Using a capital loss carryforward?

[tacks]

Client has a large capital loss carryforward. Client will soon sell real estate rental property at a gain.

I conclude that capital loss can NOT be utilized to offset sale of rental property. Rental property is not a capital asset -- and although gains are taxed at capital gains rates -- the law expressly states that rental props are NOT capital assets. And thus capital loss carryforward can NOT be used to offset sale of rental.

Am i correct?

thanks in advance

[Maribeth]

Client has a large capital loss carryforward. Client will soon sell real estate rental property at a gain.

I conclude that capital loss can NOT be utilized to offset sale of rental property. Rental property is not a capital asset -- and although gains are taxed at capital gains rates -- the law expressly states that rental props are NOT capital assets. And thus capital loss carryforward can NOT be used to offset sale of rental.

Am i correct?

thanks in advance

No, you are not correct. The gain on the sale of the property is capital gain and the loss carryfoward can offset it.

Maribeth

[tacks]

Hi Maribeth,

Thanks for responding.

[appelman]

Suspended passive losses applied first

I believe that any suspended passive losses are applied first. As I understand it, suspended losses on the property sold are applied in toto, even if they exceed the gain. If there is gain left over, other suspended passive losses may be applied to reduce the gain, but not below zero. What I am less clear on is just how this should be entered on the return. Can anyone clarify?

[tacks]

thanks appelman

[Davc]

No, you are not correct. The gain on the sale of the property is capital gain and the loss carryfoward can offset it.

Maribeth

Usually. However, If it was depreciated under ACRS then it may be 1245 property with depreciation recapture as ordinary income. Also, you need to check the previous five years returns for net unrecaptured 1231 losses. See 4797 instructions for lines 8 and 26

[Davc]

I believe that any suspended passive losses are applied first. As I understand it, suspended losses on the property sold are applied in toto, even if they exceed the gain. If there is gain left over, other suspended passive losses may be applied to reduce the gain, but not below zero. What I am less clear on is just how this should be entered on the return. Can anyone clarify?

Suspended losses are allowed on Schedule E. They have no direct affect on 4797 or Schedule D.

[appelman]

I guess that makes sense.

I guess that makes sense. Thanks.

[tacks]

Thanks DaveC,

So, generally speaking, one can indeed use a long term capital loss carryforward to offset gains from the the sale of rental property (the depreciation recapture portion being ordinary income subject to the $3,000 limit).

[Davc]

Yep.........