topic Carry forward NOLs or unallowed PAL for rental property that I actively managed. I sold it this year. I am a US citizen living abroad and am preparing last 3 years taxes. in Investors & landlords

Carry forward NOLs or unallowed PAL for rental property that I actively managed. I sold it this year. I am a US citizen living abroad and am preparing last 3 years taxes.

sagar40 — Mon, 03 Jun 2019 18:53:20 GMT

I have a choice to decide between above two methods as I am filing late. I sold my rental property this year (2017). My CPA is pushing me to file using PAL method for last three years returns. I am concerned that I may be losing out big time as I had major rental losses each year and no other ordinary income. I did pay about $16,000 in income tax in 2012 and 2013 - so I could carry back for those two years first.

Total depreciation taken - $53,000.

Capital Gain - $0.

Total rental losses in 2014-16 amount to $64,000.

Sale of a business use property of my wife also sold in 2017: Long term capital gain = $43,000 and Dep recap = 36,000,

Ordinary income in 2017 = $9,000

Thanks!

PS: I can document that I managed actively.

Here are my comments from another post that you had comme...

TaxGuyBill — Mon, 03 Jun 2019 18:53:22 GMT

Here are my comments from another post that you had commented on:

Can you clarify what your question is?  You don't have a choice between them.

If you sold your rental property (in a fully taxable transaction), all previous Passive Loss carryovers from that property are released, and go on your tax return.  You don't have a choice to keep them or not.  If those losses create a NOL (your income on Line 41 of Form 1040 will be negative), that is a completely separate thing.
<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/2896177-i-m-a-non-resident-and-my-only-income-is-from-real-estate-rental-activities-what-is-better-for-me-active-participation-or-no-active-participation">https://ttlc.intuit.com/questions/2896177-i-m-a-non-resident-and-my-only-income-is-from-real-estate-rental-activities-what-is-better-for-me-active-participation-or-no-active-participation</a>

So in 2014-2016, it sounds like you were eligible to take the $25,000 loss each year.  That is not a choice.  It sounds like that created a NOL for each year, which would be carried back (unless you made an election  to waive the carryback on a timely filed tax return).

1) I think the two terms are NOL vs. passive losses but a...

sagar40 — Mon, 03 Jun 2019 18:53:24 GMT

1) I think the two terms are NOL vs. passive losses but am not sure about the terms. Which one should I use? My accountant is pushing for passive losses. The facts are that I did not file 2014-2016 yet, I had about $20,000 in rental losses per year, I managed the rental actively myself.

2) Is it too late to file for carryback to 2013 if I am still with in the 3 year deadline to file 2014 taxes by April 2018?

If your rental had a loss, that is a Passive Loss. Howev...

TaxGuyBill — Mon, 03 Jun 2019 18:53:25 GMT

If your rental had a loss, that is a Passive Loss. However, because you "actively participated" in the rental and your total income was under $100,000, you are allowed to use up to $25,000 of Passive Loss on that tax return. Because your loss was under $25,000, you would NOT have a Passive Loss Carryover for those years, you would have a NOL (Line 41 of your Form 1040 will be negative) for each of those years.

As you say, the deadline for 2014 is not until next April. That means you can still amend your 2012 and 2013 tax returns for the NOL that occurred in 2014. The 2014 NOL is first carried to 2012. It would only go to 2013 if it was not used up in 2012. Your 2015 NOL would be carried to 2013.

Thanks! I understand. In that case, my accountant seems...

sagar40 — Mon, 03 Jun 2019 18:53:26 GMT

Thanks! I understand.

In that case, my accountant seems to question/ignore that I managed actively due to my presence abroad.

Curious, is there a major difference in the amount of taxes whether or not I file using NOL?

Because you actively participated, the only option is an...

TaxGuyBill — Mon, 03 Jun 2019 18:53:27 GMT

Because you actively participated, the only option is an NOL. To not use it would eliminate a large deduction. So let's hypothetically say you were in the 25% tax bracket in 2012. Using a $20,000 NOL would reduce your 2012 taxes by roughly $5000.

Yes, your accountant wants to lie on your tax return by saying you did not actively participate. He probably wants to do it because it is easier to carry a Passive Loss forward to 2017 than to amend your 2012 and 2013 tax returns for an NOL. However, lying on a tax return can be tax-fraud.

ALso, since you have to sign the tax return (actually or...

Carl — Mon, 03 Jun 2019 18:53:28 GMT

ALso, since you have to sign the tax return (actually or digitally with a PIN - it doesn't matter), you are the one stating the return is not false, and you (and only you) are liable for filing a false tax return. The CPA has no liability because they will claim you did not provide them all the information necessary for them to *not* file your return fraudulently.
This is one of the major reasons I complete and file my own returns. There's no way I'm paying a CPA, if they will not sign a document to at least share any potential criminal responsibility with me.

I am informed by another CPA that I can not claim active...

sagar40 — Mon, 03 Jun 2019 18:53:30 GMT

I am informed by another CPA that I can not claim active participant if I am living abroad. Can anyone please help cite a source for such a rule? Also, according to this CPA, even if I amend the 2012 return now to carry-back some rental losses, IRS will not issue a refund as its now a closed year. Thanks.

I see no such restriction for being an Active Participant...

TaxGuyBill — Mon, 03 Jun 2019 18:53:32 GMT

I see no such restriction for being an Active Participant. If the CPA says that, ask that CPA for a citation.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p925#en_US_2016_publink1000104573">https://www.irs.gov/publications/p925#en_US_2016_publink1000104573</a>
<a rel="nofollow" target="_blank" href="https://www.irs.gov/instructions/i8582#idm140044366636368">https://www.irs.gov/instructions/i8582#idm140044366636368</a>
<a rel="nofollow" target="_blank" href="https://apps.irs.gov/app/vita/content/12/12_05_005.jsp">https://apps.irs.gov/app/vita/content/12/12_05_005.jsp</a>

That CPA is absolutely wrong about amending 2012. As long as 2014 (the year of the NOL) is still an 'open' year to be amended, then the you can still amend 2012 to use the NOL. That is specifically stated in the Tax Code Section 6511(d)(2).
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/6511#d_2">https://www.law.cornell.edu/uscode/text/26/6511#d_2</a>

The rules on this lack clarity. According to the IRS Audi...

Carl — Mon, 03 Jun 2019 18:53:33 GMT

The rules on this lack clarity. According to the IRS Audit Techniques Guide there is not a specific hour requirement. Even if you use a management company, you will be considered active if you are involved with the operation of your rental. However, the taxpayer must be exercising independent judgment and not simply ratifying decisions made by a manager or management company. In addition, the taxpayer must have at least a 10% interest in the rental activity.