Sold all Rental Properties. Left with a Carryover Loss. How to apply to income?

[deirdre99fsu]

We sold our last rental property in 2022 and had a carryover loss of $81k.  I see this year that entry exists as a a loss against QBI.  It is my undershtanding that once all real estate is sold, losses can be taken against ordinary income.  Is that the case still?  How do I do this in Turbotax?  Do I need to refile in 2022 or can I do this for 2023?

[MonikaK1]

You may wish to revisit your 2022 return to see whether the rental loss should have been reported as an ordinary loss and wasn't. See this discussion for more examples. Amend your 2022 if necessary before filing your 2023 return. 

See this tool for information about the availability of forms in TurboTax. As of now, Form 1040X for amended returns is projected to become available on February 14, 2024, subject to change.

There are times when you should amend your return and times when you shouldn't. Here are some common situations that call for an amendment:

• You realized you missed out on claiming a tax deduction or credit.
• You accidentally claimed the wrong tax filing status.
• You need to add or remove a dependent.
• You forgot to claim taxable income on your tax return.
• You realize you claimed an expense, deduction, or credit that you weren't eligible to claim.

See this article and this one for more information on filing an amended return with TurboTax.

Rental property is income-producing property and, if you're in the trade or business of renting real property, you report the loss on the sale of rental property on Form 4797, Sales of Business Property. Normally, you transfer the loss as an ordinary loss to line 4 of Schedule 1 and attach it to Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. 

If your rental activity doesn't rise to the level of a trade or business, but instead is held for investment or for use in a not-for-profit activity, the loss is a capital loss. Report the loss on Form 8949, Sales and Other Dispositions of Capital Assets in Part I (if the transaction is short term) or Part II (if the transaction is long term). 

If you have a tax loss from selling a rental property you’ve owned for more than a year, that loss will be a Section 1231 loss—which can be a good kind of loss to have.  Section 1231 losses can be used to reduce any type of income you may have—salary, bonus, self-employment income, capital gains, you name it.

See also this IRS FAQ and this TurboTax tips article. 

[deirdre99fsu]

What about the ongoing carryover losses from prior years?  Do those become actionable against ordinary income upon divestiture of the asset or do I need to draw those down in subsequent years?

[RobertB4444]

Unfortunately, this involves amending your 2022 return.  Your passive losses need to be taken in the same year as the complete disposition of the passive activity.  So you need to go back to 2022 and take all the losses then.

@deirdre99fsu