How do carryover losses offset the capital gain on a rental property? Gain of $130k with losses of $100k but taxes look to be ~$20k.

[DET]

The $130k gain takes into account the depreciation taken. The difference in sale price vs. purchase price is $80k, and there was ~$76k of depreciation. The net of those with selling expenses is ~$130k.

[Ashby]

Your carryover losses are applied, in full, in the year you sell the property. After being calculated on Schedule E, you get to report that amount on Schedule 1, Line 17. This flows to your 1040, Line 6 as a reduction of your income.

But, when reporting the sale on Form 4797, you have to add the depreciation taken over the years to the sales price. So, the gain you thought to be $130K is increased by the amount of depreciation taken.

This add-back of the depreciation is what causes the tax to be around $20k.

[DET]

The $130k gain already takes into account the depreciation taken. The difference in sale price vs. purchase price is $80k, and there was ~$76k of depreciation. The net of those with selling expenses is ~$130k. Shouldn't the carryover losses then offset that $130k resulting in less than $20k of tax?

[Ashby]

So, when you look at your return, do you see the losses being reported at the bottom of Schedule E and on Schedule 1, Line 17? If so, how much?

[DET]

Yes, Schedule E shows losses of -$100k, and Schedule 1, Line 17 also shows the same amount.

[Ashby]

Ok, good. Now what number shows in Form 4797, Part 1, Line 2, Box G?

[DET]

There is nothing in Line 2 at all. Line 6 shows the gain, but there isn't anything in Line 2 a-g.

[DET]

Any thoughts on this? Please let me know.

I've also tried to call, but the system prompts hung up on me several times.