I have carry over losses on my rental property ~ will they ever expire?

[k9nkid]

I have carry forward losses on my rental properties for the last few years ~ will they expire or will they always be there.  Do I have a limited time to use them or say will they still be usable if I sale the property in say 10 years?

[Belling · Accepted solution]

Rental property passive losses that are not deductible right away are called suspended passive losses. These deductions are not lost forever. Rather, they are carried forward indefinitely until either of two things happen:

• you have rental income (or other passive income) you can deduct them against, or
• you dispose of your entire interest in the property.

The tax rules provide that you may deduct your suspended passive losses from the profit you earn when you sell your rental property. To take this deduction, you must sell "substantially all" of your rental activity. If you own only one rental property and sell it, then you can take the deduction because that property is your entire rental activity. The same holds trule if you own several properties and treat them each as separate activities for tax purposes. However, many landlords with multiple properties elect to combine them as one activity for tax purposes. In this event, if you own several rental properties and only sell one, you can't take the deduction because you won't have sold "substantially all" of your interest in your rental activity.

In addition, you must sell the property to an unrelated party—that is, a person other than your spouse, brothers, sisters, ancestors (parents, grandparents), lineal descendants (children, grandchildren), or a corporation or partnership in which you own more than 50%. And, the sale must be a taxable event—that is you must recognize income or loss for tax purposes. This means tax-deferred Section 1031 exchanges don’t count, except to the extent you recognize any taxable income. (I.R.C. §469(g).)

[k9nkid]

if I have 3 properties and I report them separately on a sch e is that considered keeping them separate activity

[Carl]

Yes. If you have one reported in Column A, another in B and a third in C, they are separate activities. The IRS refers to that as separate "like kind" activities.

[Carl]

Hey, just realized I was notified today (oct 😎 of a waiting response to a message from 2 years ago. @TurboTaxGabi the IT folks playing with the servers again? 🙂

[kevinr]

rental property converted to llc, with related party, PAL loss carryforward on 1040 $160k, do I lose the carryforward loss or does it continue to carryforward until llc is disposed?

[Carl]

"rental property converted to llc"
What kind of LLC? It matters. Single member LLC? Or multi-member LLC, which is the same as a partnership, basically?

[climbsalot]

I have the same issue with carry forward losses going into a multi-member LLC.   I can't find where in TurboTax to report that carry forward loss from the property prior to it being moved into an LLC.

[Carl]

We now have 3 different people in this thread and it *will* lead to confusion and incorrect information being given. Please start a new thread with your specific problem/issue so that *YOUR* specific situation can be property addressed.

[gll]

So after one sells the property, if there are still net unused losses remaining, what can you do with them if you only have W-2 earnings from employment?

[Carl]

It is very *uncommon* for rental property to *not* show ever increasing losses on paper as the years pass; especially if there's a mortgage on the property. On your tax return the carry over losses are shown on IRS Form 8582 and you'll see that loss amount increase with each passing year.

When you combine mortgage interest, rental dwelling insurance, property taxes and the depreciation you're required to take by law, that alone can quite easily exceed your rental income for the year. Add to that the other rental expenses and that makes it rare for rental property to ever show an actual profit on paper. Therefore the total losses accumulate and just continue to increase with each passing year since you are only allowed to claim your passive losses against passive income.

Now in the tax year you sell the property you will be allowed to "realize" all those losses first against any taxable gain you may get from the sale. If it gets your taxable gain to zero and you still have more loss to deduct, then you're allowed to claim it against other "ordinary" income - such as any W-2 income you may have that year.

Depending on your total AGI your loss for the year could be limited to as little as $3000. But that's still not a problem because the remaining loss is just carried over to the next year where the same rules apply.

Now in the tax year you sell the rental, if you report the sale in the rentals & royalty income section of the program, it will take care of all this for you automatically in the background. However, if your AGI is high enough to actually limit your "allowed" loss that year, the program will not always automatically carry that over to next year's taxes. So that's why once your tax return is accepted by the IRS, you want to print out a copy of *every* *thing* and not just the forms needed for filing or the forms to "keep for your records".

The IRS Form 8582 will show your loss amount that was not allowed that year (if any) and you "may" have to manually claim/enter that amount in the program when you do your taxes next year.

[gll]

Thank you so much for this info. I have been searching for a while and am happy to hear that net passive losses after the sale of the rental property can be used against W-2 income, since that is the only other income we have. Limited as it is, at least you can carry it forward and continue using it against ordinary income. Thanks again!

[cellis]

How are the passive losses entered into Turbotax (e.g. added to property cost base, etc.)?

[JulieS]

When you enter the rental into Turbo Tax:

1. Look for the screen that says, Do Any of These Situations Apply to This Property? at the top. It is in the Property Profile section.
2. Scroll to the bottom of the list and find Carryovers.
3. Check the box next to I have passive activity real estate losses carried over from a prior year.
4. Click Continue and enter your carryover amounts. 

You can use the losses in a year when you have passive income, or in the year that you dispose of the property. 

[cellis]

Thanks JulieS. I didn't rent the property in 2019 as I was selling it. TT seems not to want to include the property going through this process in the "Rental Income" section.