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?
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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...
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 .
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.
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