What happens to the passive loss carryovers from our rental property if we change the property from rental to our primary home?

[jp29]

Because of high income limits we have not been able to deduct any rental property losses for many years.  The losses keep growing and are carried over every year.  If we stop renting the property and turn it into our primary residence, would we be able to claim any of the carryover losses (provided our income was reduced and met the income limits)?

In short, if we stop renting the property before we reduce our income, do we lose all the carryover losses from prior years?

[view2 · Accepted solution]

You can only deduct suspended passive-activity losses in 2 situations:

    Against passive-activity income

    When you dispose of the passive activity in a fully taxable transaction to an unrelated party

When you converted rental property into a personal home. The rental home had suspended passive-activity losses. So, you can continue to deduct the suspended passive-activity losses from other passive income. If you have no other passive income, the suspended losses remain suspended. Carry them forward until you sell the home in a fully taxable transaction.

[jp29]

Thank you.  Your answer was very helpful.  As you suggest, since we have no other passive income, our suspended losses will have to remain suspended and carried forward until we sell the home.  Another dumb question - If the gain on the sale of the home is not significant, I assume that we can only use that portion of the suspended losses that offsets the gain on the sale, and the rest of the suspended losses would now be truly lost.

[view2]

A question unknown is never considered in that category.

Passive losses are generally deductible only to the extent of passive income. However, current and suspended losses are fully deductible if there is a “qualifying disposition.” Under IRC § 469(g), a “qualifying disposition” requires three criteria:

1. Disposition of an entire interest (or substantially all[1])
2. In a fully taxable event (where all gain/loss is realized and recognized).
3. To an unrelated party.


If these three tests are met, losses are fully deductible against non-passive income (unless the taxpayer has basis limitations). Thus, in the year of disposition, losses allocable to the passive activity may offset portfolio and other investment income or may become part of a net operating loss."

However if IRC  Section 121 applies [home exclusion ] When you sell the property, you might qualify to exclude gain on the sale. If so, the sale isn't a fully taxable transaction. So, you still won't be able to use the suspended passive-activity losses.

[ScottM7]

I have a follow on question:  I converted a rental property into a residence in 2010 and then back into a rental property in 2013.  Can I start to use the suspended PAL's from 2010 again to deduct against active income under the 25K limitation?

[view2]

ScottM7 check under you question, answered there.

[deankelby]

Same situation but I have another rental property.   Can I continue to deduct the carry forward losses on the one I converted?

[view2]

@deankelby PAl's are  offset only by passive income, carryovers remain suspended from the related property until [1.] you have passive income again. [2.] you sell in a qualified disposition.
No, the passive losses for that property you converted are suspended until one of the two.

[deankelby]

Thanks but a follow-up....I still have passive income with the other rental so I thought I could continue to deduct the carry forwards from the converted property... Are you saying the passive income condition must specially relate to the converted property in order to to resume claiming the carry forward losses or I sell that converted property?

[view2]

Generally, disallowed passive losses may be carried forward to the next tax year (Sec. 469(b)). However, if the activity continues to be passive in future years, losses are in effect carried forward until the underlying activity is disposed of (Sec. 469(g)).

<a href="http://www.irs.gov/publications/p925/ar02.html#en_US_2014_publink1000296629" rel="nofollow" target="_blank">http://www.irs.gov/publications/p925/ar02.html#en_US_2014_publink1000296629</a>

[clamendo]

Okay, Rental Property - 2010 thru 2013 converted to personal use in 2013, sold property in 2014 where do I reflect this in TT so I can finally realize the deferred loss...no one knows...(2) In determining if I have to recapture any depreciation - if I sold the property and had to closing expenses - travel to the closing, real estate commissions, etc. The 1099 says 100K for example but after closing costs really ended up with 100K - 10K. Or is the recapture based on Gross Proceeds - Cost Basis.

[view2]

You should contact TurboTax,  

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In the "Ask your question" box, enter your question and click "Submit".

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[kainr2003]

OK >>>> If you have no other passive income, the suspended losses remain suspended. Carry them forward until you sell the home in a fully taxable transaction.

I find form 8582 and end up bottom is $ 0.00.  What do I need to do with this to continue carryover of loss???

[timbob99]

@view2 

You seem to have a good handle on this, so I hope you can clarify one point:

If I have suspended losses as described (due to previous passive loss carryovers and then converting the property from a rental to personal use), wouldn't I be able to use some or all of the suspended losses to offset ordinary income in a later year if my income drops to a level such that I meet the special allowance criteria (i.e. <$150k)?

Form 8582 Line 1c asks for "Prior years' unallowed losses" and nothing I see in the instructions would prevent you from filling that in even if the property has been converted. So my expectation would be to continue to fill out Form 8582 every year after conversion until I'm either able to use the previous years' passive loss OR I dispose of the property in a fully taxable transaction.

Does that all make sense, or am I missing something? Thanks!

[AmeliesUncle]

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@timbob99 wrote:

If I have suspended losses as described (due to previous passive loss carryovers and then converting the property from a rental to personal use), wouldn't I be able to use some or all of the suspended losses to offset ordinary income in a later year if my income drops to a level such that I meet the special allowance criteria (i.e. <$150k)?

Form 8582 Line 1c asks for "Prior years' unallowed losses" and nothing I see in the instructions would prevent you from filling that in even if the property has been converted. So my expectation would be to continue to fill out Form 8582 every year after conversion until I'm either able to use the previous years' passive loss OR I dispose of the property in a fully taxable transaction.

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No.  Line 1, Worksheet 1 and the $25,000 allowance is for rental real estate with Active Participation.  You don't have Active Participation.