suspended rental loss & llc

[janedj]

i have a client who is a member of a two member llc. the sole activity of the llc is holding two parcels of rental real estate property. the client receives a k-1 from the llc. due to the client's level of taxable income at his individual level, the rental losses from the llc k-1 have been suspended ($48,000 of suspended losses at 12-31-06). in 2007, the llc sold one of the rental properties and still owes one of the rental properties. question 1: does the sale
(disposition) of the one property free up any of the suspended losses to be used at the individual tax return level in 2007? there is a rather significant gain on this property. question 2: if the sale does free up suspended loss - how would you allocate the $48,000 between the two properties? thanks for the help - jayne

[dsi]

1. Generally, a suspended loss is freed up when the property is completely disposed of. However, in your situation, I can't say for sure, but I would lean towards a yes.

2. Since your client is one of two members, have him/her bring you a copy of the LLC return so you can trace the amount of the loss associated with the disposed of property.

[les grans]

Carryover (suspended) passive losses

IIRC, the suspended loss(es) should be - already - identified separately between the two rental properties. The losses are incurred and computed and suspended and carried over (and whatever else...) on an activity-by-activity basis, which in this case would be a rental property-by-rental property basis. It's not one loss from the LLC that's suspended, it's two losses, one from each of the rental properties, that have been suspended. The complete and taxable disposition of one of the two rentals will "free up" the suspended loss that's attached to that activity, and - also - the gain from the disposition will be a passive gain that might soak up some of the other suspended loss. It's mechanically very complicated, but only mechanical, if you get what I mean. A sophisticated tax prep software package does it well.
And don't forget that the "freed up" suspended loss is an ordinary loss, while the gain from the sale is most likely a section 1231 gain, and probably has some unrecaptured section 1250 gain included in it....

Afterthought, edited in: the LLC should have been separating the two properties on its books, and providing the members with information separately for the two properties. If this hasn't been done in prior years, there's a lot of work to be done now. It's *not* the individual taxpayer, the member of the LLC, who has to do this work. The member can't do it: he doesn't have the information needed to do it!!

[abby]

Form 8582

Just wondering:

If there are 'significant gains' these will be reflected on Form 8582 on the 1040 and offset passive losses - including prior year unallowed losses and this, then, is not a question of matching the gains to the specific property as Form 8582 nets income and loss - is there enough gain that all prior year losses will be released? If there are, you may not need to find the underlying allocation.

I understand that if not all losses are released by the income that you may need to look deeper, as the suspended losses from the sold property would no longer be considered passive in terms of the Form 8582 calculation and therefore you would have to idenitfy them and go through some of things others have mentioned.