Transitioning from QBI carryover losses to passive activity losses

[fszaba1]

Hi.

I am helping my mom do her taxes, after her tax accountant of many years retired. Her situation is simple: Social Security income plus a small IRA RMD, which is much less than the standard deduction.

She has a single family vacation rental property, which usually has taken a loss of ~$1-3K for the last several years.  Her CPA had her listed as real estate professional for many years, as she passed the minimum time tests for primary involvement, etc, and carried her net operating losses forward as QBI losses on form 8995.  On her 2022 form, she had -$1996 loss listed on line 2, plus -$3028 carryover loss from prior years on line 3, and thus resulting in -$5024 Total QBI loss carryforward on line 16.

Now that she is slowing down, I do not believe that she meets the 750 hours of activity per year in her rental to be considered a real estate professional.  My question is how do I transition her out of that status, and into the status of "passive rental" activity without losing those cumulative QBI losses from previous years.  Is there a way to convert them into Passive Losses, so that they could be used to offset her passive rental income in the future if she were to have a year that generated positive income in the future?

Thank You,

Frank

[AnnetteB6]

The question about being a real estate professional is found in the very beginning of the Rental Income and Expenses section of TurboTax.  There are also questions about qualifying as a active participant in the Property Profile section of the rental property.  This also affects how losses may be claimed.

Take a look at the following TurboTax help article to learn more about the QBI deduction and rental income.  Your mom no longer being a real estate professional may not exclude her from claiming the QBI deduction and QBI carryover losses.

Can I get the QBI deduction on rental income?

QBI carryover losses cannot be converted to passive losses.  They would remain QBI losses until they can be applied to QBI income.