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coach4life83
New Member

What is passive carryover loss?

 
6 Replies
tagteam
Level 15

What is passive carryover loss?

The following is directly from the mouth of the IRS.

 

Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. You can carry forward disallowed passive losses to the next taxable year.

 

Passive activities include trade or business activities in which you don't materially participate. You materially participate in an activity if you're involved in the operation of the activity on a regular, continuous, and substantial basis. In general, rental activities, including rental real estate activities, are also passive activities even if you do materially participate.

Portland2416
New Member

What is passive carryover loss?

with all these tax loss carryforwards from renting property for 13 years, how do I get those losses back when I sell the property (closing Monday)

Anonymous
Not applicable

What is passive carryover loss?

when you sell the property the losses are no longer treated as passive, so they flow thru in the year of sale

 

Carl
Level 15

What is passive carryover loss?

There are two basic (very basic) types of income an individual can receive. Passive income and non-passive income. Non-passive income is more accurately referred to as "earned income".

Non-Passive, or earned income is money that you are paid when you go out and "do" something on a recurring basis to actually "earn" it. This type of income is generally reported to you on a W-2, or on a 1099-MSIC in box 3. It also includes income that you "earn" through self-employment if you are "in business" for yourself.

Passive income is income you receive on a recurring basis that you don't actually "do" anything on a recurring basis to earn it.  One example of passive income is rental or royalty income. All you do is "sit there" and collect that income every month. You don't actually go out and "do" anything to earn that income.

 

Rental income is passive income. Therefore, any expenses incurred or deductions taken for rental property (including depreciation) are considered passive expenses. You can only deduct your passive expenses from passive income. Once those passive expenses gets your taxable passive into to zero, that's it. You can't deduct any remaining passive expenses. Instead, those unallowed passive expenses are carried over to the next year where they can be deducted *if* you have the passive income to deduct them from. But that's not going to happen with rental property. Especially if you have a mortgage on the property.

 

So with rental property, each passing year your passive carry over expenses will continue to grow. This is perfectly normal and expected.

 

Now in the tax year you sell the rental property, your passive expenses carried over are no longer restricted to the passive income. Additionally, in the tax year you sell the property you are required to recapture all prior depreciation taken on the property and pay taxes on it. That recaptured depreciation will be taxed anywhere from 0% to a maximum of 25%. Here's how it works in the tax year you sell the property.

 - First, all prior depreciation taken on the property is added to your sales price to determine your "adjusted" sales price. This commonly results in a taxable profit on the sale.

 - Next, your carried over passive expenses (losses) are deducted from any gain (profit) you realize on the sale, thus reducing the taxable amount of that gain.

 - If your taxable gain is reduced to zero and there are still any losses left, then those remaining losses are deducted from other "ordinary" income. (to include your W-2 income). But you can only deduct a maximum of $3000 a year from that other ordinary income.

 - If after deducting the maximum allowed from other ordinary income there is still more left over to deduct, the remaining is carried over to the next year where you can deduct up to a maximum of another $3000 from other ordinary income. This will continue each year until all of the losses are used up.

 

LudwigVan_fan
Level 8

What is passive carryover loss?

Passive loss and carryover losses are a very complicated area.  Basically, if you are involved in a defined "Passive" activity...or, an active activity that you don't participate in, those are passive activities.

 

When those activities result in a loss for the year, generally you can only deduct those losses against defined passive income.  If passive income isn't sufficient to absorb the loss, then the remaining loss is carried over to the next year, and so on.

 

For a better and complete explanation of passive income, passive losses, suspended passive losses, see IRS. Publication 925

 

https://www.irs.gov/pub/irs-pdf/p925.pdf

 

**Disclaimer: Effort has been made to offer correct information; but due to the discussion forum limitations, the poster disclaims any legal responsibility for the accuracy of the poster's response**
LudwigVan_fan
Level 8

What is passive carryover loss?

If you are making a complete disposition of that passive activity, please review the instructions for Form 8582 and look under dispositions.

Instructions for Form 8582

https://www.irs.gov/pub/irs-pdf/i8582.pdf

 

This is a copy and pasted example from the instructions for Form 8582

 

Example 1. Activity with overall
gain. You sell your entire interest in a
rental real estate activity in which you
actively participated for a gain of
$15,525. $7,300 of the gain is section
1231 gain reported on Form 4797,
Part I, and $8,225 is ordinary recapture
income reported on Form 4797, Part II.
On line 22 of Schedule E (Form 1040 or
1040-SR), you report a total loss of
$15,450, which includes a current year
$2,800 net loss and a $12,650 prior
year unallowed loss. You have an
overall gain from the disposition
($15,525 – $15,450 = $75).
Because you had an overall gain, you
make the following entries on
Worksheet 1. You enter the $15,525
gain on the disposition in column (a),
the current year loss of $2,800 in
column (b), and the prior year unallowed
loss of $12,650 in column (c).

 

For more information, review Pub 925 and look under dispositions.

 

https://www.irs.gov/pub/irs-pdf/p925.pdf

 

**Disclaimer: Effort has been made to offer correct information; but due to the discussion forum limitations, the poster disclaims any legal responsibility for the accuracy of the poster's response**
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