We have a rental property with over $20,000 accumulated in passive activity losses. My husband and I are separating and we need to decide between converting the rental property back into a primary residence for myself, or selling it and using the profit to purchase another home for myself.
I understand that if we sell the property the passive activity losses can then directly reduce our income for taxes
this year. I am also of the understanding that by using the revenue from the sale to purchase another home, it is considered a like-kind exchange and we then won't have to pay taxes on the gains from equity in that rental property.
We need answers to two questions to help us decide.
1. If we convert it back into a primary residence, do we then lose the passive activity loss or does it just continue carrying forward?
2. If we sell it and use the revenue to significantly pay down a mortgage on another property we already own, is that considered a like-kind exchange?
In the state of AZ.
Any guidance is appreciated.