Passive Activity Loss At Death

If the taxpayer dies during the tax year the deductible suspended passive loss on the taxpayer s final income tax return will be limited to 25 000 75 000 50 000 step up in basis.

Passive activity loss at death. For individuals with large pals it is important that practitioners be aware of the rules relating to the disposition and transfer of passive assets and be proactive in. If just one of the spouses owned the asset that generated the capital loss carryover any carryover is solely attributable to the spouse who owned the property and incurred the loss and that carryover is lost if not absorbed in the joint return filed for the year of death. Passive activity loss carryovers. A carryover of the excess losses to the decedent s estate is also not allowed.

Passive activity loss rules are generally applied at the individual level but they also extend to virtually all businesses and rental activity in various reporting entities except c corporations. Passive activity losses pals generated when a taxpayer incurs ordinary losses in a passive investment may be treated differently in the case of a taxpayer s death. These carryovers can include net operating losses nols passive losses charitable contributions and myriad other deductions or credits that have not been used in prior years. Disposing of a passive activity allows suspended passive losses to be deducted.

The deductible loss can offset other income such as interest dividends and earned income. 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 2 b any of the decedent s pal carryovers are allowed on the final joint return. One of those is dealing with carry overs that the taxpayer or spouse may have had at the time of his or her death.

Suspended passive activity losses pals must be traced to the owner of the activity. Suspended losses transfers by. If a passive activity interest is transferred because the owner dies unused passive activity losses are allowed to a certain extent as a deduction against the decedent s income in the year of death. The passive activity loss and the passive activity credit and the 25 000 amount under subsection i shall be allocated to activities and within activities on a pro rata basis in such manner as the secretary may prescribe.

Suspended losses transfers on death suspended losses are deductible by the decedent when a passive activity is transferred by reason of death to the extent that the excess of the fair market value stepped up basis in the hands of the transferee over the decedent s adjusted basis is less than the amount of suspended loss.