Suspended passive loss of a rental property converted to primary residence to offset another rental

[Frank666]

• Property A was rented with $X suspended passive loss, and then converted to primary residence
• Can I use $X passive loss from property A to offset the gain from Rental Property B even if property A is currently not a rental anymore? 
• If yes, how can I report it in tax return (Schedule E) since property A is not a rental property anymore?
• How do I keep the passive loss $X record in tax returns during the years when property A is not a rental?

Thanks!

[DianeW777 · Accepted solution]

Yes, you can carry the passive losses to other passive activity income properties.

• You can only deduct suspended passive-activity losses in two situations:  
  • Against passive-activity income (your other rental activity when there is a positive income)
  • When you dispose of the passive activity in a fully taxable transaction to an unrelated party (a future sale of property A)

When you converted rental property into a personal home.

The rental home had suspended passive-activity losses. You can continue to deduct the suspended passive activity losses from other passive income. If you have no other passive income, the suspended losses remain suspended. Carry them forward until you sell the home in a fully taxable transaction (noted above).

• IRS Publication 925

[Frank666]

Thank you for your reply and confirmation! Here are my follow-up questions:

• When I have no other positive rental income to offset, do I need to keep the suspended passive loss $X record/carryover in each year's tax return? If I do, where in the tax forms? since property A is not a rental anymore, I don't think I can include it in Schedule E, right?
• If I don't need to keep the suspended passive loss $X in each year's tax return, several years later (say 2030) when I have positive rental income to offset, do I just add $X carry over loss in the Schedule E only in that year 2030?  

Thanks!

[Frank666]

@DianeW777 could you please help answer my follow-up questions above? Thank you!

[DianeW777 · Accepted solution]

No, if you have no rental property/activity, then you keep the information until you fully dispose of the property through sale. It is not reported on the tax return since you do not have an active rental property.  

Yes, you will include it when and if you begin a rental activity and/or until you sell the property. Likewise you will need all depreciation on the building and any asset attached to the rental activity until each one is disposed of which will be a taxable event if sold.

What you do need to do is keep the 8582 and all tax return(s), including worksheets that relate to this property.  Those tax records do not carry a 'statute of limitations' as long as they remain attached to any future tax return.

@Frank666 

[Frank666]

Great! Thank you DianeW777 for your detailed explanations! 

[Pete7566]

I appreciate the clear answer to passive losses when converting a rental property to a personal property.  I have net losses shown on form 8582 in tax year 2023.  In 2024 I converted to personal property and will not file a schedule 3 as there was no income/loss and no depreciation calculated.  However in TurboTax when I seek to make this change my 8582 shows $0 on line 1b when I say I want no longer show the property on a Schedule E.  How to a proceed to file 8582 only to show the carryover net loss for future years.

[PatriciaV]

Once you indicate that a Rental Property was not rented all year. TurboTax deletes all forms and entries relating to that property. If you need to know the amount of carryover losses, look at Form 8582 from last year.

You'll need to keep all records of your business use of the asset, and of the amount of depreciation claimed for use when the property eventually sells. That includes carryover losses that you don't apply to another rental property.

If you have another Rental Property, you can add the carryover losses to that property from the "Situations" page by checking the box for "I have passive activity real estate losses carried over from a prior year."

@Pete7566

[Ken20251]

I have the same situation of converting rental property to personal use in 2020. Now that my income has dropped below $100k (phaseout), can I use the Special $25,000 allowance (Pub 925, p 5) this year to deduct my PAL from my non passive income, rather than waiting until I sell my property? If so, how do I enter the PAL in TurboTax?

[DianeW777]

No. The PAL is allowed only against passive income from your rental and will be used when your property is sold. It's very important to track all of your rental activity because you will need it when you sell if you hope to reduce gain. 

I would advise to continue to add this to your tax return in the rental section until you sell the property. The information below will show you how to add it to your tax return each year.

• Open your TurboTax Online or TurboTax Desktop return and go to your rental property > Select Edit beside it and review the Property Profile.
• When you are on the screen 'Do any of these situations apply to this property?' (Property Profile section), be sure to check the box under Carryovers or the box beside 'I have passive activity real estate losses carried over from a prior year.'

@Ken20251 

[Ken20251]

I'm a little confused by your reply, @DianeW777 . You did not specifically address the Special $25K Allowance (Pub 925, page 5) that I mentioned. I assume that you are saying that this Allowance is applicable only while I have an active rental property, and not after the rental property has been converted to personal use, right?

But in the second part of your reply you advise that I "continue to add this to your tax return" until I sell the property. If I add it to the tax return (by having a Schedule E for my property that has been converted to personal use but not sold), then TurboTax will generate a Form 8582, and then the PAL will be applied via the Special $25K Allowance if my income is low enough. So was the second part of your reply applicable only if I have another rental property?

BTW, I use TurboTax Desktop, and it had been carrying forward the PAL from year to year automatically, until I deleted the Schedule E when I converted the property to personal use in 2020.

[Mike9241]

if you have no rental real estate activities with active participation you don't get the special allowance. you need to keep copies of the return for the last year it was a rental so when you go to sell, you'll have the necessary information =  asset costs, accumulated depreciation, PAL carryover.