Rental property

[chrisl911]

We have a rental house that is next door to our primary residence.  It was rented out from 2017 through 18 July 2025 and was converted to personal use on 19 July 2025 so we would have a place for my 96-y.o. mother.  We plan to either sell or re-rent the property in mid-2026.  When I enter the days or personal use in TurboTax, it does the calculations to split between personal and business use as expected, but it also allows the loss for the part of the year it was rental property.  Up until now, all my losses have been carried forward.  I'm happy to get the deduction, but what happens when I sell the house in 2026?  We would have about 180-200 days of personal use prior to the sale.  I'm assuming we'll still have to pay capital gains on the gain on the property as if it were still an rental property, but will we still be able to deduct the losses carried forward from 2017 through 2024?   

[DaveF1006 · Accepted solution]

It depends.Turning a rental into your personal home is a “suspension event” for your tax benefits. You don’t lose them, but the timing of when you can use them will change. Here is the breakdown of what happens to those carryforward losses and how the 2026 sale will look. 

The losses you’ve been carrying forward since 2017 are called Suspended Passive Activity Losses (PALs).  When you convert a rental to personal use, these losses remain "frozen" or suspended. You cannot use them to offset your salary or other income while the house is a personal residence (unless you have other passive income from different rentals).

• These losses are fully "unlocked" only when you dispose of your entire interest in the property in a fully taxable transaction to an unrelated party in 2026.
• When you sell the house in 2026, all those carryforward losses from 2017–2024 will finally be released. They will first pay off any money you made from selling it. If there are any further losses, they can then pay off your other income.

Yes, you will need to pay capital gains on the property once it is sold.

[chrisl911]

Thanks, that clears up the situation for me.