carried-over passive losses when rental converted to second home

[RustyShackleford]

We've had a short-term rental property the last few years.   We've been able to take the passive losses on it using the "Special Allowance for Rental Real Estate" on Form 8582.     However, we have a carry-over of about $5000 of disallowed losses (because they exceeded the $25,000 cap).

This year we are converting the property to x second home.  We have not rented it at all during 2024, so Turbotax wants to delete Schedule E - which makes sense.   But it's also deleting Form 8582, and therefore not allowing us to take that $5000 loss this year.    (If I search for 8582 and open it, it is blank). 

Is this an error in Turbotax and is there some workaround, or am I mistaken that we're able to take that  passive loss this year ?

[RustyShackleford]

Ok thanks, good to see that discussion. 

 I'm more confused though: Am I unable to take those carried-over passive losses this year, if I do not have any passive income ?   Or do investment dividends count as passive income ?

[RustyShackleford]

But can I deduct them THIS year - as far as tax law is concerned - if I could figure out how to make Turbotax do it ?

[RustyShackleford]

Seems like the simplest solution is to somehow manage to rent the property for at least one day before the end of the year.

[AmeliesUncle]

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@RustyShackleford wrote:

We've had a short-term rental property the last few years.   

We've been able to take the passive losses

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Let's back up a bit.  Did you "Materially Participate" in the short-term rental?   I don't know your circumstances, but unless you have a management company handling, it, I suspect you did Materially Participate in it.

If you did Materially Participate in it, any losses would have been non-passive and should have already been used (there would not be any carryover).  I suspect you may need to amend your prior tax return(s) to claim that non-passive loss (although I don't think TurboTax is really set up for that well, which may be why you were not aware of it).

https://www.irs.gov/publications/p925#en_US_2023_publink1000104582

In the event you did NOT "Materially Participate" in the rental, was it attempted to be rented this year (are you talking about 2024?)?

[RustyShackleford]

In the interview, I say I "actively participate", due to owning at least 10% and making major management decisions.   

The other test, of being a real estate professional, I can't come close to meeting, at least according to the Turbotax interview concerning "real estate professional".  But looking at IRS publications, it does look like I DO pass this test for "material participation": You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual.    (Although the 100hr figure is a little tough to justify).   

Kinda seems like Turbotax may have steered me wrong ;-(.  OTOH, if the only advantage of amending is to not have to mess with this $5k carry-over, and if I can figure out another way to handle it, then why bother ?

Yes, I talking about the tax return I'll soon file for 2024.   The $5k carry-over is from 2023.

[AmeliesUncle]

I could be wrong, but as far as I know TurboTax does not guide you for this circumstance at all, and the only way to do it is to go into the "Forms" mode to manually check the "other passive exceptions" box on the "Schedule E Wks".

If the loss was non-passive, you can't carry it over to your 2024 return.  The only way to benefit from the $5000 loss it to amend.

For amending, you first need to figure out which year(s) would need to be amended.  On your 2023 tax return, was any amount carried over from previous years?  If so, you would amend all previous years that incorrectly gave a carryover to the next year.

[RustyShackleford]

The only carry-over loss is from 2023.   But I'd really like to avoid amending.   

There's still a fundamental thing I don't understand about my situation.   Let's assume I can't say I materially participate.   Do the tax rules allow me to take the $5k loss this year (assuming I have minimal add'l passive loss on the property, and that I'm converting it to second-home status, and that our MAGI is below $100k) ?    IOW: are we allowed to take the carried-over loss this year, and the only issue is how to get Turbotax to do it ?   

[RustyShackleford]

So, to clarify the fundamental thing I don't understand about my situation (is my problem tax law or Turbotax ?) ... this seems to be the story:

Suspended passive losses are the passive losses you could not deduct in the current year. These suspended passive losses can be carried forward indefinitely until you either use them to offset passive income or dispose of your rental property.

So looks like my issue (I'd like to take my suspended passive losses in 2024) is with tax law itself, so maybe Turbotax is just following the law by not doing a Form 8582 if I have no Schedule E.

Does that make sense ?   

The only loophole I can imagine is if converting the property from rental to second home (which I'm doing in 2024) counts as "disposing" of the rental property.  Any hope there ?

[AmeliesUncle]

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@RustyShackleford wrote:

But looking at IRS publications, it does look like I DO pass this test for "material participation":

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That means you don't have Passive Losses.  You need to amend to correct past mistakes.

[RustyShackleford]

Not gonna open that can of worms.   But thanks.

I think we just rented the place for a couple of nights.   That's all it should take to have a Schedule E and the Form 8582, and get the $5K carryover and a bit more.

[AmeliesUncle]

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@RustyShackleford wrote:

and get the $5K carryover and a bit more.

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You don't have a carryover loss because it is not a passive loss.  Claiming a carryover in a future tax return would result in a false tax return.