Passive Loss Carryover

[Colejw]

I took a job in Australia for 7 years. We rented our home while in Australia for 7 years. During that time we accumulated some Passive Activity Losses and they were carried forward several years. Now that we are taking our home out of the rental market and moving into it. How do I recover the passive losses without selling our home?

[AmyC]

A passive loss can be used to offset a passive gain or it can be rolled into the basis of your house.   See Topic No. 425, Passive Activities – Losses and Credits.

[Carl]

How do I recover the passive losses without selling our home?

You don't. You can't realize those losses until the tax year you sell or otherwise dispose of the property. For the last year you report the property on SCH E, make absolutely certain that you print out IRS Form 8852, along with all three of the 4562's for that property, and file them with your original property purchase paperwork. You will need that information when one of three things happens in your life.

1. You sell the property

2. You convert the property back to a rental, or any other type of business use.

3. You die.

[AmeliesUncle]

As was mentioned above, unless you have other Passive income, those Passive Losses stay suspended until the home is sold.

Unfortunately, TurboTax does not correctly file the tax returns for this situation.  You either need to file a false rental form (Schedule E) to keep reporting the passive loss carryover (Form 8582) or you don't file the Form 8582 at all (which is clearly contrary to the IRS instructions).

[Mike9241]

I agree with Carl. The link referred to says

Disposition of Entire Interest

• Generally, you may fully deduct any previously disallowed passive activity loss in the year you dispose of your entire interest in the activity.
• In contrast, you may not claim unused passive activity credits merely because you disposed of your entire interest in the activity. However, you may elect to increase the basis of the credit property in an amount equal to the portion of the unused credit that previously reduced the basis of the credit property.

So the basis adjustment is only for certain PAL credits, not unused PAL losses.