), worksheet 4 has me puzzled by the way it calculates the unallowed loss amounts for the unsold condos. Can't understand the calculation of how the loss in column 1, ratio in column 2 yield the unallowed loss in column c

Help?!!!!

[AmeliesUncle]

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@maroneymt wrote:

these cumulative past losses that were limited now all become allowable.

  My question then becomes do I add up all my past years depreciation that was not accepted, or do I put zero (0) for Depreciation?

As you said, they all become allowable when you sold the home.  So you yes, you need to add up all of the depreciation over the years.

[AmeliesUncle]

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@Dmarc wrote:

I wouldn't think property 2's loss carryover could offset property 1's remaining gain.

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Passive losses can offset Passive gain.  So when you sold the house #1, you now had Passive gain for the carryover losses (from house #2) to be used against.

[AmeliesUncle]

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@Kay9 wrote:

    - but why did it also reduce my passive loss carryovers, not only for the sold condo but by large amounts for the other unsold condos too. I would think the unsold condos will just get the additional special allowancess upto 25K? 

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 Passive losses can offset Passive gain.  So when you sold the condo, you then had some Passive gain for the losses to be used against.

[Kay9]

it cut out the first part of my question which was if I have capital loss carryovers which are reduced by the capital gain selling the condo, why is the passive loss carryover amounts also reduced for all the condos.

[Dmarc]

Thank you, Amy. I had read the case study but wasn't sure it was applicable to individuals as the examples were for a PSC and CHC. I was also hung up on whether the 2 rental properties were considered a single activity and the sale of one property wouldn't be considered a disposition of an entire interest. I presume an election would have had to been made to group the 2 properties as 1 activity. Glad not the case here.