Quote Originally Posted by TaxGuyBill View Post
I'm not sure if there is any actual direction on this matter.

The possible options that I can think of are Schedule E or Line 21. I would lean towards Schedule E because if it WAS rented in 2017, the loss would show up on Schedule E.
I think instructions for Forms 8582 and 4797 cover this, although it takes some digging, so I'm not going to try to quote all the relevant parts.

As a practical matter, to answer your question about how to file, I would have the following:

INPUT:
In my software, I would (re-)create a Schedule E with the building/land asset. (I would have been able to mark the previous rental activity as inactive when taxpayer moved back in, so it would actually still be there for me). Force current depreciation to zero and prior deprecation to the correct amount, if necessary. I would enter prior year unallowed passive loss amount, and then indicate a complete disposition of the rental activity, as well as a sale of the asset(s).

OUTPUT:
Your Form 4797 will show the correct amount of unrecaptured Sec 1250 gain in Part III, and the total gain in Part I. Per instructions for Form 4797, you show your Sec 121 partial exclusion as a loss amount in Part I. These items flow automatically to Schedule D. Then, for the rental activity, the net income from disposition, and prior year unallowed passive loss, should also flow automatically to Form 8582, whence the passive loss will then flow automatically to Schedule E, and from there to 1040 Line 17.