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I have three rental properties and they are separate

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I have three rental...

I have three rental properties and they are separate activities for tax purposes. There are suspended passive losses on each one. I sold one of them last year with capital gain. I know that the suspended passive loss from all three properties should be available to offset my capital gain. However, can I choose to only use the passive loss from the sold property and leave the passive loss from the other two properties to be used for those individual property when I sell them later?Or can I choose to play tax on the capital gain and do not use any passive loss at this time so that I can use all these passive loss later when I sell my other properties?

Accountant's Assistant: What are the assets or property for this capital gain?

Rental property

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Submitted: 2 months ago.Category: Tax
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5/2/2018
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 2 months ago
Fred Rook
Fred Rook, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 141
Experience: 20+ years as a Certified Public Accountant, including 19 years working in public accounting firms with extensive tax, audit, write-up and consulting experience.
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Hello. My name is ***** ***** I can assist you. You are correct in saying that you can deduct your suspended passive losses from the capital gain when you sell the rental property. In order to take the passive losses, you must sell "substantially all" of you rental activity. If you own several properties and treat each one as separate activities for tax purposes, then you can still take the passive losses against the capital gains. If you elect to combine the activities as one activity for tax purposes and you only sell one property, you can't take the passive losses because you did not sell "substantially all" of your interest in your rental activity.

Please let me know if this addresses your question.

Regards,

Fred

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Customer reply replied 2 months ago
No, this did not answer my questions. My 3 properties are 3 separate activities. They’re not considered as “substantially all”.
Customer reply replied 2 months ago
I sold one of them with capital gain. My question is: do I have to use all the unsuspended passive loss to offset my capital gain,or I can choose to use part of it and pay tax on part of my capital gain.
Customer reply replied 2 months ago
The unsuspended passive loss is from all 3 properties.
Customer reply replied 2 months ago
My question is: can I choose to only use the passive loss from the sold property and leave the passive loss from the other two properties to be used for those individual property when I sell them later?
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 2 months ago

No - you have to claim the available passive activity losses from your rental properties. You can't pick and choose your passive losses, otherwise they will not carry over.

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Customer reply replied 2 months ago
Since they are separate activities,can I use the passive loss separately for each activity?
Customer reply replied 2 months ago
I have 2 qualified free call with Justanser.com can I use them for our phone communication?
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 2 months ago
I will be back in fromt of my computer in 5-10 min
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Customer reply replied 2 months ago
Which Publication has the details of these rules?
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 2 months ago

Publication 925 from the IRS has these rules in detail. Also, I found an article that talks about how you can't utilize an amount of passive loss that is less than what you can utilize. Hope this helps....

https://www.irs.gov/publications/p925

https://www.bankrate.com/finance/taxes/defer-passive-activity-loss.aspx

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Customer reply replied 2 months ago
The article is for the $25,000 used for offset AGI. Would that be the same for sold properties ? Especially the properties are separate activities?I read publication 925. Doesn’t seem there are specific rules for my issues.
Customer reply replied 2 months ago
Are you there?
Customer reply replied 2 months ago
Can you suggest the page /paragraph on p925 for this issue? Thanks
Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 2 months ago
The point of the article was to simply point out that you can’t utilize less passive loss than you have available. I’ll take a look at p925 in a few.
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Tax Professional: Fred Rook, Certified Public Accountant (CPA) replied 2 months ago

Page 11 of the publication talks about the dispositions but is more a general discussion and not specific. Section 469 of the IRC has more specifics with respect to your issue.

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Customer reply replied 2 months ago
On p925, page8, under subtitle: Separately identified items of deduction and loss.
—- what that means
Customer reply replied 2 months ago
Does that mean: if it does result in an income tax liability differently ,the item of deduction or loss an be account separately?
Customer reply replied 2 months ago
Can be
Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 2 months ago
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,132
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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Hi! Different expert here. I have been working in the tax area for over 33 years, and am familiar with your situation.

You are mistakenly stating that you "offset your capital gain with the passive losses". You do not do this. When you sell a property, the suspended passive losses FOR THAT PROPERTY ONLY are freed up and are deducted. The normal $25k allowance does not apply to the property that was disposed of. And the $25k deductible allowance is only allowed if your AGI is under $100k. It is reduced by $1 for every $2 that your AGI exceeds $100k. It is totally phased out if your AGI exceeds $150k. However, when you dispose of a property, the suspended losses from prior years that are allocated to that property are deducted, regardless of your income level. Your AGI could be $1 million, and you could still deduct the suspended passive losses from a property that was sold.

This passive loss does not directly offset any gain, whether ordinary or capital. The suspended losses are deducted on Line 17 of the Form 1040. They can be used to offset any other income, whether wage income, partnership income, pension income, and yes, gains. But when you calculate your tax, the gains are taxed at the capital gains rates, and the net of the rental losses will offset your other income that is taxed at normal rates first.

So you are not "wasting" your capital gains tax rates by using the suspended passive losses, unless you have less income from other sources than you have passive loss. In this case, the passive losses will offset the capital gains, but only because there is no other income taxed at regular tax rates.

You cannot elect not to take any suspended passive losses that are triggered by the sale.

I hope this answers your question. If you have any more, please feel free to ask and I will be happy to answer.

Thanks! Have a great week!

Roger

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Customer reply replied 2 months ago
Hi, Thanks for answering my questions. Sorry I have just been off work and able to chat with you.
My question is not about the $25,000 for the AGI.
My question is: after I sold 1 of my 3 rental properties (they are separate activities), can I choose to only use the previously accumulated and suspended passive losses from the sold property and leave the passive loss from the other two properties to be used for those individual property when I sell them later?
Customer reply replied 2 months ago
According to your answer to me: “When you sell a property, the suspended passive losses FOR THAT PROPERTY ONLY are freed up and are deducted. ” Any publication or tax law described this?
Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 2 months ago

Internal Revenue Code (IRC) §469(g) addresses the complete disposition of the passive activity. It says that if you dispose of the passive activity in a fully taxable transaction (in other words, not a sale to a related party) then you can deduct the losses. You can only deduct the suspended losses that were generated from the activity that was sold, not the other ones.

Here is an article from the AICPA's Tax Advisor magazine. It is pretty good.

https://www.thetaxadviser.com/issues/2008/may/disposingofanactivitytoreleasesuspendedpassivelosses.html

Let me know if this helps.

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Customer reply replied 2 months ago
Hi Roger,
I read the article. It is good, but I am even more confused.
According to your answer to me: “When you sell a property, the suspended passive losses FOR THAT PROPERTY ONLY are freed up and are deducted. ” However, the examples in the article showed that the capital gains were absorbed by PAL of other unsold properties. Isn’t that conflict with your statement?
Customer reply replied 2 months ago
Hi Roger,
Are you going to answer my question with further explanation? Thanks.
Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 2 months ago

Here is another article. It also addresses corps and other issues (credits carried forward, etc) but if you look at the paragraph that says "Disposing of a passive activity allows suspended passive losses to be deducted" it says that the taxpayer can deduct suspended and current losses from that activity.

Here is from TurboTax's website, and it says the same thing that I said above, about the income and losses being on different parts of the return and not offsetting the capital gain.

https://ttlc.intuit.com/questions/3430246-can-passive-loss-carryover-be-used-to-reduce-capital-gain

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Customer reply replied 2 months ago
I saw this article on TurboTax web. I agree that it has the same point as yours. However, don’t you feel this is different from the article on the AICPA's Tax Advisor magazine? Is this a obscure area?
Customer reply replied 2 months ago
I really want to have some info from more authoritative sources with clear definitions for this issue. Anything like that available?
Customer reply replied 2 months ago
Such as publications or instructions from IRS or tax laws.
Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 2 months ago

The article in the Tax Advisor was written for Corporations. You can see that in the article. Corporations have a different set of rules for the taxation of gains and suspended losses.

I will look for something more authoritative.

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Customer reply replied 2 months ago
Thanks, ***** ***** wait for your news.
Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 2 months ago

Still looking. Found articles, but looking for authority.

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Customer reply replied 2 months ago
Any findings?
Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 2 months ago

I found an article from the Tax Advisor, April 1 2017 edition. In the article, it says:

"Disposing of a passive activity allows suspended passive losses to be deducted

When a taxpayer disposes of the entire interest in a passive activity, that activity is no longer subject to the passive activity rules. If the activity is disposed of in a fully taxable (as opposed to tax-deferred) transaction to an unrelated party, both current and suspended passive activity losses generated by that activity (as well as any loss on the disposition) can be deducted (Sec. 469(g)(1))."

So only the passive losses from the activity that was disposed of can be triggered, which is what I said originally.

An other article, in the CPA Journal, states that

"Dispositions

Suspended passive losses are fully activated upon disposition of the activity. To qualify as a disposition, the entire interest in the activity must be disposed of. This requires a disposition of the taxpayer's interest in all entities engaged in the activity and all assets used or created in the activity. Even if the suspended losses allocable to the activity produce a net loss upon disposition the loss would be allowed in full. Taxpayers should be aware of their suspended passive losses. In the case of a disposition where no cash is received,such as a bankruptcy, the taxpayer would be able to offset the relief of debt and the restoration of the capital account against such suspended losses. When a passive activity is disposed of, and the suspended losses allocable to that activity are less than the gain recognized upon disposition, passive losses allocable to other activities may be utilized."

Again, it states that only the losses from the activity that was disposed can be used. The other suspended losses can't be used.

And, as I stated, the losses that are generated appear on the different lines of the Form 1040, and the gain that results is calculated at the capital gains tax rate.

I ran an example through my tax program and the result followed this pattern.

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Customer reply replied 2 months ago
Thanks for sharing the articles. However, how do you explain this sentence in the second article: “When a passive activity is disposed of, and the suspended losses allocable to that activity are less than the gain recognized upon disposition, passive losses allocable to other activities may be utilized.”If Ok, Could you show me your example through your tax program and the result followed this pattern? I am working on my tax return and try to use the suspended previous passive losses from the disposed property only, but the forms only give me the option to use the passive losses from all my properties.
Thanks!
Customer reply replied 2 months ago
8220;When a passive activity is disposed of, and the suspended losses allocable to that activity are less than the gain recognized upon disposition, passive losses allocable to other activities may be utilized."——do I have the option not to use the passive losses allocated to other activities?
Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 2 months ago
That means if other activities have a current your loss, the passive income from the game can be utilized to use these losses. It applies to current year losses from the other activities.
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Customer reply replied 2 months ago
Are you able to send me your example which you ran through your tax program? Thanks!
Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 2 months ago
I will have to reconstruct it. I did not keep it.
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Customer reply replied 2 months ago
Please. Thanks!
Tax Professional: taxmanrog, Certified Public Accountant (CPA) replied 2 months ago

I have run some different scenarios. If you can give me your approximate numbers, I can run something that means something.

I have been busy at work and with family issues (wife is fighting cancer, had some bad news) so I apologize for the delay in responding.

Thanks!

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Customer reply replied 2 months ago
I am really sorry to hear about that. Hope your wife will get good treatment and recover.I realized this is a hard issue. I do get conflicting answers from different CPAs. I am trying to contact IRS for an answer.So, please take care of your family. I won’t bother you to run the process. Thanks for your hard work for helping with my tax issue.
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