Walnted to confirm with all the experts - client had a 1031 exchange for residential rental property in 2005. The house that they traded had passive loss carryovers of $70,000 from previous years. That carryover just carries forward to new property, correct?? And then, if after a few years, the client decides to retire and move into the residential rental for several years and then sells house as personal residence, the $70,000 passive loss is basically lost, unless client has other passive income to apply against - do I have it all correct??
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peggysioux -
Mostly true
Mostly true, though I don't have any advice on how to break the news to your client. Suspended passive losses could offset any boot received in the exchange, but otherwise roll over into the new property. If it is not a passive activity or is converted to non-passive or personal use, the suspended losses remain suspended until there is passive income to take them against. -
Jainen,
Thanks for the confirmation. There was no boot received to apply the passive loss, so I guess just advise client to look at potential gain on property at decision making time and see which would be more beneficial - sell the property, apply passive losses, and buy another home with the proceeds or keep the house and make it a personal residence and forget the passive losses.peggysiouxComment
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1031 passive loss
I disagree. The suspended loss is not taken until the property is disposed of in a fully taxable transaction. So if ultimately the taxpayer excludes the gain on the property due to Sec 121, the suspended passive loss would be lost forever.Comment
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Passive losses
Passive losses do not have to be taken against income from the same activity. Consider a taxpayer with two rentals. If one property has a loss, you will net it against the other.Comment
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never mind last post!
Sorry, I posted before re-reading the question. The suspended passive loss would carry forward against other passive income. I completely mis-read the question.Comment
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