Main home sale and unallowed passive loss - Posted by redave

Real Estate Investing Real Estate Law
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Posted by redave on April 08, 2007 at 12:58:08:

Jimmy,

Thanks for your response. Surfing the internet I found the Q&A below, it’s clear I can use suspended losses from a “former passive activity”, “…even thought there would be a gain exclusion if it is a principal residence”.

Now I just need to figure out how to make turbotax do what I want. The best I can figure is that I need to complete schedule D, doesn’t seem to be any other form involved wrt the sale, and somehow make form 8582 stop carrying the suspended losses forward for that property.

I will reduce the basis by the allowed depreciation since May 6, 1997 and increase the basis by the amount of the suspended losses, and use the $250k exclusion for which I qualify, and pay capital gains on the net as indicated on schedule D.

Thanks for your comments,
Dave

Converting a Rental Property to a Personal Residence

A client had a rental house that had a passive loss carryforward of $54,506. They decided to move into the home and lived in the house for two years before they sold it. Does the passive loss maintain its status and become a deductible passive loss carryover in the year the house is sold?

The rental house would be a “former passive activity.” If there is other passive income in the year in which the activity became a former passive activity the passive loss carryover (from the current former passive activity) is available to offset such other passive income after such passive loss carryover is reduced by any income from the former passive activity in the current year. See Sec 469(f)(1)(c)

In the case of a rental property converted to a residence, there would not be any current income from the activity which could absorb suspended passive losses carried forward to years prior to the year of sale of the residence.

The suspended losses would be deductible in the year of a taxable disposition of the former rental property, now residence. A sale of a residence is a taxable disposition, even though there would be a gain exclusion if it is a principal residence.

Any excess loss on the disposition of a former passive activity is treated as active not passive.
See IRC Sec. 469(f) and Sec 469(g).

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Main home sale and unallowed passive loss - Posted by redave

Posted by redave on April 07, 2007 at 21:11:58:

I sold my main home last year and qualify for the $250k capital gains exclusion because I lived in it for the last two years. Prior to my living in the house I rented it out since 1992 and have accumulated a lot of unallowed passive loss.

I’m wondering if I can use the unallowed passive loss against my capital gain?

I still have some capital gain even after using the exclusion.

Dave

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Re: Main home sale and unallowed passive loss - Posted by Jimmy

Posted by Jimmy on April 08, 2007 at 07:31:57:

its been a while since I worked with these rules, but here is my recollection.

the sale of a property with suspended passive losses will trigger the recognition of the losses.

some things I do not know: (a) impact of the conversion of the rental property on the suspenced losses. maybe it kills them. or maybe it causes them to be recognized in the year of the conversion. or maybe they remain suspended until you sell the property.

if the conversion trips recognition, you will need to ga back and file an ameded return. this is a good thing. the losses will be useable, or carried forward.

if the suspended losses remain suspended, and are triggered on sale, another question comes up. which do you apply first? the 250K exclusion or the suspended losses.