Pennsylvania Net Gain or Loss from the Sale, Exchange or Disposition of Property

[TROS]

I sold a rental property this year that had losses in prior years as such I understand that I cannot apply those prior year losses to the gain on the sale of rental property this year but part of the losses that were not used in prior years was depreciation which is being deducted from the cost basis of the rental property to calculate the gain on the sale of the rental property. It doesn't seem right that I'm reducing the basis of the rental property and thus picking up more gain on the sale for depreciation I never got the benefit for. Does the basis for PA need to be adjusted to only account for the depreciation that was actually taken to reduce income? 

[PattiF]

No, the basis for the rental does not need to be adjusted. Your losses for the property that you were not able to use in past years, "suspended passive losses", will be deducted when you sell your rental property.

The losses have been carried forward until you have disposed of the property in 2021. All of this will be calculated automatically in the rental income section of TurboTax if you have used this program in the past. This will be used to decrease the taxable gain that you have after depreciation recapture from the rental.

[TROS]

Ok I sold the property and entered the information into Turbo Tax but it says that suspended losses in a prior year are not able to offset the gain in Pennsylvania. Is there another way to do this? 

What you described below is how it worked for Federal purposes but not for Pennsylvania. 

[ThomasM125]

You are not allowed to carryover unused losses on rental activities in Pennsylvania, so there is no other way to report them on your state tax return. You can read more about this here:

Net Income (loss) from rents and royalties

[TROS]

Got it thanks. 

Can you adjust the basis of the property to only reflect the depreciation that you were actually able to take?

Said differently if you bought a property for $50K depreciated it $30K so the adjusted basis would be $20K but if you weren't able to take any of the $30K depreciation against income on your PA return can you adjust the basis back to $50K such that if you sold the property for $50K there would be no gain since you didn't get any tax benefit from the depreciation? 

[ErnieS0]

No. The rental property rules for Pennsylvania are not the same as the IRS. PA has no suspended losses.

You would have been able to take a full rental loss in PA each year even if those losses were suspended at the federal level. That is why, as super Tax Expert @ThomasM125 says, PA has no carry forward losses.

Here are Pennsylvania's depreciation rules:

Pennsylvania's rule for adjustment of basis for depreciation expense requires that a minimum amount of depreciation must be recognized by the taxpayer on depreciable property in the amount of depreciation expense that would be allowed under the straight-line method.

• To the extent the taxpayer uses a different method to calculate depreciation and receives a tax benefit for some amount of depreciation expense greater than straight-line, that increased amount must be recognized.
• If, however, the taxpayer did not receive a tax benefit of the amount in excess of the straight-line amount, that excess does not have to be recognized. The taxpayers must reduce their basis by at least the straight-line depreciation expense even if they received no tax benefit.

Rental property is depreciated on a straight-line basis.

See: Federal vs Pennsylvania Basis and Tax Benefit Rule

[TROS]

Got it that's helpful thanks