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goodlife1010
Level 2

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

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Accepted Solutions
MinhT
Expert Alumni

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

The suspended passive losses cannot be used to offset depreciation recapture.

But you can fully deduct these suspended passive losses when you sell your rental property in a qualifying disposition.

Under IRC § 469(g), a “qualifying disposition” requires three criteria:

1. Disposition of an entire interest (or substantially all)

2. In a fully taxable event (where all gain/loss is realized and recognized).

3. To an unrelated party.

In order to release the suspended losses, there must be a complete disposition to an unrelated party in which all gain or loss realized is recognized. In other words, the gain or loss must be recognized, but not necessarily included in gross income.


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14 Replies
MinhT
Expert Alumni

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

The suspended passive losses cannot be used to offset depreciation recapture.

But you can fully deduct these suspended passive losses when you sell your rental property in a qualifying disposition.

Under IRC § 469(g), a “qualifying disposition” requires three criteria:

1. Disposition of an entire interest (or substantially all)

2. In a fully taxable event (where all gain/loss is realized and recognized).

3. To an unrelated party.

In order to release the suspended losses, there must be a complete disposition to an unrelated party in which all gain or loss realized is recognized. In other words, the gain or loss must be recognized, but not necessarily included in gross income.


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goodlife1010
Level 2

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

Yes, the sale is a qualify disposition.    Can those released passive losses be used to offset ordinary income then?
MinhT
Expert Alumni

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

Yes, they are deducted from ordinary income.
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goodlife1010
Level 2

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

Thank a lot for explaining TurboTaxMinhT.
Fiery-Dragon
New Member

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

How/where can I see that TT is deducting this from ordinary income? Do I need to pay first?
jesseo-gonzalez
New Member

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

I second that. Where do you enter the suspended PALs?
mainhoon
Level 2

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

So the 2 out of last 5 yrs rule applies to me and so I can exclude gains - ie it is no longer a qualifying event - then does it mean the passive losses are now post forever? The sale is done or they can keep carrying forward to a future sale?
leslei99
New Member

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

Can anyone elaborate on those first two conditions? 1. Disposition of an entire interest (or substantially all) 2. In a fully taxable event (where all gain/loss is realized and recognized). Does the entire interest has to dispose in the same tax year? In other words, if I have grouped my rental properties in my tax returns, do I have to sell them all in the same year to be able to fully deduct the suspended passive loss? And can those loss to offset some of the description recapture taxes, not just capital gain?
ptorab
Level 1

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

Is there a MAGI limit/phase out to this? I have a large suspended PAL this year (sod the rental property), am seeing a large "gain" because of asset depreciation every year, and cannot seem to offset the gain with my PAL (TT reports a PAL, but no tax benefit) -- this doesn't seem right: without (or with less) depreciation, landing PAL to near 0, and reducing "gain" tax seems to be lower? Depreciation increasing tax at rental property sales time for high MAGI cases?
sandymc
New Member

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

I have a partnership that liquidated.  I have told TT that is is a final K-1 and that the partnership was dissolved.  But it is still carrying over all of the passive losses instead of releasing them. How to I get TT to release the passive losses for this final year?
dauga
New Member

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

 

So if I have 8 years worth of Suspended Passive activity Losses  (PALS).  I have sold the house in 2020.

 

Where do I entered the total (last 8 years) of PALS. 

 

Can this be add/deducted from my cost basis?  Or is there another area in Turbo Tax I enter this?

 

Thanks

dennis m m
New Member

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

Client has sold a rental property with carryforward PAL of $70,000.  I realize he should be able to take these carryforward losses since he has fully disposed of the property.   His earned income is over $150,000.  How do I report that he get the $70,000 loss to offset this earned income.   Or is he still limited to $25,000 because of his high income?

DianeW777
Expert Alumni

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

No, this is not limited in the year of disposition or sale.  In this final year of the property the full suspended loss is used.

 

To record this passive loss carryforward, if it is not carried forward automatically in TurboTax follow these instructions.

  1. Click the Federal Taxes tab
  2. Click Wages & Income
  3. Scroll down to the Rental Properties and Royalties section
  4. Click the blue Show More in this section
  5. Click Start (or Revisit) next to Rental Properties and Royalties (Sch E)
  6. Click Yes
  7. Click Continue
  8. Click the blue Edit button next to the rental you'd like to add info for
  9. TurboTax CD/Download version: Continue until you reach the screen entitled Do any of these situations apply to this property
    • Scroll to the bottom and check the box next to I have passive activity real estate losses carried over from a prior year 
  10. TurboTax Online version: Scroll to Less Common Situations > Click Edit next to Carryovers, limitations, at risk info, etc.
  11. Click Continue
  12. You'll be able to input the carryover amounts on the next screen
bonzaikid
New Member

I sold a rental property that had suspended passive losses. Can those passive losses be used to offset the depreciation recapture tax?

it took me a while but what you have to do is go to Wages & Income - go to  Rental Properties and Royalties - you should see your current passive loss amount in the 2020 column - hit the update button - then go those all the questions until you get to Review your XXXX Rental summary screen - here is the trick - go to Property profile and hit update - go thru screen until you get to Do any of these situations apply to this property ? - check the sold box ( important ) 

 

then the passive loss amount will appear in line 8 of your  form 1040 with would be negative number - thus decreasing your AGI

 

I was wasting time looking for this passive loss in all the other form like schedule E and  Unrecap1250 etc 

 

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