Real Estate Pro can not offset ordinary income with passive loss

[schumia]

Hi All,

 My wife is a real estate professional and I'm a W-2 earner.

 Having followed various threads on this forum, I believe i've properly checked the right boxes to recognize her "real estate Professional" status in Turbotax, I was expecting that any carry-over passive loss from rental activity can be used to offset my "active (W-2)" income. However, it appears that we still have passive activity losses that's "disallowed (see last screenshot from Schedule E Worksheet where it says $5844 is still disallowed)." 

Is there somewhere else I didn't do properly? 

[tagteam]

Per Section 469(c)(7), the election is applicable to each taxable year and would not impact suspended losses (i.e., PAL carryovers from a prior tax year).

[schumia]

Tks tagteam for your reply..

So the way I understand what you're saying "..Per Section 469(c)(7), the election is applicable to each taxable year...," this means prior years carry-over passive losses can not be used to offset this year's (2020) "active" income.

So the only way to offset "ordinary/active" income in a given year (say 2020) is to have "fresh" passive losses generate from passive activity (apartment rental in my case), and this passive loss needs to be large enough to first offset "rental income" and whatever that is leftover, can then be applied towards ordinary income? 

It's a mouthful to describe, but just want to get the concept right 😃 Thanks for your explanation.

[tagteam · Accepted solution]

@schumia I believe you stated it correctly and have the correct understanding of the scenario.

In short, if you are a real estate professional who materially participates in a given year, then you are not limited by the passive activity loss rules; you can use your losses to offset all other income.

In any year in which you are not a real estate professional who materially participates, your PALs may be suspended.