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

[golies]

Clamendo:  I have the same situation with a rental property converted to personal use in 2019 and sold in 2020.  Did you figure out a solution to this problem last year?  If so, how did you file?  I cannot file Sched. E this year to activate PAL because I did not rent the property at all in 2020, but it is now a fully disposed of activity.  Many thanks!

[MarilynG1]

@golies Since you 'converted the rental property to personal use' in 2019, report the sale in 2020 as 'Sale of Business Property'.  You are correct that you won't have a Schedule E, but you will need your Accumulated Depreciation amount from your 2019 return.

From Expert @Colleen D:

"If you did not rent it in 2020, there is no reason to enter it in the Rental section. You would enter your information in the Sale of Business Property section.

To this rental sale under the sale of a business property in TurboTax Online or Desktop, please follow these steps:

1. Once you are in your tax return, click on the “Business" tab ("Federal Taxes" tab in Premier)
2. Next click on “Business Income and Expense" ("Wages and Income" tab in Premier)
3. Next click on “I’ll choose what I work on” (Jump to full list)
4. Scroll down the screen until to come to the section “Less Common Business Situations” ("Business Items" in Premier)
5. Choose “Sale of Business Property” and select “start’
6. Select "Sale of business or rental property that you haven't already reported"
7. Sale of Business or Rental Property - yes
8. Enter all the information about your Rental Property Sale here

1. Description - address of property
2. Date acquired - original acquisition date
3. Date sold - date of sale (should be on 1099-S)
4. Total sales price - total sales price (should be listed on 1099-S)
5. Cost of property (or tax basis) plus expenses of sales - original cost plus any capital improvements plus expenses of sales
6. Depreciation taken on this property - total depreciation taken property when rental (Please note the IRS will assume that you have taken the correct depreciation on your rental property while your property was available for rent regardless of whether you have actually take it or not)

1. What type of property is this? - select - Rental estate that I took depreciation on.
2. Installment sales - no if not on installment sale
3. 2 screens that show the summary of what you have entered for your property sale."

[golies]

Thank you, Marilyn!

My next question is how to get TT to activate my suspended passive losses accumulated over the years on this property through 2019 from the 2019 Form 8582.  I will owe capital gains on this property that can be offset somewhat by a deduction of those activated passive losses carried over.  I know I can now activate those suspended losses because I have fully disposed of my interest to an unrelated party in this past passive activity and it is fully taxible.  Where is that PAL amount even reported as a deduction on Form 4797 -- or do I report it somewhere else?  It would normally be reported on Schedule E, but I can't file Schedule E.

[AmeliesUncle]

If it was converted to a personal residence, you do NOT report it in the "Sale of Business Property" section.  You report it as the "Sale of Home".  Be sure to look for the question that asks if you ever used part of the house for a Home Office or rental, because that is where you will enter the depreciation.

As for the Passive Loss Carryover, one option is to fill out the rental section for Schedule E, say it was rented for 15 days, enter the Passive Loss Carryover, and enter zero for everything else (including don't enter assets).  If you DON'T have any other Passive Income or Losses this year, the other option is to enter it as "Other Income" as a negative amount.  However, I am unsure of the exact location of that in TurboTax.

[MarilynG1]

@golies  You will have to adjust the basis by hand by the amount of your 8582 losses. Keep your Form 8582 with your printed return.

Or, you could add your Rental Property again for Schedule E (with 0 days rented) to claim the Passive Loss Carryover. 

Click this link for more info on Sold Rental Property with Passive Loss Carryover. 

[AmeliesUncle]

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@MarilynG1 wrote:

@golies  You will have to adjust the basis

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No, DON'T adjust the Basis.  Passive Loss Carryovers are ORDINARY income/loss.  If you adjust the Basis, that would be treating as a Capital income/loss.

[golies]

@AmeliesUncle and @MarilynG1 :

I truly cannot thank you two enough for your advice on how to resolve this issue.  Others, including tax experts I've consulted on-line and via friends, were vexed on how to report this situation.  You've both been terrific and so responsive!  

Based on your instructions, I've decided to take somewhat of a hybrid approach.  I played around with various scenarios in TT.  Here's what I'm planning to do:

1.  Declare the sale of the home on Form 4797 -- Sales of Business Property

2.  Declare the released multi-year PAL carryover as regular income and as a negative entry in "Other Income," which I found  to be easily entered in the TT "Other and Miscellaneous Income" menu in the Income/Wages tab.  This entry shows up on Line 8 of 1040 Schedule 1 verbatim.

3.  I note in the instructions for Form 8582 (used to carry over PAL year to year), in the year of dispositioning a previous passive activity, if all of the carryover can be used (which it can in 2020) there is no need to file 8582 again in that year, so big relief there.  No need to figure out how to generate a 2020 8582 in TT!   

Like everyone, I want to report this obscure situation in the most legitimate way so that it raises no red flags with the IRS.  For that reason, I decided not to file a Schedule E because TT does not allow me to use the form at all unless I erroneously declare 14 days rented at fair market value, which -- regardless of whether I declare 0 rental income and 0 expenses -- is untrue.  I don't want to declare anything that is untrue even if the math is right.  I'm also opting not to file the "Sale of Main Home" form and instead use 4797 because I think it appears more legitimate to dispose of this previous passive activity as an investment property now (it was for 10 of the 12 years I owned it) even if I lived in it for a time in 2020.  Because my spouse and I do not qualify for the $500K exemption on capital gains and because both the Sale of Main Home form and the 4797 take into account reclaimed depreciation, the amount of capital gains both forms generate is exactly the same figure.  I just think 4797 feels more legitimate and pairs well with the PAL I'm declaring on Schedule 1 when scrutinized.  If the IRS looks back through my tax history, they're going to see a Schedule E declared in 2019 all the way back to 2010, when I first rented the property.  4797 feels like the most appropriate way to dispose of it.

Does my logic and decision making seem right to you two (creative) experts?  Anything I'm missing here?  Again:  I can't thank you enough!

Mike (golies)  

[MarilynG1]

@golies Sounds like you got it  handled!

[jenbenroth]

Thank you!  I have a very similar tax situation and this information was very helpful.  A difference in my situation is that my property had no rental activity since 2017 and in reviewing my TT tax returns I see that my PAL was reported properly until 2017 but in 2018 and 2019 the form was not filed due to no schedule E activity. Should the form have been generated in 2018 and 2019 even if it was only to show the 2017 PAL carry over amount? If so do you know how I should just file the form now for 2018 and 2019?  I see no reason to amend the prior years return since the PAL has no tax impact in 2018 or 2019.   I am reporting this PAL in 2020 now that the property has been sold.  Thank you!

[AmeliesUncle]

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@jenbenroth wrote:

Should the form have been generated in 2018 and 2019 even if it was only to show the 2017 PAL carry over amount?

If so do you know how I should just file the form now for 2018 and 2019?  I see no reason to amend the prior years return since the PAL has no tax impact in 2018 or 2019.  

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Yes, Form 8582 should still have been filed for 2018 and 2019.  The Instructions are quite clear on that point.  However, TurboTax erroneously does not let you file it, forcing you to file an incomplete tax return.

As for as what to do now, I don't know.

[maclayman]

I have suspended passive losses from a rental property.  Last year I did not rent the property as I put it up for sale and it was sold last year.  I want to claim the suspended passive losses now that the all my interest in the property has been sold to an unrelated party.  However, when I tell TurboTax that I did not rent the property in 2020, it removes Schedule E.  Schedule E is where I would have entered the suspended passive losses.  Under these circumstances, where do I enter past year suspended passive losses?  Or is there a way to suppress the depreciation calculation so I can continue to use Schedule E?

[golies]

Hi maclayman,

This is exactly my situation.  I am not using Schedule E to report the PAL, but rather Line 8 of 1040 Schedule 1 .  Here's what I'm doing (as expressed in my response earlier in this thread, which you should review in full):

I am going to:

1.  Declare the sale of the home on Form 4797 -- Sales of Business Property (not Schedule E, since it was not rented in 2020)

2.  Declare the released multi-year PAL carryover as regular income and as a negative entry in "Other Income," which I found  to be easily entered in the TT "Other and Miscellaneous Income" menu in the Income/Wages tab.  This entry shows up on Line 8 of 1040 Schedule 1 verbatim.

3.  I note in the instructions for Form 8582 (used to carry over PAL year to year), in the year of dispositioning a previous passive activity, if all of the carryover can be used (which it can in 2020) there is no need to file 8582 again in that year, so big relief there.  No need to figure out how to generate a 2020 8582 in TT!   

Good luck!

golies 

[golies]

@jenbenroth

Have you found a way around the incomplete tax return situation for 2018 and 2019 previously mentioned?  Is it possible to file an amended return simply to add a form that was missing in past years?  My read of the instructions for Form 8582 also suggests you should have filed it in 2018 and 2019.  Fortunately, though, if you are releasing the full amount of PAL carryover in 2020, you do not have to file the form for 2020.  That's also explicit in the 8582 instructions.

[Irene2805]

Passive activity losses can only be:

• deducted against passive income; or
• taken when you sell the property in a fully taxable transaction to an unrelated party.

Since you converted your rental property to personal use, you can continue to deduct the losses against any passive income you may have.  The balance continues to be carried forward until you sell the property in a fully taxable transaction.

[jenbenroth]

@golies   In regards to filing my 2018 and 2019 forms 8582, I ended up calling TurboTax.  I spoke with Kim and she said the best thing to do was NOT to amend since the forms would not change my taxes for those years.  Amending would most likely cause confusion.  She said to go ahead and file in 2020 and take the PAL and if they ask for the forms at a later date I could just send in the forms separately.  At that point I could just print a hard copy and mail it.  Although she thought it was unlikely they would request anything since they have record of the PAL from the 2017 filing and many tax programs do not file the form in this situation so I am not alone.

I want to thank you for your explanation on how to file the sale and PAL. It is very helpful.  I have also spent a lot of time trying several ways in TurboTax to get the correct way.  I will most likely file the same way you described as I am having a lot of problems trying to enter the PAL on Schedule E when it wasn’t a rental in 2020.  I also am unable to get my state return (California) to pick up the PAL when entering in Schedule E even though the property is in California and all activity on the rental was always in California and the passive loss was filed with California in prior years. @AmeliesUncle if I do enter the PAL in schedule E as you suggested is there something I need to do so that the PAL shows up on my state (California) return?  Also, thank you so much for all your posts on this topic.  They have been very helpful.