My client owned and rented out a 3 family house. It has suspended losses. At some point (my guess is 2004 or 2005) he converted the building to condos. In 2005 he sold two of the units, keeping the third as a rental property. Now isa there any way to elect to make this one activity 3 activites so as to trigger 2/3 of the suspended losses or are the suspended losses locked up till the third unit is sold?
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Don't Know for Sure
Well Mark, I don't know for sure and no one else is responding, so I will take a stab at it. Probably to be intelligent, there needs to be a little better description of the 3 family house, suspended losses (so it has been a rental?) and the conversion to condos.
But, generally speaking if the taxpayer could not use the passive loss and it is carried over, the allocation is done on the 8582, (I know you know all of this) So would it not seem likely that when the conversion to condos took place, the 8582 losses carry forward would then be allocated to each of the converted condos. And if that is the case the losses would be released on the units that he sold.
I believe from past experience on release of suspended losses, that all of the suspended losses will be applied to the ones that sold. None to carryover to the remaining unit held for rental.
Maybe Bees, Armando, Ed, Jainen, Bart, Snags and a few others will jump in to clarify some more.
Sandy -
Clarification
ST thanks for your responses. The issue is, if the 3 family is 1 activity, then since only 60% of the activity was disposed of, then none of the suspended losses are deductible.
However if the condo conversion or something else allows us to now say we have three activities then 60% of the losses would get triggered. I assume since the rents from the 3 units were reported in column A of Schedule E for the 4 years the property was owned that this is our defacto declaration of it being one activity.Comment
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Not sure either
Sorry, you are getting all the insecurities here.
If your scenario is equal to have made the election to group passive activities then the losses can only be taken after the last piece is sold. I would think that having had one piece of property before constitues this election. But maybe not.Comment
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End of problem I think
Even though my client did not sell all of the activity, the gain from the sale of 60% will be much more than the suspended and current passive losses so under the normal passive rules the suspended losses will be deductible against the positive income. If this is correct I do not see why publications make such a big deal about grouping activities and suspended losses.Comment
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change of use
I've hesitated to weigh in, because these are waters I've navigated before, and yet I don't have a definitive answer for you.
My concern, though, is that they probably don't want to structure this is a way that points to change of use of the property. Unless they are planning to go into the business of converting rental property to condos, then I believe you could take the position that the conversion was incidental to the sale of their rental building.
If you separate them into three properties, it appears to me that you then have two properties that are now inventory properties and you risk giving up the preferential capital gain treatment.
There may be regulations or guidance that can guide you through this more and more common activity, but until those surface (anyone?) I'd want to treat the building as one activity and thereby, as you say, the losses will be offset by the gains.Comment
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