How to handle court award from prior year?

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Hello,

In 2022 we received $4000 from a former tenant to pay a court judgement for unpaid rent. The judgement was awarded in 2022 for rent owed from 2020. In the 2020 tax year we did not claim a loss or anything special; our rental income was just lower due to the unpaid rent. In 2021 we converted the rental to our primary home (this question is not about that). We have suspended passive activity losses of about $5000 from the time the house was a rental.

For 2022 I entered the $4000 in TT as rent for the house, with 0 rental days, 0 personal use days, and $0 expenses. I thought the suspended PAL would offset the rent so that they would zero out on Schedule E. However, the allowed loss from Form 8582 exceeds the rent, which seems too good to be true.  Did I do this correctly? Is there a different/better way? 

Many thanks in advance for your time and attention.

[Anonymous_ · Accepted solution]

What you are seeing could very well be the result of the special allowance for active participation.

See https://www.irs.gov/publications/p527#en_US_2020_publink1000219124

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Thank you for the reply. Apart from the PAL, would you enter the unpaid-rent payment as I described?

[Anonymous_]

Since the recovery was for unpaid rent, yes.