Passive Loss Disgorged

[Snaggletooth]

The software treatment on this one leaves me dumbfounded, but after jumping through the hoops manually, I come out with the same thing. Thought I'd ask -- this seems bizarre.

Wealthy client makes appx $500K per year. He has rented out a residence every year since 1986, and is a terrible operator as a landlord, and has NEVER shown a rental profit. Of course the $150K phase out on rental losses gets him every year, and his accumulated prior year losses are $70K over the course of 17 years, since the 86 tax law implemented limitations on rental losses for the rich.

Well guess what? His company had a huge loss, and his AGI for 2004 was -90K or thereabouts. His rental property had another loss, as usual, but only ($1000). When I populate my software with his $70K in prior losses, the software allows the full loss allowance of $25K on his 8582 and carries the $25K to schedule E.

If I follow the math, however, I come out with the same answer. The effect is that his -90K loss now becomes -115K loss, and his carryback to 2002 is thus increased.

Does this seem right, folks? Thanks in advance - Ron Jordan

[Armando Beaujolais]

It sounds right

IRC section 469(b) says that a loss disallowed under the passive loss limits "...shall be treated as a deduction or credit allocable to such activity in the next taxable year."

I read that to mean a passive loss carryover is no different from any other deduction associated with the activity for a particular tax year. In your client's case it will be picked up in the year the income allows the $25,000 special passive loss allowance from rental of real estate.