Rental Carryover Loss on NJ Returns

[ihatetaxesjohn]

Last year I sold a rental property which I owned for about 10 years.

I sold it for roughly the same amount as I bought it.

I had accumulated a substantial amount of passive activity carryover loss for the property.

This seems to have been handled correctly on the federal return.

However, on the NJ return, it's showing a substantial profit (because of the depreciation). The loss doesn't seem to apply. Is this correct?

[rjs]

That sounds right. The following are from the Instructions for Form NJ-1040.

Page 7:
"No carryback or carryover of losses is allowed when reporting income on your NJ-1040."

Page 17:
"There is no distinction between active and passive losses for New Jersey purposes. You cannot carry back or carry forward such losses when reporting income on Form NJ-1040. You can deduct federal passive losses in full in the year incurred against any gain within the same category of income."

[ihatetaxesjohn]

Thanks... but since I haven't been able to write off any of the past losses in NJ because of the category of income (including the deprecation), why is the depreciation reducing my cost basis in NJ? I haven't realized the depreciation loss in NJ, so why is NJ recapturing it?

[AndyFromNJ]

Did you manage to find an answer to your question? I am in the same boat and really hate that I can not apply relatively large loss through turbo tax. Maybe one has to add it to net and simply put that number. I am really frustrated there is none to ask.

[ihatetaxesjohn]

Yes... I located a CPA (actually several mentioned it) who explained to me that there's case law in NJ (one is called Koch the other is Moroney, which is based on Koch - you can search for these) that allows you to write off the unused depreciation (but not any other remaining losses - which you'll have to carry). TurboTax Online WILL NOT handle it. I've escalated, they researched it, and basically said that unless it's in the filing instructions, they do not take case laws into account like this. TurboTax Online can't be used to file it.

However, the Desktop version can be used to edit the appropriate form. The software won't automatically do it, so you have to edit it manually. I was instructed to add a line item in NJ-DOP form listing the unused depreciation with a description (I used: Koch/Moroney Treatment of Unused Depr.) You should make sure you have all the previous returns to determine the depreciation. You'll also have to fix up the NJ-BUS form to fix the carryover of the remaining losses.

[ihatetaxesjohn]

Also, I was explicitly told by the "live experts" that Online did not and cannot handle this and to get a refund and use the Desktop (which, as. I mentioned, also didn't handle it automatically but at least allowed manual fixing). Trying to the get the refund for the Online version was a whole separate ordeal. 🙂

[AndyFromNJ]

Thank you very much. At least something to start with. This is incredible omission on TurboTax part. 

[merrilllunt]

I'm in the same boat as well. Sold a property this year, which due to depreciation shows a gain on Federal. However, I was not able to depreciate the property in NJ, and the depreciated value is being used to determine the "gain."

I've read the following, wrt rental homes ...

" if you’ve had non-deductible carry-forward losses, all will be deductible in the year of sale."

Can anyone explain / she light on this?

[ihatetaxesjohn]

NJ is special apparently. The losses cannot be written off except against the same income type, and disposition of assets is not rental income. However, because of this (https://caselaw.findlaw.com/nj-supe[product key removed]late-division/1211705.html) case law (which is based on another one called Koch), you are allowed to write off your previously unused depreciation (but only the the depreciation and not other losses like maintenance/taxes etc.).

You have to do this "manually" by editing a form so there's no way to do it in TT online. You have to use the Desktop version of the software. You can then edit NJ-DOP form to add this in, and adjust the remaining carryover of the other losses.

[merrilllunt]

Thank you!  This is one & only rental property sold so there will be no more gains to offset the carry over losses. Oh well.

A few more questions to get this complete  - appreciate any insight you may have ...I have the desk top version & would like to e-file.

• I entered the depreciated amount in NJ-DOP, and although I wrote "Koch/Moroney Treatment of Unused Depr." turbo tax changed it to "Disp Sch NJK-1 .... " Is this ok, or should I write something else?
• Not sure how to update my carry over losses - Should I manually changed the amount of "loss carryforward from 2020 on the NJ-BUS-2 schedule?  (line 5) or where do we change it?
• with these kinds of changes, any thoughts on whether e-file or mail file is a better choice?

Thank you again ! This thread has really been super helpful !!!

[ihatetaxesjohn]

Yes, unfortunately you'll have continued carry forward losses (you never know, maybe it'll be applicable in the future). TurboTax didn't change the description for me. I entered it as a new line (I left everything it populated and just added the new line with the description and depreciation). These are the steps I took (kept notes to remember in the future):

1. Added new Moronoy/Koch line to NJ-DOP with NJ depreciation from 2012-2021
2. Update the carryforward NJ-BUS-2 to less depreciation from 2012-2020
3. Update the 2021 losses on NJ-BUS-1 to remove 2021 year's depreciation

As long your numbers add up, TurboTax will "check" them and you can e-file (that's what I did).

[merrilllunt]

Thank you very much.  i spent hours trying to figure this out - really appreciate you sharing the information.

[nancy 2022]

I don't have any carryforward loss on the NJ Bus -2.  Do I have to reduce my depreciation basis adjustment for each year when the  alternative  adj reduced taxes because of that years loss?

[aljfromnj]

How does one calculate the "unused" depreciation(for Koch/Moroney)? Some years I lived in NJ, with regular job income, when the rental income was greater than expenses, but lower than depreciation plus expenses (which turned into carryover losses) and others I lived out of state with no NJ income, including the year in which I sold the investment property.

Thank you!

[RobertB4444 · Accepted solution]

Passive loss carryovers are on form 8582 in your federal return.  New Jersey doesn't allow passive loss carryovers and requires that you take losses against gains in the same category of income in the same year that they are incurred.  

So if you look at your federal form 8582 and see prior year losses that would be the amount that went unused in New Jersey.

@aljfromnj