Vacation Rental with Suspended Passive Loss Sold for Gain

[HighlandHiker]

A vacation rental property was sold in 2020 and the gain was enough to release all suspended passive losses.  I'm transitioning to TT Home & Business this year from an accountant.  1040 filings prior to 2020 did not include passive losses from the vacation rental as QBI losses on 8998-A, and the safe harbor was never elected (based on my read the vacation rental didn't qualify as trade or business in any event).  Upon sale in 2020 the suspended losses were recorded as a Rental Real Estate Loss on Schedule 1 Line 5 but also recorded on Form 8995-A Schedule C Loss Netting and Carryforward as a QBI loss and included in the carryforward.  Now in 2023, I have QBI income and it would save money to preserve the QBI deduction which will be reduced because of the large carryforward recorded in 2020 upon sale.  Do I need to file an amended returns for 2020, 2021 and 2022 to correct the loss carryforward since the suspended passive loss was not QBI loss?  Or can I just create a separate schedule with the correct (much lower) QBI loss carryforward for my records and input that value into the 2022 Qualified Business Income Loss Carryovers Easy Step?  

Thanks for your thoughts.

[Mike9241]

the issue is aggregation.  was it proper to aggregate the vacation rental with your other rental activities?

In Eger v. United States, Egers claimed an election on their federal income tax returns that grouped their 33 rental properties, including the three Resort Properties, as a single rental real estate activity. The court determined that because these rentals were rented on average less then 7 days per customer, it did not meet the definition of a rental activity and was not eligible to be grouped with the other rental activities. Therefore, the losses from the resort properties were classified as passive.

therefore, based on the above if aggregation was improper, then I would file amended returns.

[HighlandHiker]

Thanks for the input!  I should have mentioned the vacation rental property is the only real estate investment, so there were no other properties to aggregate.  The QBI income in 2023 and some small QBI loss in prior years is related to a completely unrelated consulting business.   In this case do would you think amending the prior year returns is necessary to correct the suspended passive loss recognized on sale of the property that was recorded as a QBI loss carryforward in 2020?

[RobertB4444 · Accepted solution]

I would create the schedules and keep them in my records and just enter that number into the 2023 return.  Be prepared to submit those schedules to the IRS if you are questioned.

@HighlandHiker 

[Rick19744]

Attempting to provide guidance in a forum such as this, in which the end result is based on facts and circumstances, is difficult.

However, based on your limited facts, in which you indicate the rental activity did not rise to the level of a trade or business even with the safe harbor, then there are no QBI losses available for this activity.

As such, those should all be removed.