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Level 2

Question

Real Estate Passive Activity Loss Carry Forward $25k Limitation -- Don't Want to Use It

Forum|Forum|4 years ago
January 13, 2022
11 replies
126 views

I have loss carry forwards and am classified as an Active Participant and MAGI below $100k so I am eligible for $25k of the loss carry forward to offset ordinary income in 2020. I filed my taxes and TT used the $25k but it then put me in a loss for AGI. I want to amend my return and use only a portion or even none of the $25k to manage my AGI to equal my standard deduction so my taxable income is $0. I guess the question is do I have to use the entire $25k loss carry forward? Can I just defer all or a portion of it to later years and then how do I amend this in TurboTax?

M-MTax

Level 15

The $25k is NOT carried forward. You don't carry forward the part you don't use.

maglib

Level 11

@KGSHU See response from @Hal AL here https://ttlc.intuit.com/community/taxes/discussion/the-simple-answer-is-no-but-you-must-report-the-capita/01/754674#M836201

Don't forget though about the Cares Act. The CARES Act (2020) temporarily created a special five-year tax carryback allowance and eliminated the 80% limit on net operating losses for 2018, 2019, and 2020. The provisions of this law ended on December 31, 2020. So you may want to amend prior year returns if that gets you a better outcome.

**I don't work for TT. Just trying to help. All the best. . ***Say "Thanks" by marking as BEST ANSWER and clicking the thumb icon in a post and that I solved your question. **Mark the post that answers your question by clicking on "Mark as Best Answer" I am NOT an expert and you should confirm with a tax expert.

M-MTax

Level 15

??????

That link is about a capital loss carry forward. THIS is about the $25k special allowance.

If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that’s disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income.

Critter-3

Level 15

The $25K passive loss MUST be used in full if you qualify ... you cannot choose to not take it even if it puts you into an NOL situation. You can choose to only carry the NOL forward otherwise it must be carried back. These rules are not flexible or up for discussion.

KGSHUAuthor

Level 2

Thanks everyone for the replies. Let me try to be more specific. Assume I have $100k of passive activity loss carryforwards available and I'm an Active RE participant and my MAGI is below $100k. I know I am eligible to offset up to $25k through the Special Allowance against nonpassive income. My issue is that I don't need to use $25k of my loss carryforwards because it puts me into a negative taxable income position. Assume I only need to use $10k of my $100k carryforward. I don't see a way to do that within TurboTax. It just takes the entire $25k Special Allowance amount and then reduces my $100k loss carryforward down to $75k. In my mind it is just a $15k waste ($25k that was used vs $10 that I need) of my loss carryforward.

Help?

ThomasM125

Level 15

If you have a loss carryover, you must use it in the current year if you are able to. I don't know your complete tax situation so I can't comment on whether the loss is being applied properly, but I assume it is and if so, you can't apply it otherwise.

Also, if you are ending up with a net operating loss then that can be carried over to next year, so you are not losing any loss carryovers.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

SmartandConfused

Level 2

I am having the same issue. Could any of the commenters here specifically reference cases in tax court that have gone against this without getting into PAL and material participation? I know that is the primary issue here, but hear me out. Here is an example scenario:

Steve worked nearly full time (he couldn't work full-time because school starts at 8am and lets out at 3pm plus he is a single parent whose child has autism and he has to take her to ST, OT, and PT appointments 3 times a week) all year and made $25,000 in W-2 wages. No one can claim him as a dependent. He is a US Citizen, and stayed in the country all year. He is filing head of household in year 2022. He rents out 2 properties in Illinois that he kept and rented out to avoid negative equity during a tumultuous time in the past (Covid19/having to move for better medical care and family support). His rentals produced a $35,000 loss due to interest, repairs that were eligible for immediate expense as well as Section 179 deductions from extensive repairs after his previous tenant. He had no other income or losses. The special allowance is actually HURTING Steve (a low income, indebted taxpayer) by 1. Not giving him true use of the rental losses and 2. Not letting him have the benefit of his standard deduction. Here are the numbers:

$25,000-wages

($25,000) rental loss using active participation rules to offset active income

$0 AGI

($19,400) Standard Deduction - ZERO TAX BENEFIT BECAUSE HIS SPECIAL ALLOWANCE WAS OVERSTATED PER FORM 8582

In this scenario, you can see that Steve is losing out on the ability to use his standard deduction OR his rental losses. You can look at it either way. Ideally, taxpayer would want to limit his special allowance for rental income passive losses to the difference between the standard deduction and the maximum allowance of $25,000. This would look like the following:

$25,000 - Wages

($5,600) - Special Allowance for Rental Losses

$19,400 - AGI

($19,400) Standard Deduction

$0 Taxable Income

The intent for the special allowance is to provide a tax incentive for small-time, "main street" investors to participate in real estate and help provide rental housing, while still curbing tax shelter abuses by high-income individuals. The poster's question is asking why he can't reduce this loss so that he is not losing the benefit of the deductions. He doesn't fall into a category that is specifically excluded from the standard deduction like MFS or being claimed as a dependent. Does Steve not have the right to a standard deduction? Should Steve lose the entire amount of his investment into the rental properties and not be able to take the amounts actually spent against future rental income just because he only made $25,000 and not $44,400? What incentive does Steve have to help provide rental housing to others when he is going to be shorted like this?

One solution I would suggest is allowing taxpayers to choose the amount of this "special" "incentivizing" allowance so that the true intent is honored by adapting Form 8582 to make this change. Another might be to have an election to forego the allowance altogether.

Assuming there are no other ways to solve this particular shortcoming of the original intent that lawmakers had?

M-MTax

Level 15

@SmartandConfused wrote:
Assuming there are no other ways to solve this particular shortcoming of the original intent that lawmakers had?

Yeah, personally, I get hypos like this one ALL the time and the facts rarely make a lot of sense and/or would seemingly affect an infinitesimally small number of taxpayers (or perhaps even only one).

Along those lines, I would be interested in learning how it is that Steve, ostensibly, only has wage income of $25,000 for the tax year yet had a $35,000 loss due to interest and repairs on his rental property. Where did the $10,000 differential come from and how did Steve manage to live and support himself and his child with a NET $10,000 loss?

My first point is, while you may have a valid argument, the numbers don't quite make a whole lot of sense. One resolution would be to simply sell the rental properties. If Steve is underwater, he might consider a workout with the lenders or sending them the keys. Bankruptcy protection is also an option.

My second point is that the Code and Regs weren't written with someone in Steve's situation. This is not uncommon; there are quite a few examples where some taxpayers fall through the cracks.

SmartandConfused

Level 2

I can see how a myopic view of one particular year could lead someone to question Steve. He is, however, a going concern and has a big picture. Steve was doing quite well in 2017 when his child was born and purchased one home before he then needed to move closer to family as the child's development as well as the circumstances of Covid began to illucidate.

Steve was able to use his great credit score, along with the gross rents, to finance the repairs over a longer period of time. Steve also has exempted income from VA disability benefits after he fought in an overseas war that aid him in making ends meet.