Passive Carryover loss from multiple rental properties when one is sold

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Alana888
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Passive Carryover loss from multiple rental properties when one is sold

Post by Alana888 » Thu Feb 13, 2020 6:17 pm

I own 2 real estate rental properties with passive activity carryover losses accumulated over 5 years.
In 2019 I sold the less expensive of these properties.
I was thinking that Turbo Tax would calculate the passive carry over loss for the one property I sold and it would appear as a deduction for about $32,000 on Schedule E.

What TT did instead was include all of the accumulated carryover loss from this property and the other property that I haven't sold and put a loss of $130,000 on schedule E.
For many reasons this is not beneficial to me and I would like to apply just the carryover loss for the property that I sold this year against my other taxable income, not the carry over loss for the other property I still own, which I would like to use when I sell that property.

Is this something that is allowed by the IRS or do I have to take the accumulated passive carryover loss deduction for all the properties I own if I sell only one of them?

If this is allowed, how do I go about adjusting this so that TT only reports the passive carryover loss for the property I sold as a loss on schedule E and continues to carry over the loss for the property I still own until I sell it.

Thank you for any help with this.

fabdog
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Location: Williamsburg VA

Re: Passive Carryover loss from multiple rental properties when one is sold

Post by fabdog » Thu Feb 13, 2020 6:40 pm

Based on your other post where you were having issues getting this all set up in Turbo Tax, I am guessing you have made an error in setting up the properties.

the proper tax treatment is that the passive loss carryovers should be released for the property you sold.

Not all of the properties.

Give the struggles you are having getting this done you may want to consider paying someone to do your taxes this year

Mike

kaneohe
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Re: Passive Carryover loss from multiple rental properties when one is sold

Post by kaneohe » Thu Feb 13, 2020 6:41 pm

https://www.irs.gov/pub/irs-pdf/f8582.pdf

see F8582 lines3/4/15/16. My understanding is that you are allowed to take the loss/suspended loss from the property sold. If that happens to be a gain rather than a loss, you are allowed to use enough of the other property loss to offset the gain.

MarkNYC
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Re: Passive Carryover loss from multiple rental properties when one is sold

Post by MarkNYC » Thu Feb 13, 2020 7:10 pm

With certain exceptions, passive losses are allowed only to the extent of passive income, or in the year of disposition of the passive activity.

Let's say the taxpayer has two passive rental properties. Property 1 has a loss carryover to the current year of $30K and property 2 has a loss carryover of $100K. If property 1 is sold in the current year for a $40K gain, the $30K loss carryover for that property is currently allowed due to the disposition, and since the $40K is considered a "passive gain", $40K of the $100K of other passive loss carryovers is also allowed, with the remaining $60K carried forward.

A taxpayer with passive loss (or capital loss) carryovers that are currently allowed cannot choose to forego the current year deduction on the premise that the loss would provide a better tax benefit if deducted in a future year.

kaneohe
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Re: Passive Carryover loss from multiple rental properties when one is sold

Post by kaneohe » Thu Feb 13, 2020 7:33 pm

MarkNYC wrote:
Thu Feb 13, 2020 7:10 pm
With certain exceptions, passive losses are allowed only to the extent of passive income, or in the year of disposition of the passive activity.

Let's say the taxpayer has two passive rental properties. Property 1 has a loss carryover to the current year of $30K and property 2 has a loss carryover of $100K. If property 1 is sold in the current year for a $40K gain, the $30K loss carryover for that property is currently allowed due to the disposition, and since the $40K is considered a "passive gain", $40K of the $100K of other passive loss carryovers is also allowed, with the remaining $60K carried forward.

...........................................................
MarkNYC........I would have thought that the 30K of prop 1 carryover losses would have been used against the 40K gain leaving 10K more of losses that could have been used from prop 2........leaving 90K of carryover losses for prop 2. Is this incorrect?

Are you saying that because any carryover losses from prop 1 can be used when prop 1 is sold (regardless of whether there is a gain or not), the full gain of 40K can be used against the carryover losses from prop2.

petulant
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Re: Passive Carryover loss from multiple rental properties when one is sold

Post by petulant » Thu Feb 13, 2020 7:45 pm

MarkNYC wrote:
Thu Feb 13, 2020 7:10 pm
With certain exceptions, passive losses are allowed only to the extent of passive income, or in the year of disposition of the passive activity.

Let's say the taxpayer has two passive rental properties. Property 1 has a loss carryover to the current year of $30K and property 2 has a loss carryover of $100K. If property 1 is sold in the current year for a $40K gain, the $30K loss carryover for that property is currently allowed due to the disposition, and since the $40K is considered a "passive gain", $40K of the $100K of other passive loss carryovers is also allowed, with the remaining $60K carried forward.

A taxpayer with passive loss (or capital loss) carryovers that are currently allowed cannot choose to forego the current year deduction on the premise that the loss would provide a better tax benefit if deducted in a future year.
Can you let me know the IRS pub or other source so I can read more? This is interesting

MarkNYC
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Re: Passive Carryover loss from multiple rental properties when one is sold

Post by MarkNYC » Thu Feb 13, 2020 7:55 pm

kaneohe wrote:
Thu Feb 13, 2020 7:33 pm
MarkNYC wrote:
Thu Feb 13, 2020 7:10 pm
With certain exceptions, passive losses are allowed only to the extent of passive income, or in the year of disposition of the passive activity.

Let's say the taxpayer has two passive rental properties. Property 1 has a loss carryover to the current year of $30K and property 2 has a loss carryover of $100K. If property 1 is sold in the current year for a $40K gain, the $30K loss carryover for that property is currently allowed due to the disposition, and since the $40K is considered a "passive gain", $40K of the $100K of other passive loss carryovers is also allowed, with the remaining $60K carried forward.

...........................................................
MarkNYC........I would have thought that the 30K of prop 1 carryover losses would have been used against the 40K gain leaving 10K more of losses that could have been used from prop 2........leaving 90K of carryover losses for prop 2. Is this incorrect?

Are you saying that because any carryover losses from prop 1 can be used when prop 1 is sold (regardless of whether there is a gain or not), the full gain of 40K can be used against the carryover losses from prop2.
The $30K of loss carryovers from property 1 is deductible in the year of sale of property 1, regardless of whether the sale results in a gain or loss. If the sale is a gain, the gain is "passive income" and will (if done properly) flow to Form 8582 and allow any other passive losses to be currently deductible to the extent of the passive gain.

--
Edit: It may be correct that the amount of loss allowable for property 2 is limited to the excess of the property 1 gain minus the property 1 current year and prior year losses. Further review required. In the OP's situation, the current-year results will not change.
Last edited by MarkNYC on Fri Feb 14, 2020 8:32 am, edited 1 time in total.

MarkNYC
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Re: Passive Carryover loss from multiple rental properties when one is sold

Post by MarkNYC » Thu Feb 13, 2020 8:16 pm

petulant wrote:
Thu Feb 13, 2020 7:45 pm
MarkNYC wrote:
Thu Feb 13, 2020 7:10 pm
With certain exceptions, passive losses are allowed only to the extent of passive income, or in the year of disposition of the passive activity.

Let's say the taxpayer has two passive rental properties. Property 1 has a loss carryover to the current year of $30K and property 2 has a loss carryover of $100K. If property 1 is sold in the current year for a $40K gain, the $30K loss carryover for that property is currently allowed due to the disposition, and since the $40K is considered a "passive gain", $40K of the $100K of other passive loss carryovers is also allowed, with the remaining $60K carried forward.

A taxpayer with passive loss (or capital loss) carryovers that are currently allowed cannot choose to forego the current year deduction on the premise that the loss would provide a better tax benefit if deducted in a future year.
Can you let me know the IRS pub or other source so I can read more? This is interesting
The somewhat complicated passive activity rules are explained in IRC Sec. 469. Certain sections of the instructions to Form 8582 may also be helpful.

Topic Author
Alana888
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Joined: Thu Apr 10, 2014 3:50 am

Re: Passive Carryover loss from multiple rental properties when one is sold

Post by Alana888 » Thu Feb 13, 2020 8:18 pm

Thank you for your replies.

I started this new thread because I have figured out and resolved all of the issues in my previous thread and just have this one question left.

Its seems that these responses are somewhat contradictory with some saying that I can deduct the loss carry over from this property only and others saying that I have to use the deduction of the carry over loss for all the properties, if there was enough of a gain to offset them (which there was)

MarkNYC - What you are describing might be what Turbo Tax did but it seems to have used the carryover loss from both properties to offset the gain on my ordinary income.

The property I sold had $135,000 taxable gain and $32,000 passive carryover loss. The property I didn't sell has $95,000 carryover loss. On Schedule 1 Turbo tax put my $100,000 ordinary income from another business and then deducted the $127,000 carry over loss from both properties leaving a $27000 loss that it transferred to 7a of the 1040 where it was deducted from the rest of my taxable income.
The $100,000 of income from my other business wasn't even transferred to the 1040 as it was cancelled out on Schedule 1 by the carryover loss from the 2 properties.

Given the choice I would like to pay tax on my ordinary income and just use the carryover loss from the property I sold as a deduction against the gain from that property and let the loss from the other property continue forward. If that is not allowed, thats ok, I just would like to know if the tax law says I must use the deduction from both properties to offset my income this year or if its just a limitation in Turbo tax that I can change.

MarkNYC
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Re: Passive Carryover loss from multiple rental properties when one is sold

Post by MarkNYC » Thu Feb 13, 2020 9:16 pm

Alana888 wrote:
Thu Feb 13, 2020 8:18 pm
Its seems that these responses are somewhat contradictory with some saying that I can deduct the loss carry over from this property only and others saying that I have to use the deduction of the carry over loss for all the properties, if there was enough of a gain to offset them (which there was)

MarkNYC - What you are describing might be what Turbo Tax did but it seems to have used the carryover loss from both properties to offset the gain on my ordinary income.

The property I sold had $135,000 taxable gain and $32,000 passive carryover loss. The property I didn't sell has $95,000 carryover loss. On Schedule 1 Turbo tax put my $100,000 ordinary income from another business and then deducted the $127,000 carry over loss from both properties leaving a $27000 loss that it transferred to 7a of the 1040 where it was deducted from the rest of my taxable income.
The $100,000 of income from my other business wasn't even transferred to the 1040 as it was cancelled out on Schedule 1 by the carryover loss from the 2 properties.

Given the choice I would like to pay tax on my ordinary income and just use the carryover loss from the property I sold as a deduction against the gain from that property and let the loss from the other property continue forward. If that is not allowed, thats ok, I just would like to know if the tax law says I must use the deduction from both properties to offset my income this year or if its just a limitation in Turbo tax that I can change.
As I previously stated, you cannot choose which year to deduct allowable losses.

I've explained as clearly as I can the applicable passive activity rule, and don't think I can add anything useful without seeing your relevant tax forms and schedules. If you are receiving contradictory comments and remain uncertain as to what is correct, there are enough dollars involved that you should consider engaging a tax professional to assist with your tax return preparation.

Topic Author
Alana888
Posts: 106
Joined: Thu Apr 10, 2014 3:50 am

Re: Passive Carryover loss from multiple rental properties when one is sold

Post by Alana888 » Thu Feb 13, 2020 9:51 pm

As I previously stated, you cannot choose which year to deduct allowable losses.

I've explained as clearly as I can the applicable passive activity rule, and don't think I can add anything useful without seeing your relevant tax forms and schedules. If you are receiving contradictory comments and remain uncertain as to what is correct, there are enough dollars involved that you should consider engaging a tax professional to assist with your tax return preparation.
Got it
Thank you. There was some discrepancy in the responses so I guess I needed to hear it a little more strongly.
Sounds like you know what you are talking about and TT seems to agree

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