I own investment property that I rent out, which is at a loss on Sch E for past 5 yrs. Can I offset a gain of the sale of stock with this carried forwarded rental loss?

[dianavv2011]

I believe there are different rules for passive and active gains and losses.  I wasn't sure how those apply to real estate investment property losses, and stock sale gains and whether the two activities could be offset on my return.  Any advice would be very helpful!

[IreneS · Accepted solution]

UPDATED FOR TAX YEAR 2019

Unfortunately, no.  The gain on stock is considered a capital gain. 

The losses on your Schedule E are passive losses, a totally different animal.  Only two types of activities generate passive income as defined by the IRS: 

• Rental activity, including rents and other fees paid to a landlord, are considered a passive revenue stream.
• Investing in companies but not providing hands-on direction is also a passive activity. This definition doesn’t apply to stock ownership, but merely financial arrangements in which an investor serves as a “silent partner,” bankrolling a business venture while leaving its day-to-day operations up to others.

Your accumulated passive losses, however, will offset any capital gain when you sell the rental property--they are taken in the year of sale.

The IRS does allow taxpayers to deduct rental losses if the following apply:

1. You actively participate in the rental property. Active participation means having meaningful management decisions regarding the rental property and have more than a 10% ownership interest in the property.

2. Your income is between 100,000 and 150,000 dollars in MAGI.

Your passive losses and carryovers are tracked by Form 8582, and it should show up on the TurboTax carryover statement when you print your return.

Check Form 8582, Worksheet 1, Column C.

[Edited | 3/31/2020 |  9:33am PDT]