I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?
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The suspended passive losses cannot be used to offset depreciation recapture.
But you can fully deduct these suspended passive losses when you sell your rental property in a qualifying disposition.
Under IRC § 469(g), a “qualifying disposition” requires three criteria:
1. Disposition of an entire interest (or substantially all)
2. In a fully taxable event (where all gain/loss is realized and recognized).
3. To an unrelated party.
In order to release the suspended losses, there must be a complete disposition to an unrelated party in which all gain or loss realized is recognized. In other words, the gain or loss must be recognized, but not necessarily included in gross income.
The suspended passive losses cannot be used to offset depreciation recapture.
But you can fully deduct these suspended passive losses when you sell your rental property in a qualifying disposition.
Under IRC § 469(g), a “qualifying disposition” requires three criteria:
1. Disposition of an entire interest (or substantially all)
2. In a fully taxable event (where all gain/loss is realized and recognized).
3. To an unrelated party.
In order to release the suspended losses, there must be a complete disposition to an unrelated party in which all gain or loss realized is recognized. In other words, the gain or loss must be recognized, but not necessarily included in gross income.
So if I have 8 years worth of Suspended Passive activity Losses (PALS). I have sold the house in 2020.
Where do I entered the total (last 8 years) of PALS.
Can this be add/deducted from my cost basis? Or is there another area in Turbo Tax I enter this?
Thanks
Client has sold a rental property with carryforward PAL of $70,000. I realize he should be able to take these carryforward losses since he has fully disposed of the property. His earned income is over $150,000. How do I report that he get the $70,000 loss to offset this earned income. Or is he still limited to $25,000 because of his high income?
No, this is not limited in the year of disposition or sale. In this final year of the property the full suspended loss is used.
To record this passive loss carryforward, if it is not carried forward automatically in TurboTax follow these instructions.
it took me a while but what you have to do is go to Wages & Income - go to Rental Properties and Royalties - you should see your current passive loss amount in the 2020 column - hit the update button - then go those all the questions until you get to Review your XXXX Rental summary screen - here is the trick - go to Property profile and hit update - go thru screen until you get to Do any of these situations apply to this property ? - check the sold box ( important )
then the passive loss amount will appear in line 8 of your form 1040 with would be negative number - thus decreasing your AGI
I was wasting time looking for this passive loss in all the other form like schedule E and Unrecap1250 etc
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