Form 8582 Schedule E Loss Carryfoward Question

[Twin Turbo Z]

Question is, are PAL losses (Sche E related) not allowed due to a taxpayer filing seperate from their spouse in previous years, allowed to be carryfoward. They live together, I repeat they live together and for the past few years it was beneficial for them, State wise, to file seperate. Now its beneficial for them to file together. I have searched through IRS documents and called the Pract. Hotline which fowards me to a recording to look online. Service there is non existant !! Remember they "Live Together" I know MFJ and MFS (lived apart) losses carryfoward. But do MFS and lived together losses carryfoward ?

[Twin Turbo Z]

Must be a tough question. No replies The few IRS reps I talked to didnt know how to treat it, and transfered me to the "Law Dept" which is non existant. Its a recording telling one to look online and figure it out on your own. I figured if you file sperate and lived with spouse you lost it. Use it or loose it situation. But its not clear, and our software has been carrying the losses foward. Just want to be sure before I let them take the loss. The one IRS rep that wanted to really help, told me to let them claim it and if its questioned let them know we tried to get an answere from the IRS. He hated that the "Law Dept" doesnt field these questions anymore.

[Koss]

PAL Carryover

What leads you to believe that the MFS filing status would somehow disqualify them from carrying over a passive activity loss?

I have not done exhaustive research on this, but I see nothing in Pub. 925 or in the instructions for Form 8582 to suggest that MFS would prevent a taxpayer from using a carryover, regardless of whether they actually lived with the spouse.

I think we're missing some information, or that you are making an invalid inference...

Does this have something to do with the rules that govern the Special $25,000 Allowance for Rental Real Estate? (TTB p. 7-13)

In other words... the losses that now offer a potential carryover... would these losses have been deductible under the $25,000 special allowance, but for the fact that the couple chose MFS and was living together in the year that the losses occurred?

If so...

Well, that's interesting. Somehow it was still better for them to file MFS even though the rental losses were not allowed.

But I don't see how this would deprive them of the carryover. They chose MFS while living together, which deprived them of the $25,000 special allowance. But that doesn't mean they didn't have a passive activity loss. It simply means that it was not deductible that year, so it was suspended, or carried over.

For the current year, in which they are filing MFJ, do they now have passive income that could potentially be offset by the suspended losses? Or are they going to have another loss?

Losing the $25,000 special allowance due to "MFS-living together" doesn't mean that the losses are not suspended. It means that the losses are suspended, because the special allowance was not applicable in that year.

Are you asking whether the suspended losses can now be used to offset non-passive income, since they are now filing MFJ, and qualify for the special allowance? My answer to that would be a resounding no. I think they can carry the suspended losses forward, and probably use them against future passive income. But the fact that they are now MFJ certainly does not retroactively recharacterize those losses as something that would now be allowed under the $25,000 special allowance...

BMK