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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11168
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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WE PURCHASED A HOUSE IN 2007. WE MOVED OUT IN 2013.WE COULDN'T

Customer Question

WE PURCHASED A HOUSE IN 2007. WE MOVED OUT IN 2013.WE COULDN'T GET A BUYER, SO RENTED IT AS A VACATION RENTAL FOR THE 2014 AND 2015 VACATION SEASONS, ABOUT 5-6 MONTHS.
WE SOLD THE HOUSE AT A HUGE LOSS IN 2015.
WE WERE ADVISED TO REPORT THE LOSS ON FORM 4797, BUT THIS WIPES OUT OUR 2015 INCOME, WITH NO CARRY FORWARD PROVISION???
I'M THINKING WE'RE STUCK WITH A LOSS ON SCHEDULE C OF $1,500
HELP.
Submitted: 11 months ago.
Category: Tax
Expert:  Lane replied 11 months ago.
You wouldn't be using schedule C here. Schedule C is for real estate professionals. You would have reported your rental income and losses on schedule E .. unless you were "materially involved" in the operation of the rental by providing services such as linen service, etc....Material participation is a high hurdle. You can read more about that here: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Loss-ATG-Chapter-4-Material-Participation...From there:..."In a NutshellA taxpayer materially participates in an activity if he or she works on a regular, continuous andsubstantial basis in operations (IRC § 469(h)(1)). If a taxpayer does not materially participate, losses are passive, which means they generally are not deductible in the absence of passive income. Material participation is time sensitive"...I provide this information is just for clarification....When SELLING a capital asset such as this, you DO in deed use 4797, which flows to schedule D, as a capital gain or loss....And there are really two issues there; (1) Capital losses must be used against any capital gains first, then a limit of $3000/year can be used against ordinary income (other income in the household) and then carried forward to the next year, applied the same way (first against any CAPITAL losses, then 3000 against other income) and THEN carried forward to the following years in the same manner (until the loss is completely used up....The second issue, however, (2) is that if you had suspended passive losses (coming FROM your schedule E) - where rental losses were more than the rental income (or any other passive income you had) THOSE losses can be used against any other income in the year of sale ... and once eliminating all income for the years are carried back and forward as a Net Operating Loss (NOL)....The basic rules for using an NOL are:...Carry the amount back to the preceding two tax years and apply it against any taxable income, which can generate an immediate tax rebate. You can waive this action and instead proceed directly to the next step; if so, attached a statement to your tax return in the year in which the NOL was generated, documenting the waiver.Carry the amount forward for the next 20 years and apply it against any taxable income, which reduces the amount of taxable income in those years.After 20 years, any remaining NOL is cancelled.