NOL Net Operating Loss for Rental Properties

[burgerguy14]

I check off ACTIVE participant.  Not material.  See attached.

[tagteam]

That's fine and is most likely the proper and appropriate way for your purposes.

However, where are you seeing the real estate loss (which form or schedule) and do you have Form 8582 in your tax package?

[burgerguy14]

@tagteam there are no  Form 8582s in my tax package.

I see the loss on Schedule E and then on Schedule 1.

[tagteam]

If you reported on Schedule E, checked Active Participation in the program, have a negative AGI (with a negative figure for your real estate activity), and no 8582, it's almost certainly a result of the special allowance (up to $25,000) for active participation.

See https://www.irs.gov/publications/p527#en_US_2022_publink1000219124

[tagteam]

Also note:

Form 8582 not required.

Don’t complete Form 8582 if you meet all of the following conditions.

• Your only passive activities were rental real estate activities in which you actively participated.

• Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately and you lived apart from your spouse all year).

• If married filing separately, you lived apart from your spouse all year.

• You have no prior year unallowed losses from these (or any other passive) activities.

• You have no current or prior year unallowed credits from passive activities.

• Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year).

• You don’t hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust.

If you meet all of the conditions listed above, your rental real estate activities aren’t limited by the passive activity rules and you don’t have to complete Form 8582. On lines 23a through 23e of your Schedule E, enter the applicable amounts.

[tagteam]

@AmeliesUncle 

@Mike9241 

Can the foregoing scenario result in an NOL? Under the circumstances set forth, the loss is not subject to the passive activity rules?

I've never run into a scenario where a residential rental property owner with a MAGI of, for example, $90,000 has, for example, a $20,000 net loss on rental properties.

[AmeliesUncle]

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@tagteam wrote:

Can the foregoing scenario result in an NOL? Under the circumstances set forth, the loss is not subject to the passive activity rules?

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I'm a bit lost on exactly where this conversation has gone, but ...

I've seen you say that the $25,000 real estate loss can't create a NOL, but I'm not familiar with that rule.

§469 allows the loss.  But I'm not familiar enough with the detail of NOLs to positively know how the interaction works. 

If you are going with the thought that the rental is not a "trade or business" (it is a "nonbusiness deduction" and therefore can't create a NOL), I don't know.  For some purposes, a non-§162 passive rental is considered as a "trade or business" (or example, §1231 gain/losses, and is reported on 4797, and a loss from the sale of a rental is not subject to the $3000 limit).  But in other cases it is not.  I'm not sure how it applies to NOLs.  

[tagteam]

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@AmeliesUncle wrote:
I've seen you say that the $25,000 real estate loss can't create a NOL, but I'm not familiar with that rule.

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I've just never experienced the special allowance for active participation being applied where the MAGI was $100,000 or less and that created a scenario where the AGI went negative.

Considering the language I quoted from the IRS publication, it appears as if a loss in that given scenario is not considered to be a passive loss.

[AmeliesUncle]

Yeah, my first inclination is that it would be a NOL.  

If it is a NOL, then the losses for 2017 and 2018 are lost because they were not carried back (assuming the carry back would have absorbed the NOL).

[tagteam]

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@AmeliesUncle wrote:

If it is a NOL, then the losses for 2017 and 2018 are lost because they were not carried back (assuming the carry back would have absorbed the NOL).

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Exactly! I think @Mike9241 might have pointed that out earlier so I suppose it's moot at this point. 

[burgerguy14]

I am able to generate a Form 8582 is by entering my carryover loss for EACH property from 2017 into 2018.  And then entering my carryover losses from 2018 into 2019.

See attached picture.  It seems odd that I have to actually do the math and carry over numbers manually.

[tagteam]

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@burgerguy14 wrote:

I am able to generate a Form 8582 is by entering my carryover loss for EACH property from 2017 into 2018.  And then entering my carryover losses from 2018 into 2019.

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Yes, you can certainly do that but the question is whether or not that is the proper procedure.

If the loss generated an NOL, because the loss was not considered to be a loss from a passive activity, you cannot create a passive loss that would be carried forward (out of thin air) by manually generating an 8582. Doing so would be improper.

@AmeliesUncle ?

[AmeliesUncle]

I agree with Tagteam.  In my opinion, it is a NOL.  That means the loss is NOT carried forward on 8582 and that you are too late to carry back the NOL.

[burgerguy14]

Just so I could understand how for Passive Activity losses work, I created a simple example in TT.

Year 1

Interest: 11,000

Rental loss: 28,000

Taxable income: -14,000 

Unallowed loss: -3000  (Will be carried over to year 2)

Itemized deductions: 50,000

All that was required to get taxable income to zero was a 10,000 loss.  Instead -14,000 vanishes and doesn't become a useful asset.  It doesn't get carried over to next years Form 8582 the way unused 3000 capital losses get carried over for Schedule D income/losses.

I guess in this case the tax payer has a NOL and must file the appropriate paperwork.  Is this correct?

[tagteam]

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@burgerguy14 wrote:

Just so I could understand how for Passive Activity losses work, I created a simple example in TT.

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Yes, you created a simple example that was too simple. 

Try increasing your interest income first to $125,000 and see what happens. Next, increase your interest income to $150,000 and see what happens.

What you are seeing with the figures you posted is not an NOL, it is the special allowance for active participation (up to $25,000 depending upon your MAGI).

See https://www.irs.gov/publications/p527#en_US_2022_publink1000219124