Passive Activity Loss Like Kind Exchange

Passive losses and are reported on irs form 8582 passive activity loss limitations as part of your regular federal tax return.

Passive activity loss like kind exchange. Disposition to an unrelated party. Dispose of a passive activity at a gain and not have to pay any taxes. For each rental property activity an activity may be one or more properties the amount of. Under irc 469 g current and carryforward passive activity losses are fully deductible in the year of an entire disposition in a fully taxable transaction to an unrelated party.

In other words you get tax free cash. Related parties are defined under both section 1031 and passive activity loss rules. In fact you may actually reduce your taxes despite the gain. If a real estate owner disposes of his entire interest in a passive activity to an unrelated person in a fully taxable transaction he may offset any gain with all passive activity losses allocable to the activity not limited by the pal rules.

The 13 000 is taxable under the rules of section 1031 but allows the deduction of the loss under the passive activity loss rules. First a passive loss may only be deducted against other passive income or in a fully taxable sale or exchange. There are a couple of things you need to be aware of. Treatment of passive activity losses and 1031 exchanges.

If you have suspended passive activity losses you may be able to. Under the passive activity rules you can deduct up to 25 000 in passive losses against your ordinary income w 2 wages if your modified adjusted gross income magi is 100 000 or less. For example gain or loss from the sale of assets used in a trade or business is nonpassive if the taxpayer materially participates in the business. This deduction phases out 1 for every 2 of magi above 100 000 until 150 000 when it is completely phased out.

To illustrate basis rules where nonqualifying property is transferred by the taxpayer seeking exchange treatment in a like kind exchange consider the taxpayer who exchanges a building with an adjusted basis of 1 million and a fmv of 1 1 million plus gm stock with an adjusted basis of 400 000 and a fmv of 200 000 for a vacant lot with a. Disposition in a fully taxable event where all gain loss is realized and recognized. Gain or loss from the disposition of property retains the nonpassive or passive character of the activity in which the asset was used temp. Because a 1031 exchange is by definition a nonrecognition event there is no income against which to deduct the loss.

First the 13 000 of boot and the 13 000 passive loss are subject to different tax rates. If these three tests are met losses are fully deductible against non passive income unless the taxpayer has basis limitations. As an example assume you have suspended passive losses of 300 000 from an activity that you have held for more than one.