Selling a rental property / passive loss carryover

[Weaver-John]

Hi There,

I sold a rental property this year. I have not lived in the property for over 10 years so I will be subject to capital gains tax. It is my understanding that I can use passive losses accrued during my ownership of the rental property to offset the capital gains of the sale. Is this correct? Are there limitations I should be aware of? 

Thanks

John 

[Anonymous_]

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@Weaver-John wrote:

It is my understanding that I can use passive losses accrued during my ownership of the rental property to offset the capital gains of the sale. Is this correct? Are there limitations I should be aware of? 

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That is correct; all of your suspended passive losses are released upon the sale of the rental.

Note that you will likely have unrecaptured Section 1250 gain (depreciation recapture).

[cucpa1991]

Hello!

You are correct.  You will be paying Taxes based on the gain on the sale.

You are correct that you are able to deduct the Capital Losses accumulated and carried over from prior years.

Limitations would be normal Capital Gains/Capital Loss netting rules for Income Tax.

Just follow the TurboTax interview questions when reporting the rental property activity for the year follow the steps listed:

Follow these steps to report the sale of your rental property on your tax return:

1. With your return open in TurboTax, search for rentals and then select the Jump to link in the search result.
2. Answer Yes to the question Did you have any income from rentals or royalties?
3. When you get to What are you here to report? select Rental property and fill out the description, address, and owner.
4. When you hit Tell us about your situation this year check the Sold or disposed of property box along with any other boxes that may apply.
5. Continue following the onscreen prompts to enter info about your rental property.
6. Eventually, you'll get to the Review your rental property info screen. On the following screens, we'll ask you to enter all the info we need about your rental property.
7. You can report the sale in the Expenses/Assets (Depreciation) section, along with any other pertinent info (like income and expenses)

Tip: Take your time and pay close attention. There's a lot of info and it's easy to miss if you're in a hurry.

After the entries are made you should not only have a Schedule E reporting the Rental activity, but now you will have a Schedule D reporting the Capital Gain/Loss.

One thing that I would like to add here is that there is an element of depreciation recapture for depreciation deductions taken during the rental periods. Often times my clients “forget” the impact these deductions will have on the Tax calculations.   Depreciation recapture is reported ordinary income rather than as capital gains, which is taxed at a lower rate, the difference between the sale price and adjusted cost basis is “recaptured.”  

Let us know if you need more guidance.  We stand ready to assist you!

[Anonymous_]

This is the sale of rental property so the transaction will be reported on Form 4797. 

[cucpa1991]

Thank you for stating the form correction(s) I listed above. 

• Schedule D is for gains/losses on personal property, while Form 4797 is for property used for business purposes.
• If some property were used for personal and business use, both Schedule D and Form 4797 would be used with proper allocations given to personal and business use.

[Meritaten]

I followed all the steps and it did not

work. It told me it didn’t qualify as a rental

and I had to report it in the Investment section. I sold my property in early 2023 and it was vacant while on the market so I had 0 income. But there is no option for that either. Why isn’t it working? 

[PatriciaV]

If you did not rent this property at all in 2023, you will need to report this as the Sale of Business Property rather than a rental sale.

Enter this transaction in the Business Items section of TurboTax Home & Business, under Sale of Business Property. This sale will be included in your tax return on Form 4797 and the gain or loss included on Line 14 of your Form 1040.

To add this information to your return in TurboTax Home & Business:

1. Select the Business Tab
2. Select Business Income and Expenses 
3. Select I'll choose what I work on
4. Scroll down to Less Common Business Situations 
5. Select the Start/Update button next to Sale of Business Property 
6. Follow the prompts from here and answer the interview questions related to the sale. You will need to know the total depreciation taken while it was reported as a rental property.

@Meritaten 

[Meritaten]

What if I never took depreciation during the entire time i owned it, not while I lived in it and not while it was a rental? Also. what qualifies it as a business property rather than a second home?

[AmyC]

A rental property is a business property that produces passive income. If you never took depreciation while it was a rental, you have two options. Eat all the depreciation you failed to take or file a Form 3115 and claim it all now. See another post of mine for some help with the 3115 here. You need to file 3115 with the form or pay a hefty fee to file it separately.

@Meritaten 

[demens13]

someone related question. also posted here:

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/re-disposal-of-1-rent...

I sold 1 of 3 rental properties at a gain. all 3 had suspended passive losses. TT seems to allow that entire combined total to offset the gain on the sale of 1 property. trying to find an authoritive answer on if this is acurate.

[DianeW777]

Suspended passive losses are designed and allowed to be used when there's passive income to offset it.  Only the suspended loss from the one sold is allowed to be used if there is not enough gain from the sale to absorb suspended losses from other rental properties.

The reason is that you have not fully disposed of the other two rental properties.  Even if you had decided to 'aggregate', or treat as one property for tax purposes, you haven't fully disposed of the other two properties.

For this reason, the only allowed suspended losses for 2024 are the losses for the property sold.

If you would like to send us a “diagnostic” file that has your “numbers” but not your personal information it would help.  If you would like to do this, here are the instructions: 

TurboTax Online:

Go to the black panel on the left side of your program and select Tax Tools. 

1. Then select Tools below Tax Tools. 
2. A window will pop up which says Tools Center.  
3. On this screen, select Share my file with Agent. 
4. You will see a message explaining what the diagnostic copy is.  Click okay through this screen and then you will get a Token number. 
5. Reply to this thread with your Token number and your state. This will allow us to open a copy of your return without seeing any personal information.  

TurboTax CD/Download:

If you like, you can send a copy of your return that will be scrubbed to eliminate your personal data by using these steps:

1. Click on Online in the top left menu of TurboTax CD/Download for Windows
2. Select 'Send Tax File to Agent'
3. Write down or send an image of your token number and state then place in this issue.
4. We can then review your exact scenario for a solution.
5. Please also tell us any states included in the return. This is necessary for us to view the return.

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution. 

@demens13 

[Edited: 02/07/2025 | 4:05 PM PST]

[demens13]

@DianeW777 

I'm still working on this. Looked over the form and came across Form 8582 - Passive Activity Loss Limitations. Starting in section IV as per instructions:

Name of activity, i have listed property 1 and property 2 in each line.

a - Net income is only from prop 1, call it $100k, prop 2 is 0.

b - Net loss is 10k (each property has an entry)

c - Unallowed loss (from prior years) 50k, (each property has an entry)

Taking those numbers to section I which combines the total and results in:

1d 40K (positive number)

Section 3 states to combine 1d ($50k) and 2d (empty), if this line is zero or more, stop here and include this form with your return; all losses are allowed including any prior year unallowed losses. 

So this seems to contradict your response, and states that suspended loses from the 2nd property are now allowed?

[RobertB4444]

Suspended losses are carried forward until you have passive income to deduct them against or until the complete disposition of the property that created them.  

If you have generated passive income in the sale of the property it would allow you to deduct the suspended losses against that regardless of the property that generated them.

@demens13 

[kastklan]

I Agree with you: I should be able to apply the carryforward losses from other properties against the gain from the property I sold.   But the program is not performing that task for me.

[DawnC]

You can't use passive activity losses  from one rental property against the gain on the sale of a different rental property.   You can deduct the previously disallowed passive losses when you fully dispose of that property, but not the passive losses from any other activities/properties.  @kastklan