I sold my rental condo. Every year I had more depreciation than needed to claim no real estate income. Do I report all depreciation or only the amount used for no income?

[lori-edelman]

I purchased a condo in 2005 for $135K. I rented it out started in 2007 and sold in 2024 for $145K. Sales expenses were ~17K. All those years my expenses far outweighed my rental income and schedule E always had no rental income. Schedule E had ~$5k depreciation expense each year, however I only needed about $700 each year to zero out the income. In other words, I didn't need the full deprecation amount. The question is, can I add up ~$700 per year as the amount used for deprecation instead of the $5K since the whole depreciation amount wasn't needed? TT is adding up all of those years of depreciation and it's causing me to owe $15k. I have already lost so much on this property in equity, expenses, etc. and now this is icing on the cake.

[AmyC]

There are two parts to this equation. 

First: Depreciation issue - You have what you paid minus all the depreciation allowed or allowable equals your basis. Second: Unused expenses carry over

You have the sales proceeds. The sale minus the basis PLUS unallowed  (carried over) losses over the years equals your gain. Check your old Sch E forms to see if you had carryover losses. If you changed software to do your taxes, you may have forgotten to add it in and it got lost along the way.

Make sure that years with losses are being accounted for and added in to reduce your gain. 

[lori-edelman]

Thank you, everything you described makes sense.

I don't believe that I carried over any losses because I never needed to in order to claim $0 real estate income.

I am looking at schedule E as well as the schedule E worksheet and Form 8582. Could you please be more specific about where on Schedule E (or elsewhere) I need to look for unallowed carry over losses? What is the specific line item? I see a few unallowed loss lines in Form 8582 but not in Schedule E and don't know which one to use. Do I go through all prior returns since I turned the condo into a rental property and add up those carryover losses since I never claimed those carryover losses? 

Thanks again in advance!!

[AmyC]

Anytime your sch E has a number on line 22, look for form 8582.  If you had zero income each year because losses exceed income, then it seems like you should have a stack of losses to add up.

Form 8582 part I is for the current year. If you have all your years, you can look there.

If you don't have them all, start digging. You could have several items, for example:

Look at form 8582, page 2, part VII. You see a line item there. The first column shows name of activity and the second column shows form or schedule.

If you have first column, second column, last column:

• Rental, schedule E, unallowed loss - put that number in your Sch E regular tax carryover box
• Rental, Form 6251  (the AMT form), unallowed loss - that would be the AMT number to use.
• Rental, Form 8995, unallowed loss - that is the number for QBI carryover

Once you find all the items that should be carried over, they need to be added into the program. Rentals can be treated different ways, you may want to reference the instructions for the form to match up with what you have.

Reference: About Form 8582, Passive Activity Loss Limitations.