What to do with Passive Rental Loss?

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msheald
Posts: 56
Joined: Tue Jul 07, 2015 3:54 pm

What to do with Passive Rental Loss?

Post by msheald » Sun Jan 22, 2017 6:51 am

Hello! We worked overseas for several years and accumulated $25,000 of passive loss when we rented our house out during that time.

When we returned, we have been living in our house and it is our primary residence once again.We don't have any source of passive income.

My understanding is that the passive loss will not apply to the sale of our house when we move since it is our primary residence again. Is this correct?

Will we carry the passive loss for years or is there some way to generate passive income? We do not wish to get into the rental market again. Can Vanguard's REIT index fund generate passive income that can be used of offset the loss?

Thank you and best regards.

Mike

benualson
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Joined: Tue Aug 30, 2016 8:24 am

Re: What to do with Passive Rental Loss?

Post by benualson » Sun Jan 22, 2017 8:10 am

You may be able to deduct it if your magi isn't too high:

http://www.nolo.com/legal-encyclopedia/ ... osses.html

Property owners with modified adjusted gross incomes of $100,000 or less may deduct up to $25,000 in rental real estate losses per year if they "actively participate" in the rental activity. You actively participate if you are involved in meaningful management decisions regarding the rental property and have more than a 10% ownership interest in the property. This allowance is phased out for taxpayers whose MAGI exceeds $100,000 and eliminated entirely when it exceeds $150,000. Thus, it is useless for high-income landlords.

Two Headed Mule
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Location: Brooklyn, New York

Re: What to do with Passive Rental Loss?

Post by Two Headed Mule » Sun Jan 22, 2017 2:28 pm

My understanding is that the passive loss will not apply to the sale of our house when we move since it is our primary residence again. Is this correct?
No -- any suspended passive losses are freed in full on the sale of your residence.
Will we carry the passive loss for years or is there some way to generate passive income? We do not wish to get into the rental market again. Can Vanguard's REIT index fund generate passive income that can be used of offset the loss?
REIT income is not passive income but rather "portfolio" income and thus does not free other passive losses, but this isn't relevant in your case as noted above.

Mule

Topic Author
msheald
Posts: 56
Joined: Tue Jul 07, 2015 3:54 pm

Re: What to do with Passive Rental Loss?

Post by msheald » Sun Jan 22, 2017 2:51 pm

Hello! Thank you for your response.

I am unsure what happens to the passive losses when they are freed when we sell our house. Do they disappear? Are they continued to be brought forward to be used against possible other passive income? Does it offset any appreciation of the house when we sell it?

When we move, we would roll any proceeds into our next dwelling, so we would not realize any funds from the sale at this time.

Thank you and best regards.

Mike

Lafder
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Location: East of the Rio Grande

Re: What to do with Passive Rental Loss?

Post by Lafder » Sun Jan 22, 2017 3:03 pm

Regarding this: "When we move, we would roll any proceeds into our next dwelling, so we would not realize any funds from the sale at this time."

You have realized the funds in the sale, what you do with them is up to you and should not effect or eliminate taxes due.

As long as you have lived in your residence 2 of the past 5 years at the time of the sale, you are allowed to have a 500k gain per couple, 250k for an individual, that no capital gains tax is due on. It is not necessary to roll the proceeds into a new home to claim the exclusion.

The calculation of the cost basis and capital gains taxes due may be effected by depreciation taken as a rental.

You should be sure you understand this so you know if/how much tax is due if you have a gain/profit in the sale of your home.

lafder

Two Headed Mule
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Re: What to do with Passive Rental Loss?

Post by Two Headed Mule » Sun Jan 22, 2017 3:10 pm

msheald wrote:
I am unsure what happens to the passive losses when they are freed when we sell our house. Do they disappear? Are they continued to be brought forward to be used against possible other passive income? Does it offset any appreciation of the house when we sell it?
Freed simply means that the losses are no longer suspended by the passive loss rules and you may finally "use" them on your return (i.e., they will save you tax in the year of sale). If not for the passive loss rules, you would have used these losses in the year(s) of the rental. But these special rules required you instead to defer the use of these losses until some other event occurred. The sale of your residence is one of the those events.

Mule

ryman554
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Re: What to do with Passive Rental Loss?

Post by ryman554 » Sun Jan 22, 2017 4:01 pm

Two Headed Mule wrote:
msheald wrote:
I am unsure what happens to the passive losses when they are freed when we sell our house. Do they disappear? Are they continued to be brought forward to be used against possible other passive income? Does it offset any appreciation of the house when we sell it?
Freed simply means that the losses are no longer suspended by the passive loss rules and you may finally "use" them on your return (i.e., they will save you tax in the year of sale). If not for the passive loss rules, you would have used these losses in the year(s) of the rental. But these special rules required you instead to defer the use of these losses until some other event occurred. The sale of your residence is one of the those events.

Mule
Is that true if, as the OP did, convert the house back into a personal residence? The rule are very complex about how to treat losses/gains for people which convert residences into a rental (which I did) and back (which I didn't). Wouldn't it be more proper to treat the conversion back from a rental to a personal residence as a "sale" with all the depreciation recapture and disallowed passive losses at that tine?

You are not allowed a capital loss deduction for a personal residential property, which is why I ask, which seems to indicate old passive losses may not be allowed. Offset by the very favorable capital gains treatments. I am very curious about this -- I really have no idea how it works.

Two Headed Mule
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Location: Brooklyn, New York

Re: What to do with Passive Rental Loss?

Post by Two Headed Mule » Sun Jan 22, 2017 4:47 pm

Is that true if, as the OP did, convert the house back into a personal residence? The rule are very complex about how to treat losses/gains for people which convert residences into a rental (which I did) and back (which I didn't). Wouldn't it be more proper to treat the conversion back from a rental to a personal residence as a "sale" with all the depreciation recapture and disallowed passive losses at that tine?
The conversion of property from a personal residence to rental and vice versa are not realization/recognition events for tax purposes. As a result, when these things occur there is no passive income generated with which to free suspended passive losses, nor is the "disposition rule" triggered under section 469(g) (since that requires a taxable exchange). So the treatment you describe would not be proper.
You are not allowed a capital loss deduction for a personal residential property, which is why I ask, which seems to indicate old passive losses may not be allowed. Offset by the very favorable capital gains treatments. I am very curious about this -- I really have no idea how it works.
Suspended passive losses are by definition losses that were incurred in a for-profit activity (i.e., the time the property was a rental) and, thus, are not personal losses. You are permitted to take these. The sole issue is one of timing (when are you permitted to take them). The taxable disposition of the subject property is the proper time to recognize these losses, and the IRS has held this to be the case even if part of the gain is sheltered by the personal residence exclusion.

Mule

Lafder
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Location: East of the Rio Grande

Re: What to do with Passive Rental Loss?

Post by Lafder » Sun Jan 22, 2017 6:17 pm

Msheald,
Can you give more specific numbers such as cost basis for the house at the time it was made a rental, how much was depreciated as a rental ? How long have you lived back in the house since it was a rental? Any improvements since you moved in? Estimated sales price?

This way more specifics can be discussed.

I thought I understood about selling a prior rental, but this passive loss has confused me and I may be in the same situation in the next few years.

lafder

MarkNYC
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Re: What to do with Passive Rental Loss?

Post by MarkNYC » Mon Jan 23, 2017 10:21 am

:greedy Here is a suggestion for those who prepare their own tax returns, and have suspended losses from a rental property that has been converted to a personal residence. In each succeeding year, leave the rental property on page one of Schedule E of the tax return until the property is sold. On Part 1 line 1 of Schedule E write "not in service" next to the address. List zero income, expenses and depreciation on Schedule E. The reason for this is that the suspended passive losses will carry forward each year on Form 8582, and if the rental property/passive activity is deleted from the return, there's a good chance that Form 8582 will also be deleted, which would make it more difficult to substantiate deducting the suspended loss when the property is eventually sold in some future year.

In other words, in the year that the suspended loss is deducted, you (and the IRS) want to be able to see on the tax return the passive activity that is associated with the loss.

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