Understanding passive vs unallowed loss

It depends.  Passive losses can be unallowed losses under certain circumstances, such as losses are in excess of Schedule E Rental Losses allowed for a particular taxpayer's income level.  

 

Unallowed losses can be a variety of other types of losses.  An example might be losses in excess of the basis in a partnership. 

 

If you are trying to enter passive loss carryovers from a prior year rental property, follow these steps:

 

1. Click the Federal Taxes tab
2. Click Wages & Income
3. Scroll down to the Rental Properties and Royalties 
4. Click Start (or Revisit/Edit) next to Rental Properties and Royalties (Sch E)
5. Choose the property for which you need to add the Carryovers.
6. Click the blue Edit button next to the rental you'd like to add info for
7. Click Continue until you reach the screen entitled Do any of these situations apply to this property?
8. Scroll to the check the box next to I have passive activity real estate losses carried over from a prior year. 
9. Click Continue
10. You'll be able to input the carryover amounts in this section.

 

 

 

 

sometimes they are sometimes there not.

 

Loss incurred through rented property, limited partnership, or other sources of income in which you do not take an active part. Passive losses can be used to offset passive gains.  if you income is too high, such net losses can 
not be used to offset non-passive income.  such losses are suspended (carried forward) until 1) there is passive income  2) you dispose of the activity 3) or your income drops so as to allow a limited amount of these losses.

these losses flow to form 8582 

 

losses also can't be taken if you are not at risk - the at-risk limitation form 6198 or put another way you don't have a sufficient basis.        say you put $10,000 into an S-corp. the S-corp borrows $40,000 which you guarantee.   for the year the S-corp loses $35,000.   you can only deduct $10,000 - your basis and the amount at-risk.   The IRS does not consider you at risk for the $40,000 the S-corp borrowed because it is the one primarily liable.   if you had borrowed the $40,000 and put it into the S-corp even if the S-corp guaranteed it   you would now have a shareholder loan to the core which would give you basis to deduct the $35,000

 

example:  a loss incurred in a hobby.  such loses are not allowed ever.  no carryover. 

 

another example: you own an auto used 100% in business.  you carry insurance on it. the policy has a $1,000 deductible.  you in an accident you caused with repairs costing  $1,500.  you don't want to put in an insurance claim.  the IRS doesn't want to take the place of the insurance company so $1,000 of the repairs would not be deductible.

 

certain situations TT will not know and so you must do the limiting such as the auto loss and the hobby loss

 

certain losses can be more complicated because the loss may have both passive and at-risk limitations.