A friend bought a house in October 2004 and lived in it until August 2010 when she moved to another city. She rented starting August 1, 2010. For the next 25 months and rented it to several tenants and managed the property
(although she did have a managing agent for some of the time). On her tax returns
for 2010 and 2011 she deducted straight-line depreciation
on the house. On form
8582 (Passive Activity Loss Limitations
) she declared her rental loss as a rental real estate activity with active participation so that the loss offset current income
. The loss for both years flows through to line 17 of form 1040
from Schedule E
. In July 2012 she sold the house (and land) for a significant loss.
Questions: (1) Is the house a section 1231 (business) asset
which would allow her to deduct $3,000 of the loss against ordinary income
each year (going 2-years back or 20 years in the future)? (2) In 2012 she retired and had some investment income along with social security, but no wages. The loss on the rental in2012 was greater than her income. She has elected not to carry the NOL back. Is her schedule E loss added to her NOL from the sales
of the house and carried forward?
In your answer please reference specific IRC sections.