In my specific case, the tenant was evicted, he owes significant amount, I'm suing him and expect to recover some money in the next year or two.
Good luck. Just be aware I've been down your "eviction road" a few times over my 30 plus years as a landlord. Winning your case in court and actually collecting what you are owed, are two different things. You very well may win. But you still may not collect a penny. Just be aware of that.
I just sold the property and will no longer have any property by the time I recover the money.
The eviction/backrent suit have nothing to do with the sale in "ANY" way, shape, form or fashion.
My suspended PAL, which accrued while the tenant was still in the apt., exceeds all my other gains, including recap depr., so big part of the PAL will be wasted.
Your suspended PAL does not include back rent. Never has. Never will. It also has nothing to do with depreciation or other expenses. But while you owned the property, any legal fees incurred were a valid rental expense. Legal fees incurred (for the back rent) after you closed on the sale are not a rental expense in any way, shape, form or fashion. When you sold the property, you sold "ALL" of your interest in that property.
Yet, when the recovered money comes over the next two years, it will be fully taxable. Is there a solution for this?
There's nothing to solve here. The money will be fully taxable "in the tax year you receive it". (meaning not necessarily in the tax year you are awarded it by the court, since there's no certainty you will received it in the same tax year it's awarded.) Your legal fees paid "AFTER" you sold the rental will be fully deductible "as such" since the matter is related to a rental business you no longer own.
As for the future expenses, I'm likely to have legal costs in 2023, when there is no more rental property, but receive the payout in 2024. Both, the expenses and the payout are clearly the part of the rental activity, but because I won't own the property, it looks like I won't be able to deduct the 2023 expenses, while I will have to pay full tax in 2024 on recovered amount. Is there a way to apply carry/suspend/apply the 2023 expenses against 2024 income, since those two events are linked to each other?
In Turbotax (Desktop version is all I'm familiar with) you'll claim the payout to you (if any) under the Personal Income tab in the Less Common Income section, Miscellaneous Income, Other Reportable Income. (The "learn More" link specifies that taxable court settlements go here.)
For any legal expenses paid "AFTER" the property sale was closed, you'll claim those under the Deductions & Credits tab in the Other Deductions & Credits, Legal Fees section. The "Learn More" link for that clearly states, " You can also deduct legal expenses for things that produce taxable income, such as rental property and other investments...."
Be aware that legal fees are a SCH A itemized deduction. So if the total of all of your itemized deductions do not exceed your standard deduction, then it makes no difference on your tax liability. That's just the "wait it is" since you no longer own the property.
