Rental to Personal and Passive Losses

[Possi]

My new client is military and has a common issue as a homeowner.

They bought a house, lived there, rented it, moved back in, and (one day in the next few years) will likely rent it out again.

They have passive losses that exceed the maximum deduction.

If the property was sold, I believe I could take the entire loss against any gain, but it was not sold, so I believe I need to adjust the basis of the property by this amount.

http://www.irs.gov/taxtopics/tc425.html

Am I correct? Do I understand this right?

[Kram BergGold]

My Opinion

Years ago I had someone who had suspended passive losses. Then he stopped renting the house and then his income dropped. The software just allowed the passive losses when his income dropped below $125,000. I was flumoxed. When I looked into it, this was proper. So I say you just leave the Schedule E in the software as well as Form 8582. The suspended loss will just sit there until it is triggered by an income drop or a sale. There is nothing else you need to do.

[Possi]

Good Idea

Taxwise asks if the business still owns the property.

Well, the CLIENT still owns the property, but the "business" is no longer a business. Since it was not sold, I just answered that the business still owns the property. I thought that was best, since they will eventually either sell it or rent it again.

So, I will do as you said, and leave the Sch E as it is. This year, it will allow the $25k loss, and the balance of suspended losses will be dealt with at a later time.

I'm going to the beach! Thanks!

[TaxGuyBill]

I don't think you can do anything. Just keep the losses until the property is sold (or otherwise disposed of).


§469(i) says the $25,000 loss is allowed for "rental real estate activities with respect to which such individual actively participated in such taxable year (and if any portion of such loss or credit arose in another taxable year, in such other taxable year)"

http://www.law.cornell.edu/uscode/text/26/469#i

The way I read it, the loss is only allowed if you are active in the CURRENT year AND the year the loss was incurred. If the is not the case, it is disallowed until the "taxpayer disposes of his entire interest" in the property.

http://www.law.cornell.edu/uscode/text/26/469#g

Have you tried telling your software that the taxpayer was NOT actively participating in the rental for this year?

[FEDUKE404]

Passive loss carryover might not be allowable

I think TaxGuyBill's comments are relevant and worthy of some further research by Possi.

Working your way through the Form 8582, and associated worksheets, might be a very difficult task without an underlying (current year) passive activity in play. Your first hurdle to clear is dealing with line 1c (and associated worksheet) of Part I of Form 8582.

Relevant excerpt from IRS instructions for Form 8582: "Do not enter a prior year unallowed loss in column (c) of Worksheet 1 unless you actively participated in the activity in both the year the loss arose and the current tax year. If you did not actively participate in both years, enter the prior year unallowed loss in column (c) of Worksheet 3."

Another problem I would have (with the facts presented) is determining when the property is/was a business asset, or when it is/was a personal residence. (Or even, always?, a personal residence with some short-term rental mixed in.) IIRC, having a military owner might further throw some sabots amongst those gears.

FE

[TaxGuyBill]

That triggered another thought: Section 280A. Basically, just like the 'vacation home' rules don't allow a loss, this would be the same thing.

http://www.law.cornell.edu/uscode/text/26/469#j_10

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Loss-ATG-Chapter-2-Rental-Losses

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Loss-ATG-Chapter-7-Interaction-With-Other-IRC-Sections

[Possi]

late response

Sorry for not responding sooner. I am still playing with this one. Got waylaid with a grandchild for the week. I'll get back to it later today!