topic Re: disposal of rental - incorrect carryforward loss calculation? in Investors & landlords

disposal of 1 rental makes disallowed loses on all other rentals allowable.

demens13 — Sat, 18 Jan 2025 03:32:54 GMT

I have 3 rental properties, all taking yearly loses. I am over the MAGI threshold so all loses were disallowed and carryforward.

I sold 1 property this year and TurboTax is making loses from all 3 properties allowable.

The loss reported on 1040 line 5 seems to combines the now allowable loss from property 1 AND the unallowable loss from property 2 and 3. I don't see any carryforward on the other rentals, as if sale of one made loses on all properties allowable. I don't believe this is accurate.

Appreciate any guidance.

Re: disposal of rental - incorrect carryforward loss calculation?

demens13 — Sat, 18 Jan 2025 03:32:05 GMT

The behavior is confirmed if I delete the sold property, loses on the other 2 become disallowed.

Re: disposal of 1 rental makes disallowed loses on all other rentals allowable.

AmeliesUncle — Sat, 18 Jan 2025 03:42:40 GMT

There are TWO things going on. One is that when you sell a property in a fully taxable transaction, the passive loss carryovers are allowed to be used for that property.

But there is another thing happening. Passive losses are allowed to the extent that there are passive gains.

When your three rentals have a loss, there are no gains, so the losses can not be used (except for certain circumstances).

But you sold one property, presumably at a gain. You now have Passive Gain from that sale. Your passive losses are allowed to the extent that there are passive gains.

Re: disposal of 1 rental makes disallowed loses on all other rentals allowable.

demens13 — Sat, 18 Jan 2025 18:31:51 GMT

are you certain the gain from the sale is qualified this way? I follow the logic you outlined, if the gain is "passive income" instead of just standard long term capital gain I guess it makes sense that it offsets suspended passive loses on other properties.

reading a few other posts seems to contradict this but i'm not sure. the most convincing contradiction i found is that the gain from the sale is a long term cap gain taxed at 15%, but the suspended losses (if allowed) typically offset income, which is taxed at a different rate, no?

Re: disposal of 1 rental makes disallowed loses on all other rentals allowable.

AmeliesUncle — Sat, 18 Jan 2025 19:04:55 GMT

@demens13 wrote:
are you certain the gain from the sale is qualified this way?

the gain from the sale is a long term cap gain taxed at 15%, but the suspended losses (if allowed) typically offset income,

Yes, I am certain.

I did not say the passive losses would directly offset the passive capital gain. I said the passive losses can be used "to the extent" that they is passive gain.

The capital gain will show up as normal, usually taxed at 15%. The losses losses are allowed as an "ordinary" deduction and will offset 'regular' income first (which is how the losses would have originally be treated if they had not been suspended in the first place).