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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3094
Experience:  I've prepared all types of taxes since 1987.
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How does a passive loss from rental real estate ever get ...

Customer Question

How does a passive loss from rental real estate ever get realized when there is no other passive income to offset the loss? Are the losses taken into consideration when the rental property is disposed of?
Submitted: 6 years ago.
Category: Tax
Expert:  Lev replied 6 years ago.

Yes - you may deduct passive losses from rental activities, but such deduction is limited

If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities.

If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income.

The maximum amount of the special allowance is reduced if your modified adjusted gross income is more than $100,000 ($50,000 if married filing separately).

If due to limitations - you may not deduct rental losses - losses will be carried over to the next year and - if unused - will be deducted at the time you sell the rental property.

You may find some additional information in IRS publications:

Customer: replied 6 years ago.
Do you apply the prior disallowed losses to decrease the basis to decrease gain?
Expert:  Lev replied 6 years ago.

Use Schedule D (Form 1040) to report sales, exchanges, and other dispositions of capital assets. Before completing Schedule D, for a disposition of an interest in, or property used in, a passive activity, complete Form 8582, Passive Activity Loss Limitations. - http://www.irs.gov/pub/irs-pdf/f8582.pdf - here you will report unallowed losses.

see instructions - http://www.irs.gov/pub/irs-pdf/i8582.pdf

and IRS publication 925 - http://www.irs.gov/pub/irs-pdf/p925.pdf

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 23194
Experience: Taxes, Immigration, Labor Relations
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Customer: replied 6 years ago.
How are the losses deducted at the time of the sale of the rental property? I would like that explained without having to research the regs if possible. Thanks,
Expert:  jgordosea replied 6 years ago.

Greetings,

Form 8582, Passive Activity Loss Limitations is the form that computes the loss allowed or carried over each year, adds the carry over loss to the next year and then allows the balance of the carry forward loss in the year of the sale.

The allowable loss from Form 8582 is what is reported on the Schedule E : Line 22 is for Income or (loss) from rental real estate... and Line 23 is for Deductible rental real estate loss. and also says: Caution. Your rental real estate loss on line 22 may be limited. See page E-5 to find out if you must file Form 8582.

So in a given year the actual income and deductions are totaled for Schedule E Line 22 but the amount that is deducted is figured on Form 8582 along with the amount to carry to the next year. In the next year, again the actual income and deductions are totaled for Schedule E Line 22 but the amount that is deducted for that year is figured on Form 8582 along with the amount to carry to the next year (which includes the prior year carryover amount.

Finally in the year of the sale (if you completely dispose of your entire interest in a passive activity or a former passive activity) you report net income or loss and prior year unallowed losses from the activity. All the net income and losses are reported on the forms and schedules normally used (Sch E and Form 8582). See Reporting an Entire Disposition on Schedule D or Form 4797

I hope this explains how the carryforward passive losses are deducted when the rental property is disposed.

Best regards.

 

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3094
Experience: I've prepared all types of taxes since 1987.
jgordosea and 2 other Tax Specialists are ready to help you
Customer: replied 6 years ago.
Thank you. I really appreciate the extra effort. Sometimes I need many sources of explanations before it sinks in.Chris
Expert:  jgordosea replied 6 years ago.
You are quite welcome. Thank you for the opportunity to be of service.

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jgordosea
jgordosea
Enrolled Agent
2839 Satisfied Customers
I've prepared all types of taxes since 1987.