Can passive loss carryover be used to reduce capital gain?

[amz]

I own two rental properties which have prior years' passive losses of $15k and  $25k, respectively.  We sold the first priority at a gain't of $20k (primarily due to the recapture of depreciation).  I believe that I can use the $15k in loss carryover to offset the gain.  Can I also use a portion of the losses from the second property (which I still own) to further reduce my tax liability to $0?

Also, how would I report any of this in Turbo Tax?  I have completed Schedule E for the property sold, noted it's been disposed off, reported the prior years' passive losses carryover, etc....yet the system is still showing the gain at $20k and my refund is being reduced significantly (nearly $4k) so it appears to be taxing the full $20k gain.  Any guidance would be much appreciated!

[ChristinaS]

Did you look at the 1040 itself?

The full gain is taxable, but the suspended passive loss from the sold property should be released. These 2 figures do not offset each other directly on the same line of the tax return.

• The suspended loss (c $15,000) would be on Form 1040, line 17
• The gain would be on Line 13 (and 14) of the 1040

Passive losses on the property that you still have are not "unsuspended" until you dispose of the property. You can use these losses to offset other passive income (i.e. Schedule E income, perhaps some Partnership income), but you cannot use it to offset the capital gain.

Did you rent the property in 2016 prior to selling it? Even if you didn't, the best place to dispose of the property in Turbo Tax might be there. Going through the screens below helps that suspended loss be released.

Inside the Schedule E rental section for the disposed property, you see a screen "Do Any of These Situations Apply to the Property?" :

-Is the box disposed of checked?

-Is the box I have passive losses carried over.... checked?

(You mentioned doing these things.... but we also list information for other future readers. It does seem like you reported everything correctly, but may need to take a closer look at the results)

Also:

-On the next screen (inside the rental section), is the passive loss carryover entered as a negative figure?

-What do you see on the Schedule E? Is the other property showing a gain for this year?

** A $4000 change isn't impossible if your income is already >$125k. You have $20k gain at (mostly) ordinary tax rate due to depreciation recapture, less $15k. So, simplistically speaking, that's say $5k of ordinary income. The additional income is not only taxed, but also may impact your deductions, credits, and other calculations which are based on AGI. That could easily add $4000, as crazy as that might seem.

Please review my comments vs your entries, and report back with any questions, comments, etc.

(I ran through the scenario in the 2016 program, and the losses were released simply by clicking the disposed of button and entering the Passive  carryovers)

[ChristinaS]

I made some corrections to my original response. Please review the response in the Answer Exchange rather than the original version which was emailed to you. Thank you!

[emilyzh2]

Hi Christina, I am interested in this topic and would like to know more details. Can you please send me your corrections to me ? Thanks!

[TaxGuyBill]

@emilyzh2   The answer above already shows the corrections.   If you want to know more details, it would probably be best to post a new question, with as much specific details about your situation as possible.

[Questions]

I am confused why it says that the passive loss carryover can't be used to offset the capital gain, but it says that the passive loss carryover can be unsuspended. Can it only be unsuspended against passive income, or can it be unsuspended against regular W2 income? I am trying to figure out if a passive loss carryover can be used in the year that the property was sold, even if the taxplayer does not have any passive income in that year. Thank you

[TaxGuyBill]

Is is unsuspended against any other income, such as W-2 income.

[Questions]

Thank again, I was hoping you would say that. The issue now is the mechanics in TurboTax. There is a place to list the PAL carryforward amount under the rental property section, but if you did not rent it or attempt to rent it in 2018 (i.e. stopped renting a vacation home years ago), it is telling me to delete the rental property and I see no where to add the PAL carryforward into TurboTax. Do you happen to know where I can reflect this in turbo tax? The PAL's were built up many years before I started using turbo tax.

[TaxGuyBill]

Say you rented it for 15 days.

Also, double check they are "passive loss" carryovers (there would a Form 8582 in the year of the loss), rather than "vacation home" carryovers.

[melaniezhangpt]

How do I enter multiple years of suspended pass loss when selling the rental property? There’s a place to enter last years suspended lost. Should I enter it manually in forms and which form?

[Charlie13]

What if the suspended passive losses and the capital gains all come from the same partnership?

[Critter]

Suspended losses will be shown and reported on the Sch E as an expenses which will produce a loss of ordinary income on the return ... it doesn't get put on the Sch D or form 4797 where the cap gain and depreciation recapture is reported ... but they do eventually net out. This is one of those times where you really need to use a paid tax pro so the situation can be better explained to you. When you use a DIY program you are really on your own and discussions in this forum may not be enough.

[tomdanker]

Why doesn't the 2022 form 8582 have a place to track the passive losses carried over like the 2021 form 8582 did?

[ThomasM125]

Both year Forms 8582 have a line for the previous year unallowed loss carryovers, on line 1(c) for rental losses and line 2(c) for other passive losses.

 

@tomdanker 

[tomdanker]

To the turbo tax expert

i see the lines in the 8582 that you mentioned but I am blocked by the failing software and I can’t enter my values from 2021

perhaps you can unblock me and others and allow me to enter values

even the override doesn’t work

thanks for your reply