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USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1236
Experience:  US Taxation specialist.
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I understand that CA conforms to FED passive activity loss

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I understand that CA conforms to FED passive activity loss rules. However, when completing the FTB 3801, it looks like you are forced to take the allowable amount of loss ($25000) even if you have little or no passive income to take it against. The Federal rules state that passive losses can only be taken to the extent of the passive income. How do I complete the 3801 form to take only the amount of passive loss that offsets passive income and carry forward the balance of the loss.

USTaxAdvising : Hello,Thank you for using justanswer. I can assist you with your questions today.
USTaxAdvising : I think what you are referring to is the 25k allowed loss deduction that is provided to someone renting real estate if they are actively managing the property. California follows federal on this allowed loss deduction. You are not forced to take it. But can take it if you elect to do so. I can't see why you would not take it unless you did not have California taxable income. I have looked through the instructions and the form and do not see where you are required to take the deduction.
USTaxAdvising : Can you tell me what line on the worksheets and form you are referring to?
USTaxAdvising : If you can get back to me on that I can provide a more thorough answer to your question.

Yes, it is regarding rental real estate activities. There are 5 properties. First, line 11 on the FTB 3801 form comes to $26,315 allowable loss, which includes the $25,000 allowance and $1,315 passive gain. The only other income is $48 interest income. Yet every tax software I use automatically takes the full $25,000 loss and it is then lost and is not carried forward. Since there is no income to speak of to offset the losses, how do I calculate the true carryforward on the worksheets and not take the special allowance? Specifically the worksheets 3,4, and 5 on page 3 of the FTB 3801 and the CA adjustments worksheet on Page 2 of the FTB 3801. (Explain Worksheet 3 and I can do the 4 and 5.)


I really appreciate your help with this.

Hi Kaitlyn,


The tax software is doing the correct thing with respect to the 25K. If you use it and you don't have any taxable income then it does not get carried forward. It is gone. Like you mention you don't want to take the deduction because there is no benefit for you this year. It would be better to carry forward the full disallowed loss.


You state above "The Federal rules state that passive losses can only be taken to the extent of the passive income." - while this is correct the fed allows a 25K deduction from other income when you actively participate. I am assuming you are claiming the deduction on federal return which is why it is coming over to the CA return. Are you claiming the deduction on the federal return?


If yes then you would have to answer the questions in the tax software so that you are not actively participating. Thus you would not get the 25K deduction federally. You can't say that you were active for federal and not active for CA....











Customer: replied 3 years ago.

For Federal, I am a real estate professional. As I understand it, I do not have to file a schedule C and choose not to. Everything is on the schedule E. Since I am a Real Estate Professional, I claim a net operating loss and carry forward the balance each year until my gains and income are greater than my NOL.


Does this mean that I must take the $25,000 special allowance and thus lose that much of my loss every year even if my gains do not fully offset it?


Thanks for the clarification.

Hi Kaitlyn,

Yes, since you are an active real estate professional you are actively participating and you must take the 25,000 deduction. Note though that taking this deduction may generate an NOL "net operating loss" which can then be carried forward to the next year. So you may not lose all the deductions.... See link here for some more info -

I have researched this quite a bit as I thought that you could elect out of the deduction but apparently, since you have claimed it federally, (and presumably taken the deduction in prior years) you have to take the deduction again this year.

Let me know if you have any further questions on this. It appears you will have to apply the deduction. But it may generate an NOL so the losses may not be completely foregone.

Best regards
USTaxAdvising and other Tax Specialists are ready to help you
Hi Kaitlyn,

I have continued to research this and I have been reading the same conclusions as noted above. I haven't had anyone ask about not taking the deduction before, it is always about taking the deduction.

Let me know if something is not clear or if you have further questions.

Best regards
Customer: replied 3 years ago.



The only other thing I need to know what do I need to do to properly report when I have sold a property with an unrecovered loss?



Basically what happens is the suspended loss is released and you can deduct it in the year of sale. There is nothing that you need to do really, just file the applicable forms. Federally it would be schedule e and I think form 3801 for CA.
Customer: replied 3 years ago.

Thank you so much!

No problem! Have a great day.

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