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hobbes491
New Member

I have multiple investment properties all with passive carryover losses. What happens when I sell one property at a profit?

I have three rental properties, all three with passive carryover losses. For ease of question, say each property has $10k in carryover losses ($30k total). I treat each property separtely on taxes (column A, B, C, etc.).

If I sell Property A at a $20k profit, do I pay taxes on a $10k gain (20k profit - 10k carryover loss on that property, or do $20k of my carryover losses wipe out the $20k gain for reporting. Or something different?

4 Replies
AmandaR1
New Member

I have multiple investment properties all with passive carryover losses. What happens when I sell one property at a profit?

When you sell a property, the passive loss from the property sold can effectively offset any capital gain on sale. One thing to keep in mind though when you sell a rental property, is depreciation recapture. The calculation is rather complicated but it essentially boils down to the following...

  • Depreciation recapture is added to your basis (because you received tax deductions for it in the past) and therefore reduces the loss on sale of rental property. You can see this calculation on Form 4797, which is included in the year of your property sales. See this form, part III, here: https://www.irs.gov/pub/irs-pdf/f4797.pdf
  • Most depreciation recapture is taxed, but at maximum 25% rates 
  • Long-term capital gain is passive and taxed at preferential rates. However, when you sell the property, the passive losses are released and will offset the gains in your income section. 
  • The passive activity loss offset is calculated on Form 8582, which you can see here: https://www.irs.gov/pub/irs-pdf/f8582.pdf (and in prior year returns if you've had losses). 
  • This answer explains the offset well too: https://ttlc.intuit.com/replies/5623827
hobbes491
New Member

I have multiple investment properties all with passive carryover losses. What happens when I sell one property at a profit?

Thanks. Depreciation is not issue as we haven't been able to write off any depreciation since our AGI is over $150k. I guess my main question is can the passive carryover loss from my other two rental properties help offset the gain on my sale, or only the carryover loss on the property I am selling can be used to offset the gain?
lori58sf
Level 3

I have multiple investment properties all with passive carryover losses. What happens when I sell one property at a profit?

if nature of business is similar you can .   e.g. if PYA of each investment (a, b, c ) is 1000, 2000, 3000.  you sell one and has a profit of 6000, you can use all three.  and you will have zero passive loss to carry forward .  

DeanM15
Expert Alumni

I have multiple investment properties all with passive carryover losses. What happens when I sell one property at a profit?

When you sell your rental property, you release the prior year passive loss carryovers. This allows the passive losses to be taken in the year of sale. Passive loss carryovers from other rental properties would stay with those other rental properties. 

 

The passive losses are released and taken on Form 1040. They do not go against the capital gains (or losses) you may have had on the rental property. You must sell 'substantially all" of the property, which means if you aggregated your multiple rental properties into one and sold just one, you may not take the prior year passive losses. If you have multiple properties and they are separate on the tax return and you sell one, you may take the passive losses for the sold property but not the passive losses on the other properties. 

 

You can see more here and here.  

 

@lori58sf

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