Suspended Losses

[S&D Associates]

I have a client who owns 3 rental properties which have suspended losses. One was sold for a loss, does any suspended loss get deducted? If not, what happens to the carryover loses for that particular property? Also, the transaction appears on page 1 of the 4797 instead of page 2. Is that correct?

[Beersheba]

If he has 3 rental properties, and all of them have suspended losses, the losses are prorated over all three properties, instead each property retaining its own individual loss. So the loss you are dealing with may be different than the loss incurred for the particular property that was sold.

The sale itself should be reported on page 1 of Form 4797, as we can probably assume all previous depreciation was rolled into the suspended loss. The 4797 sale will be reported independent of the suspended loss. The accumulated suspended loss should disgorge itself on Schedule E, where current year rent will also be reported (if indeed there is any).

[S&D Associates]

When you say the suspended losses should disgorge itself on Sch.E, do you mean the entire suspended loss of this property or a prorated loss depending on the loss for this property? The property had a loss of $10,000, a suspended loss of $49,000, but a deductible loss of $6,700. What happens to the rest of the suspended loss? Is it carried forward, though the property no longer exist, to still be applied against passive income?

[New York Enrolled Agent]

When you say the suspended losses should disgorge itself on Sch.E, do you mean the entire suspended loss of this property or a prorated loss depending on the loss for this property? The property had a loss of $10,000, a suspended loss of $49,000, but a deductible loss of $6,700. What happens to the rest of the suspended loss? Is it carried forward, though the property no longer exist, to still be applied against passive income?

Does this part of IRC 469(g) give you your answer? You always need to read both subsections b and g in their entirety.

(g) Dispositions of entire interest in passive activity

If during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply:

(1) Fully taxable transaction

(A) In general. If all gain or loss realized on such disposition is recognized, the excess of -

(i) any loss from such activity for such taxable year (determined after the application of subsection (b)), over

(ii) any net income or gain for such taxable year from all other passive activities (determined after the application of subsection (b)),

shall be treated as a loss which is not from a passive activity.

[S&D Associates]

Thank you for the regulation. A little confusing. Simply put, does the suspended loss for that rental get deducted on schedule E? There are 3 properties and one was disposed of at a loss leaving two. The program on form 8582 is still showing an unallowed loss for that property sold. Is that correct?

[TaxGuyBill]

Simply put, does the suspended loss for that rental get deducted on schedule E?

The program on form 8582 is still showing an unallowed loss for that property sold. Is that correct?

Yes.

No. You need to find the spot in the program that says it was sold in a "fully taxable transaction". If you tell us what program you use, perhaps somebody here may be able to point out where it is.

[S&D Associates]

I use proseries. Thank you.

[Y2KEA]

Did you check the box for EDPA (Entire disposition of a passive activity)?

[TaxGuyBill]

I use proseries. Thank you.

Check Box "H" on the Rental Worksheet (I think it is H, but maybe it is G ... whichever one says fully taxable transaction).

[S&D Associates]

Thank you so much.