Client has a single family residential that they owned since 2006 and stopped renting it in 2010. Because of their income level, they haven't been able to deduct net rental losses last couple of years. Proseries requires a disposition of the asset. I used 1/1/10 and the book value of the house for the sale price to force no gain or loss on the disposition. Now the accumulated losses from Schedule E are showing on the 1040. Client's cousin is living in the house and there is no intention of using it as a rental anymore so according to ProSeries, it is a disposition even though it was not sold. Am I on the right track? Haven't had to do this before. Thanks.
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You can't report this as disposed until actually sold. The losses will continue to be suspended and will have to be tracked.
Lacerte has the same gap in "understanding" (big surprise<G>)
Joe -
Converted to personal use
I don't use your software, but see if you have an option to convert to personal use. That's what your client did. It's no longer a rental property and certainly not disposed of by your client, but it is now a second home that his family (cousin) uses. Losses remain suspended.Comment
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Don't see anything about
converting to personal use on Proseries but this is their response to help:
"An asset is considered to be disposed of when the asset is permanently withdrawn from use in your trade or business or in the production of income. A withdrawal can be made by a sale, exchange, retirement, abondonment, destruction, gift - or you just quit using it for business purposes."
So I disposed of it at book value (no depreciation recapture involved) to avoid gain or loss and assume they will deal with that when they dispose of it for real. Now their refund is up to about 33k which invites an audit but it is what it is. I'm just unsure of how to handle it. Love to hear more comments. Thanks, again.Comment
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Can you choose "Out of Service"? The asset has not been diposed of. Allowing the suspended looses to be deducted now is totally against code.You have the right to remain silent. Anything you say will be misquoted, then used against you.Comment
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Can you set/change business use percentage to 0%, set original cost to $0, or set salvage value to equal cost (so that nothing is depreciable)? That would stop any depreciation from carrying over to Schedule E. Having the asset in the system, you probably would still get a Schedule E with no income/expenses. Seems like a lesser problem, plus it would serve as a reminder that they have all those suspended losses when they eventually do dispose of that home.
Sometimes you have to know better than the tax software. If software could replace a tax preparer, what would tax preparers do for a living?Comment
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No disposition
I agree with WO.
Property is perhaps "out of service" or something similar, to at least stop the depreciation meter from running.
Assuming you had prior losses (passive losses on Form 8283?) due to excessive income issues, so far as I know you don't even come close to having a "disposition" which would allow you now to use said losses. There is no way you had a "sale" either.
I gather your software created de minimis a Sch D and Form 4797, and perhaps even a Sch E and Form 8283 for this "sale" ?? David1980 made an excellent point!!
FEComment
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Agree with prior posts
You can not dispose of property, as you have not sold and the suspended losses are not available yet.
Out of service - and you will have to carry the suspended losses and report on the 8582 each year- should be part of the tax return
Not sure what the procedure is in your software, but there should be a way to accomplish, albeit you have to "fake out" the computer.
SandyComment
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Losses are allowed maybe
Years ago when I was using A Plus software my client stopped renting a house. A year later his income dropped and the suspended losses showed up as a loss on Schedule E. I was dumbfounded. I researched it and the software was right. However, if your client has not had a drop in income the losses can't be claimed until the house is sold. If it is gifted the suspended losses are added to basis I believe.Comment
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Passive Activity Audit Technique Guide
You need to read through the Passive Activity Audit Technique Guide. In order to take the carryover passive losses, you have to satisfy three conditions: (1) dispose of the entire interest, (2) in a fully taxable event, (3) to an unrelated party.MichaelComment
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When we allow tax software to dictate tax law we are in a heap of trouble. Whatever happened to reading the Code and Regs and making professional judgements based on these facts.Comment
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When an asset that has been on the depreciation schedule for a taxpayer, and it is converted to personal use, I just make a note of the cost, date of purchase, depreciation through the last year, AMT depreciation through the last year, and any other information and put that in the taxpayer's folder, on top of everything else. That way I always have it available, and won't forget about it, and use the information when it is finally sold.
Then I just delete the asset on the software. Period!
Sometimes I have to carry it forward for several years.Jiggers, EAComment
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Depreciation is not all?
Having not had a situation such as this, but having had to deal with Forms 8582 and the associated worksheets, here is a question:
Since to a large extent you are having to work with an "unused" passive loss carryforward concept, does not a Form 8582 still have to be filed (or at least prepared) each year? The unused passive losses will obviously rattle around for a long time, in the simplest of situations up until there is sufficient passive income to offset (mixed in with the usual MAGI limitations) and/or the property discussed here has an allowable disposition.
I still remember the stuff I had to keep in a tax file for someone who had "wisely" invested in those doggone PTPs. ("Yeah, you DO have a loss this year and you DO have some passive income, however......")
Tracking/stopping the depreciation of the "dead" asset is only a small piece of this puzzle, correct??
FEComment
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I would continue to use the 8582 for the simple reason that the TP would have a copy in their tax return. He may not come back to you next year. Who knows? He may move to Florida, etc. Shoot, you may not come back next year. Even if you had to work around the software by deleting the asset, you could still print this form with overridden figures if necessary for the client if you had to. I am still doing a few of these for those limited ptrships in low-income housing (from the early 80's). One of my clients died, and those suspended losses died with her.Last edited by Burke; 06-06-2011, 08:35 AM.Comment
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PAL ATG Chapter 5 on IRS.gov
specifies "Conversion to personal use" is not a fully taxable event. Losses not deductble until there is a "qualifying disposition". Thanks everyone.Comment
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