On form 8582, can a portion of prior years' unallowed losses be taken instead of all of them?

[mbailey555]

My wife and I sold our business and retired in 2023. We previously had a CPA firm file our taxes but are using TurboTax this year. Our 2024 income was significantly less than it had been for the past 20 years. We own rental properties that had accumulated $30K in prior unallowed losses and $25K of those losses became deductible this year on form 8582. Significant medical bills resulted in larger itemized deductions so the $25K deduction from form 8582 reduced our taxable income to less than zero (entered as zero on line 15 of form 1040-SR). On form 8582, can we deduct less than the $25K that is allowed for prior unallowed losses so our taxable income calculation would be exactly zero (instead of less than zero) and allow more of the previously unallowed losses to roll into next year? If so, how can we reduce the form 8582 deduction in TurboTax?

[DianeW777]

No, you must use what you can in a given year for passive losses, or you will lose it. Based on your information you had enough rental income to use the losses, along with other passive income.

• IRS Publication 925-Passive Income

[mbailey555]

Thank you for this information, Dianne. We actually had a small loss on the rental properties in 2024 so the deduction is being applied to non-passive income. Pub 925 states "If you actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your non-passive income" so it does apply to us. We were active participants with an AGI under $100K, but the "may be able" wording and the later "your loss is deductible UP TO the amount of the maximum special allowance" wording led me to question whether I could deduct less than that maximum and roll the difference forward along with the existing loss carryover that exceeded the $25K maximum (I.e., if I deduct the entire $25K allowed, there is still over $6K of losses rolling forward but I would like to only deduct $20K and roll $11K forward).