Passive Activity Loss When Selling Rental Property

To take this deduction you must sell substantially all of your rental activity.

Passive activity loss when selling rental property. In a fully taxable event where all gain loss is realized and recognized. 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. The cool thing here is that you don t have to sell the rental property that has generated the losses as the losses will offset any type of passive income. In general you should be able to deduct these passive losses against passive income from passive rental business activities.

Sell your rentals another great strategy to tap into your suspended passive losses is to strategically offload your rental properties. The irs has ruled that selling a home that s been converted to rental property is a complete disposition even though gain is excluded under the home sale exclusion up to 500 000 for joint filers and 250 000. If you own only one rental property and sell it then you can take the deduction because that property is your entire rental activity. Passive activity limits 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.

Disposition of an entire interest or substantially all 2. This deduction phases out 1 for every 2 of magi above 100 000 until 150 000 when it is completely phased out. But you can fully deduct these suspended passive losses when you sell your rental property in a qualifying disposition. 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.

Nonpassive activities would be when the taxpayer works on a regular continuous and substantial basis. Strategy 2 to tap into passive losses. You can also deduct suspended pals when you sell your rental property. The tax rules provide that you may deduct your suspended passive losses from the profit you earn when you sell your rental property.

Generally a passive activity is any rental business activity in which the taxpayer does not materially participate. Under irc 469 g a qualifying disposition requires three criteria. A full discussion of active participation is out of the scope of this blog but will revisit it at another time. Deducting suspended passive losses.

Although rental income is passive income the sale of any real estate including rental property results in a capital gain or capital loss.