Residential rental house unallowed loss

[Bonnie]

Taxpayer and wife (MFJ) bought a house in 2005 and rented it in 2005,2006,2007. They did not rent the house in 2008 or 2009 (I think they were just letting family live in the house). 2010 they sold the house and had a small gain. During 2005 and 2006 all losses were allowed. But in 2007 there was 5737 unallowed loss due to the size of their other income. Since house was not rented for the following 2 years, the loss was never carried forward. So how does this now affect the gain on the sale of the property? Can this be factored in to figure gain/loss?

[Kram BergGold]

Triggered

If there incomes were too high to allow the suspended loss in 2008 and 2009 then the suspended passive loss is triggered by the sale. Don't get hung up by the fact that the property was not rental in the year of the sale. If they could have taken the loss in 2008 or 2009 I would think amending is in order. I don't think that you can't choose not to take suspended losses when you are eligible.

[Bonnie]

Ok, well, there was actually two rental properties and the second one continured to be rented out. Both had unallowed losses in 2007 and the one that has been sold was not rented in 2008 or 2009. Second property continued to have unallowed losses in 2008 and 2009. So they could not have used the unallowed loss either year. I have never done this before so how do I handle the loss at the time of sale? Do I add that to cost basis? Just not sure since this is first time. Thanks

[Burke]

Yes, you have to add it to cost basis if you are using the depreciation that they could not take to reduce that basis. Does that make sense? In another post on this subject, Maribeth advised that the passive loss would go on Sche E. This does solve that problem. And that is the correct way to handle it per TTB 7-10. Then you have a direct deduction on 1040, and the sale proceeds are on Sche D along with the depreciation actually taken in the "allowed" years. After all, the suspended loss may have included expenses other than depreciation. Just need to make sure you don't have that in both places.