Suspended passive loss

[natiro]

Client has suspended loss on 4 rentals. Client has been phased out of the $25,000 allowable loss due to high AGI in the past few years. In 2005, one of the rentals was converted to client's principal residence. There is suspended loss associated with this property. In 2006, AGI is much lower and client is now getting $25,000 of loss on Sch E. The $25,000 allowed loss includes current year loss and and allocation of prior year losses.

Question: is the suspended loss from the property which is now client's principal residence included in the allocation of prior year suspended losses? Or should I pull this loss out and track it in case the property is ever disposed of in a fully taxable transaction?

Thanks for your help.

[solomon]

Latter

Track it for use when he disposes of his entire interest in that particular property.

[Brad Imsdahl]

TTB, page 7-10. “Former passive activities. A former passive activity is an activity that was a passive activity in a previous year but is not a passive activity in the current year. A prior year unallowed loss may be deducted up to the amount of the taxpayer’s net income from the activity. Any remaining prior year loss is treated like any other passive loss.”

In your situation, you have a passive activity from a prior year that is no longer a passive activity this year because it is a personal residence. The prior year losses are allowed up to current year income from the personal residence, which obviously is zero because the personal residence no longer generates income. Thus, the prior year loss is lumped in with all other passive activity losses and allocated proportionately to each passive activity. If you have passive income from other activities, a portion or all of the prior year losses can be used to offset current year passive income.

[natiro]

Passive loss

Thanks Brad for the good explanation and quick response. That's what I thought, too. Just wanted confirmation.