Passive Activity Loss Sale Rental Property

Such losses are deductible only from income from other passive activities.

Passive activity loss sale rental property. The passive activity rules prevent an investor from deducting a passive loss from salary self employment income dividends sales of investment property interest or retirement income. In my example you would take 13 000 cash at the time of the sale. To take this deduction you must sell substantially all of your rental activity. Rental property capital loss.

For most real estate investors a loss from rental properties is considered a passive loss. 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. If you sell a rental property for less than the basis you can write off your loss. The way to do this is to take cash what the irs calls boot from the sale of the property.

Individual a buys a house for 700 000 and uses it as his principle residence for 2 years. If you own only one rental property and sell it then you can take the deduction because that property is your entire rental activity. Under irc 469 g a qualifying disposition requires three criteria. Former passive activities are not too common but can cause confusion.

The tax rules provide that you may deduct your suspended passive losses from the profit you earn when you sell your rental property. Individual a then converts the house into a rental activity that is a s only passive activity for purposes of section 469. For example tax deferred exchanges can pass losses from one activity to another transfers in a divorce a change in business format and the conversion of a property. But you can fully deduct these suspended passive losses when you sell your rental property in a qualifying disposition.

Disposition of an entire interest or substantially all 2. In a fully taxable event where all gain loss is realized and recognized. The 13 000 is taxable under the rules of section 1031 but allows the deduction of the loss under the passive activity loss rules. There are several ways in which a tax return can include an item which is not passive on the current return but which was passive at some time in the past.

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. The internal revenue service irs says that a passive loss can t be deducted against ordinary income. This means that passive activity losses are generally deducted in the year of disposition. This deduction phases out 1 for every 2 of magi above 100 000 until 150 000 when it is completely phased out.