Passive loss carryover on property converted from rental to Primary residence then sold

[Y2K4JC]

We purchased a rental investment in 2003, converted it to a 2nd home in 2015 and Turbo Tax advised to keep track of these losses.  In 2016 it became our primary residence and in 2019 we sold the property.  When entering information in sale of a home, there is a place for the depreciation carryover from the prior rental designation, but nowhere to enter the passive loss carryovers.  Someone please help!!!

[ThomasM125]

If you are excluding your gain on sale of your house from taxable income because of the primary home sale exclusion, then the suspended losses are not deductible.

Otherwise, you can deduct the suspended losses but you must use the desktop version of TurboTax to enter that adjustment on your tax return.

You can read more about this here:

http://www.otcpas.com/advisor-blog/principal-residence-rental-property/

[Y2K4JC]

Hi Thomas,

Yes, I am excluding the gain, but according to the IRS formula I will still pay gains based on it being an investment property for dates after 2008; so approximately 7 years. TT online asked me for depreciation recapture, but not passive loss carryover.  I don’t see having one without the other.  Can you please provide an answer based on these new factors?  Thank you!

[KrisD15]

You should be able to apply the passive loss to the schedule E income.

Since you did not sell the rental property to a third party as a taxable event, the loss cannot be applied to the conversion to personal use. 

The depreciation recapture however, will need to be paid. 

Passive loss

[AmeliesUncle]

TurboTax is faulty in this scenario.

One work-around is to also enter it as a rental property ( you will need to say it was rented for at least 1 day, or possibly 15 days) and it will ask you for passive loss carryovers.  Be sure to indicate it was sold in the rental section.  Don't enter any income, expenses, or assets.

[jenbenroth]

Is this workaround still the best way to handle this?   In 2020 we sold our primary residence that is subject to depreciation recapture and I do not see where to enter the passive losses from when it was a rental.  The home was our primary residence from 2003-2006, then it was a rental from 2006-2017, then it was our primary residence again 2017-2020.   Thank you for your assistance!

[WendyN2]

Yes, that is still the only way - and this is true for most all (even the most "sophisticated) tax preparation programs. The guidance/rules (always subject to interpretation!) is to recognize these in the year you convert back as if you sold to yourself. AmeliesUncle's is still the most efficient way.

[dodahman]

Can you just adjust your cost basis in the home sale section by the amount of passive loss carryover you have for previous years?  

[jenbenroth]

No I would not do it that way.  These are taxed at different tax rates.  An adjustment to your basis would result in an impact to your capital gains taxes.  Your PAL offsets ordinary income at an ordinary tax rate. 

[dodahman]

So the only way to handle this is create a rental home (even though it wasn't rented that year) and then sell it to claim all the previous years' PAL?

[jenbenroth]

It's the best way I know of to do it and it is the way I ended up filing it in my 2020 tax return.  I agree it seems odd that you need to create a rental that had no income or expenses in 2020 in order to get release the PAL in 2020, but based on several conversations I had on the phone and in discussion boards with turbo tax it is the best way to do it.   Also doing it this way ensures the PAL offsets the correct type of income and it also makes it very clear that the rental property is the source of the PAL.  There is another discussion related to this topic where others and myself were asking the same types of questions that you are asking.  I put the link below.  It may be helpful to you to read through this discussion as well.  

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/re-okay-rental-proper...