A new client had suspended passive losses from 2003. In 2004 and 2005 there was passive income. In 2006 the property was sold. Can I just deduct the suspended losses in 2006 or do I have to amend 2004 and 2005.
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Suspended losses are allowed as a deduction in the year the activity is fully disposed of in a taxable transaction. -
Yes, but
I know that suspended losses are trigered by the sale. The issue is, can one choose not to take passive losses in a year there is passive income.Comment
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Probably need to amend the prior years
In almost every situation, you must assign income and deductions to the proper year. I know of no situation where you can pick and choose. Consider the 'allowed-or-allowable' rules for depreciation--use it or lose it.
You could definitely amend the returns for prlor years. Skipping a few years then deducting it all in a high-income year would be a good tax-minimization approach if it were allowed.Comment
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Don't think So
I guess I'm in a rare disagreement with my colleague Joe. There should be no ambiguities remaining for 2006.
Maybe an example would help. Go back to the original question and assume the loss for 2003 is $9000 and disallowed. In 2004 there is a otherwise gain of $2000, and in 2005 there is an otherwise gain of $3000.
The gain in 2004 is $2000 but is reported as zero due to the finegaling with the 8582 and its concomitant worksheets. This gain reduces the suspended $9000 to $7000 for 2005 and future years. In like fashion, the gain of $3000 in 2005 is reported as zero as well, and another $3000 of the suspended loss is absorbed. The remaining suspended loss for 2006 is $4000, and is added to the conventional basis as part of the sales transaction.
On the schedule E, there is a different line for a reportable rental income or loss than what normally computes in the preponderance of revenue and expense. This different line is to allow for the effect of the passive loss rules. This "reportable" line may be malevolent to the taxpayer or beneficial depending upon the current year and prior history.Comment
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Agree with previous. Have not researched it but know of no Regs or Court cases that would allow us to pick and choose when to put items of this nature on the tax return. Would be nice if we could pick and choose when to include items. "Use them or loose them." Would think that open years could still be amended.Comment
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The prior years' losses should have been reported on form 8582. Complete the form for this year and indicte the qualified disposition of the asset. The form will show that you can recover all the prior years unallowed losses for that activity and if there is any additional income or gain that could be used to offset other passive activity losses. Carefully read the instructions.
You can not ammend the prior years, since the facts have not changed for those years. If your client carried the loss for 30 years, would you ammend 30 years of returns?Last edited by gkaiseril; 02-17-2007, 03:24 PM.Comment
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Deducting prior allowable losses
If that approach were legal, then it would be possible to hoard passive losses and skip deducting them in years in which you are in a low bracket and save them until you are in a high bracket. There has never been any tax rule that allows you to save deductions for 30 years, then take them all at once.Originally posted by gkaiseril View Post
If he had no passive income for 30 years, then you could deduct them upon disposition of the asset, but you cannot skip deducting losses when they are originally deductible.Comment
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I mightnot be understanding the following excerpts from the instructions for Form 8582 Passive Loss Limitations.
page 6:
"Dispositions"
"Disposition of an Entire Interest"
"If you disposed of your entire interest in a passive activity or a former passive activity to an unrelated person in a fully taxable transaction during the tax year, your losses allocable to the activity for the year are not limited by the PAL rules."
From page 7 of the instructions:
"Reporting an Entire Disposition on Schedule D or From 4797"
"If you completely dispose of your entire interest in a passive activity or a former passive activity, you may have to report net income or loss and prior year unhallowed losses form the activity. All the net income and losses are reported on the forms and schedules normally used."
and from From pages 9 and 10 Publication 925 Passive Activity and At Risk Rules
"Dispositions"
"Any passive activity losses (but not credits) that have not been allowed (including current year losses) generally are allowed in full in the tax year you dispose of your entire interest in the passive (or former passive) activity. However, for the losses to be allowed, you must dispose of your entire interest in the activity in a transaction in which all realized gain or loss is recognized.Also, the person acquiring the interest from you must not be related to you."
The extended example in Publiction 925 shows the unallowed 2005 loss being takon on the 2006 return.
From the above, it sounds like one would take all previous unhallowed losses in the year of disposition. Could you please explain to me what I am not understanding about the above?
My sources:
Form 8582 http://www.irs.gov/pub/irs-pdf/f8582.pdf
Instruction From 8582 http://www.irs.gov/pub/irs-pdf/i8582.pdf
Publication 925 http://www.irs.gov/pub/irs-pdf/p925.pdf
U.S. Code TITLE 26 > Subtitle A > CHAPTER 1 > Subchapter E > PART II > Subpart C > § 469 Passive activity losses and credits limited
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