Because of high income limits we have not been able to deduct any rental property losses for many years. The losses keep growing and are carried over every year. If we stop renting the property and turn it into our primary residence, would we be able to claim any of the carryover losses (provided our income was reduced and met the income limits)?
In short, if we stop renting the property before we reduce our income, do we lose all the carryover losses from prior years?
You can only deduct suspended passive-activity losses in 2 situations:
Against passive-activity income
When you dispose of the passive activity in a fully taxable transaction to an unrelated party
When you converted rental property into a personal home. The rental home had suspended passive-activity losses. So, 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.
You can only deduct suspended passive-activity losses in 2 situations:
Against passive-activity income
When you dispose of the passive activity in a fully taxable transaction to an unrelated party
When you converted rental property into a personal home. The rental home had suspended passive-activity losses. So, 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.
Thank you. Your answer was very helpful. As you suggest, since we have no other passive income, our suspended losses will have to remain suspended and carried forward until we sell the home. Another dumb question - If the gain on the sale of the home is not significant, I assume that we can only use that portion of the suspended losses that offsets the gain on the sale, and the rest of the suspended losses would now be truly lost.
A question unknown is never considered in that category.
Passive losses are generally deductible only to the extent of passive income. However, current and suspended losses are fully deductible if there is a “qualifying disposition.” Under IRC § 469(g), a “qualifying disposition” requires three criteria:
1. Disposition of an entire interest (or substantially all[1])
2. In a fully taxable event (where all gain/loss is realized and recognized).
3. To an unrelated party.
If these three tests are met, losses are fully deductible against non-passive income (unless the taxpayer has basis limitations). Thus, in the year of disposition, losses allocable to the passive activity may offset portfolio and other investment income or may become part of a net operating loss."
However if IRC Section 121 applies [home exclusion ] When you sell the property, you might qualify to exclude gain on the sale. If so, the sale isn't a fully taxable transaction. So, you still won't be able to use the suspended passive-activity losses.
I have a follow on question: I converted a rental property into a residence in 2010 and then back into a rental property in 2013. Can I start to use the suspended PAL's from 2010 again to deduct against active income under the 25K limitation?
Same situation but I have another rental property. Can I continue to deduct the carry forward losses on the one I converted?
@deankelby PAl's are offset only by passive income, carryovers remain suspended from the related property until [1.] you have passive income again. [2.] you sell in a qualified disposition.
No, the passive losses for that property you converted are suspended until one of the two.
Thanks but a follow-up....I still have passive income with the other rental so I thought I could continue to deduct the carry forwards from the converted property... Are you saying the passive income condition must specially relate to the converted property in order to to resume claiming the carry forward losses or I sell that converted property?
Generally, disallowed passive losses may be carried forward to the next tax year (Sec. 469(b)). However, if the activity continues to be passive in future years, losses are in effect carried forward until the underlying activity is disposed of (Sec. 469(g)).
<a href="http://www.irs.gov/publications/p925/ar02.html#en_US_2014_publink1000296629" rel="nofollow" target="_blank">http://www.irs.gov/publications/p925/ar02.html#en_US_2014_publink1000296629</a>
Okay, Rental Property - 2010 thru 2013 converted to personal use in 2013, sold property in 2014 where do I reflect this in TT so I can finally realize the deferred loss...no one knows...(2) In determining if I have to recapture any depreciation - if I sold the property and had to closing expenses - travel to the closing, real estate commissions, etc. The 1099 says 100K for example but after closing costs really ended up with 100K - 10K. Or is the recapture based on Gross Proceeds - Cost Basis.
You should contact TurboTax,
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OK >>>> 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.
I find form 8582 and end up bottom is $ 0.00. What do I need to do with this to continue carryover of loss???
You seem to have a good handle on this, so I hope you can clarify one point:
If I have suspended losses as described (due to previous passive loss carryovers and then converting the property from a rental to personal use), wouldn't I be able to use some or all of the suspended losses to offset ordinary income in a later year if my income drops to a level such that I meet the special allowance criteria (i.e. <$150k)?
Form 8582 Line 1c asks for "Prior years' unallowed losses" and nothing I see in the instructions would prevent you from filling that in even if the property has been converted. So my expectation would be to continue to fill out Form 8582 every year after conversion until I'm either able to use the previous years' passive loss OR I dispose of the property in a fully taxable transaction.
Does that all make sense, or am I missing something? Thanks!
@timbob99 wrote:
If I have suspended losses as described (due to previous passive loss carryovers and then converting the property from a rental to personal use), wouldn't I be able to use some or all of the suspended losses to offset ordinary income in a later year if my income drops to a level such that I meet the special allowance criteria (i.e. <$150k)?
Form 8582 Line 1c asks for "Prior years' unallowed losses" and nothing I see in the instructions would prevent you from filling that in even if the property has been converted. So my expectation would be to continue to fill out Form 8582 every year after conversion until I'm either able to use the previous years' passive loss OR I dispose of the property in a fully taxable transaction.
No. Line 1, Worksheet 1 and the $25,000 allowance is for rental real estate with Active Participation. You don't have Active Participation.
Clamendo: I have the same situation with a rental property converted to personal use in 2019 and sold in 2020. Did you figure out a solution to this problem last year? If so, how did you file? I cannot file Sched. E this year to activate PAL because I did not rent the property at all in 2020, but it is now a fully disposed of activity. Many thanks!
@golies Since you 'converted the rental property to personal use' in 2019, report the sale in 2020 as 'Sale of Business Property'. You are correct that you won't have a Schedule E, but you will need your Accumulated Depreciation amount from your 2019 return.
From Expert @Colleen D:
"If you did not rent it in 2020, there is no reason to enter it in the Rental section. You would enter your information in the Sale of Business Property section.
To this rental sale under the sale of a business property in TurboTax Online or Desktop, please follow these steps:
Thank you, Marilyn!
My next question is how to get TT to activate my suspended passive losses accumulated over the years on this property through 2019 from the 2019 Form 8582. I will owe capital gains on this property that can be offset somewhat by a deduction of those activated passive losses carried over. I know I can now activate those suspended losses because I have fully disposed of my interest to an unrelated party in this past passive activity and it is fully taxible. Where is that PAL amount even reported as a deduction on Form 4797 -- or do I report it somewhere else? It would normally be reported on Schedule E, but I can't file Schedule E.
If it was converted to a personal residence, you do NOT report it in the "Sale of Business Property" section. You report it as the "Sale of Home". Be sure to look for the question that asks if you ever used part of the house for a Home Office or rental, because that is where you will enter the depreciation.
As for the Passive Loss Carryover, one option is to fill out the rental section for Schedule E, say it was rented for 15 days, enter the Passive Loss Carryover, and enter zero for everything else (including don't enter assets). If you DON'T have any other Passive Income or Losses this year, the other option is to enter it as "Other Income" as a negative amount. However, I am unsure of the exact location of that in TurboTax.
@golies You will have to adjust the basis by hand by the amount of your 8582 losses. Keep your Form 8582 with your printed return.
Or, you could add your Rental Property again for Schedule E (with 0 days rented) to claim the Passive Loss Carryover.
Click this link for more info on Sold Rental Property with Passive Loss Carryover.
@MarilynG1 wrote:@golies You will have to adjust the basis
No, DON'T adjust the Basis. Passive Loss Carryovers are ORDINARY income/loss. If you adjust the Basis, that would be treating as a Capital income/loss.
@AmeliesUncle and @MarilynG1 :
I truly cannot thank you two enough for your advice on how to resolve this issue. Others, including tax experts I've consulted on-line and via friends, were vexed on how to report this situation. You've both been terrific and so responsive!
Based on your instructions, I've decided to take somewhat of a hybrid approach. I played around with various scenarios in TT. Here's what I'm planning to do:
1. Declare the sale of the home on Form 4797 -- Sales of Business Property
2. Declare the released multi-year PAL carryover as regular income and as a negative entry in "Other Income," which I found to be easily entered in the TT "Other and Miscellaneous Income" menu in the Income/Wages tab. This entry shows up on Line 8 of 1040 Schedule 1 verbatim.
3. I note in the instructions for Form 8582 (used to carry over PAL year to year), in the year of dispositioning a previous passive activity, if all of the carryover can be used (which it can in 2020) there is no need to file 8582 again in that year, so big relief there. No need to figure out how to generate a 2020 8582 in TT!
Like everyone, I want to report this obscure situation in the most legitimate way so that it raises no red flags with the IRS. For that reason, I decided not to file a Schedule E because TT does not allow me to use the form at all unless I erroneously declare 14 days rented at fair market value, which -- regardless of whether I declare 0 rental income and 0 expenses -- is untrue. I don't want to declare anything that is untrue even if the math is right. I'm also opting not to file the "Sale of Main Home" form and instead use 4797 because I think it appears more legitimate to dispose of this previous passive activity as an investment property now (it was for 10 of the 12 years I owned it) even if I lived in it for a time in 2020. Because my spouse and I do not qualify for the $500K exemption on capital gains and because both the Sale of Main Home form and the 4797 take into account reclaimed depreciation, the amount of capital gains both forms generate is exactly the same figure. I just think 4797 feels more legitimate and pairs well with the PAL I'm declaring on Schedule 1 when scrutinized. If the IRS looks back through my tax history, they're going to see a Schedule E declared in 2019 all the way back to 2010, when I first rented the property. 4797 feels like the most appropriate way to dispose of it.
Does my logic and decision making seem right to you two (creative) experts? Anything I'm missing here? Again: I can't thank you enough!
Mike (golies)
Thank you! I have a very similar tax situation and this information was very helpful. A difference in my situation is that my property had no rental activity since 2017 and in reviewing my TT tax returns I see that my PAL was reported properly until 2017 but in 2018 and 2019 the form was not filed due to no schedule E activity. Should the form have been generated in 2018 and 2019 even if it was only to show the 2017 PAL carry over amount? If so do you know how I should just file the form now for 2018 and 2019? I see no reason to amend the prior years return since the PAL has no tax impact in 2018 or 2019. I am reporting this PAL in 2020 now that the property has been sold. Thank you!
@jenbenroth wrote:Should the form have been generated in 2018 and 2019 even if it was only to show the 2017 PAL carry over amount?
If so do you know how I should just file the form now for 2018 and 2019? I see no reason to amend the prior years return since the PAL has no tax impact in 2018 or 2019.
Yes, Form 8582 should still have been filed for 2018 and 2019. The Instructions are quite clear on that point. However, TurboTax erroneously does not let you file it, forcing you to file an incomplete tax return.
As for as what to do now, I don't know.