MFS return and lived together all year. Client sold rental property mid-year. Sch E shows a $5K loss and Form 4797 a 20K gain. Form 8582 is netting them and showing a positive 15K on lines 1d and 4. The instructions for Form 8582, Part II, where it disallows the loss due to MFS, refer to the positive 15k. Is this correct?? The Sch E loss is still showing on p1 of 1040, and I thought it would be disallowed due to MFS..
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In the year of disposition, all prior year unallowed passive losses are allowed. This is true even for unallowed losses due to MFS.
The MFS rule only applies to the disallowance of up to $25,000 of current losses on residential real estate rentals. Such losses are suspended until there is passive income, or the property is completely disposed of.
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