The suspended passive losses cannot be used to offset depreciation recapture. it produces $10,000 net losses that are disallowed as passive losses under § 469(a). (A full discussion of active participation is out of the scope of this blog, but will revisit it at another time.) Is there a MAGI limit/phase out to this? Here is a good example: Bob Smith owns three rental properties that he has held for several years. I second that. Suspended passive losses continue to track forward until they can be deducted against active or passive income, or you dissolve your interest in the property. Prior year suspended losses from the properties are: This year Bob’s tenant offered to buy Whispering Pines for $250,000. An amount of the taxpayer’s gross rental activity income for the taxable year from an item of property equal to the net rental activity income for the year from that item of property is treated as not from a passive activity if the property . is rented for use in a trade or business activity . . Can anyone elaborate on those first two conditions? If you own only one rental property and sell it, then you can take the deduction because that property … At Bourke Accounting we are well versed in Passive Activities, give us a call today at 502-451-8773. But you can fully deduct these suspended passive losses when you sell your rental property in a qualifying disposition. Any excess losses are suspended until the taxpayer has passive income to offset those losses or disposes of the property. Can those released passive losses be used to offset ordinary income then? While this is pretty straightforward with a single property, additional complexity arises when a  taxpayer owns multiple properties. In other words, the gain or loss must be recognized, but not necessarily included in gross income. In a fully taxable event (where all gain/loss is realized and recognized). Under IRC § 469 (g), a “qualifying disposition” requires three criteria: 1. As such, they are used to offset additional suspended passive losses. The $100,000 in gain will be offset by the suspended losses and current year losses, therefore he will pay tax on $59,000. Within three years ofrenting the property, A sells the entire property to an unrelated third party for $800,000, realizing a net gain on the sale of $100,000 (not taking into account the $30,000 suspended passive losses). Can those passive losses be used to offset the depreciation recapture tax? When you convert the rental property to personal use (investment property,includes second home, or primary residence), your passive loss carryovers will stay suspended with the property but cannot be used until you sell the property a fully taxable transaction to an unrelated party. Income from passive activities including rental real estate may also be subject to the 3.8% Medicare Contribution Tax on net investment income. A’s $100,000 of gain from the sale of the property is excluded from A’s gross income as provided under IRC 121. Can those passive losses be used to offset the depreciation recapture tax? Under IRC § 469(g), a “qualifying disposition” requires three criteria: 1. Thank a lot for explaining TurboTaxMinhT. For most real estate investors, a loss from rental properties is considered a passive loss. From there they are netted against the Schedule E gain/loss and propagate to the 1040, line 7a. Selling a rental property for a gain will allow you to activate any suspended passive losses regardless of which property you sell and which property actually produced the losses. Are you familiar with “suspended passive losses?” Generally, with  a passive activity (e.g., rental property), losses each year are allowed to the extent of income unless the taxpayer qualifies under 469(i) as actively participating in the activity. So this effectively allows them to offset ordinary … Yes, they are deducted from ordinary income. To take this deduction, you must sell \"substantially all\" of your rental activity. I have 3 rental properties .1. has $300,000 in suspended passive losses 2. has $150,000 in suspended passive losses 3. has $35,000 in suspended passive losses .If I sell a property and the gain is gre … read more I have deferred passive losses on multiple rental properties that have accumulated over the last eight years to the total of around $180,000. The suspended and current passive ordinary losses from property A would be deductible against nonpassive income in the year of disposition. The rental home had suspended passive-activity losses. Will those excess gains release some of the suspended passive losses from the other rental properties the taxpayer still owns? This means that you can sell property A for a gain and activate the suspended losses produced by properties B, C, and D. **Say "Thanks" by clicking the thumb icon in a post. See you soon! Exceptions to Passive Loss … The sale is done or they can keep carrying forward to a future sale? If you sell a rental property with suspended PALs, you may be able to deduct them on top of deducting any Section 1231 loss from the sale. Smith's distributive share of the net loss for 1988 is $20,000 for federal and Massachusetts purposes. And can those loss to offset some of the description recapture taxes, not just capital gain? 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