I have a few rental properties that were passive activities originally. However, I started to materially participate in these properties and claim myself as a real estate professional a couple of years ago with losses from all properties. These losses were reported as nonpassive loss and prior year passive loss from a long time ago were carried over (not allowed).
This year, one of the properties has net income. I expected all rental income and losses to be treated as nonpassive and none should go on Form 8582. Therefore, the prior year loss would continue to carry forward since I do not have any passive income from other sources. However, the one property that I had income this year flows on Form 8582 and it releases prior year loss on current year tax return.
Does anyone know why this would be the case? Is it correct that prior year PAL is allowed because I have income even though I am treated as real estate professional who materially participated in the activity? I did not think this is correct but I do not know how to fix it.
