carried-over passive losses when rental converted to second home

Forum|Forum|1 year ago
December 4, 2024
2 replies
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We've had a short-term rental property the last few years. We've been able to take the passive losses on it using the "Special Allowance for Rental Real Estate" on Form 8582. However, we have a carry-over of about $5000 of disallowed losses (because they exceeded the $25,000 cap).

This year we are converting the property to x second home. We have not rented it at all during 2024, so Turbotax wants to delete Schedule E - which makes sense. But it's also deleting Form 8582, and therefore not allowing us to take that $5000 loss this year. (If I search for 8582 and open it, it is blank).

Is this an error in Turbotax and is there some workaround, or am I mistaken that we're able to take that passive loss this year ?

R

RustyShacklefordAuthor

Employee

Ok thanks, good to see that discussion.

I'm more confused though: Am I unable to take those carried-over passive losses this year, if I do not have any passive income ? Or do investment dividends count as passive income ?

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RustyShacklefordAuthor

Employee

But can I deduct them THIS year - as far as tax law is concerned - if I could figure out how to make Turbotax do it ?

A

AmeliesUncle

@RustyShackleford wrote:

We've had a short-term rental property the last few years.

We've been able to take the passive losses

Let's back up a bit. Did you "Materially Participate" in the short-term rental? I don't know your circumstances, but unless you have a management company handling, it, I suspect you did Materially Participate in it.

If you did Materially Participate in it, any losses would have been non-passive and should have already been used (there would not be any carryover). I suspect you may need to amend your prior tax return(s) to claim that non-passive loss (although I don't think TurboTax is really set up for that well, which may be why you were not aware of it).

https://www.irs.gov/publications/p925#en_US_2023_publink1000104582

In the event you did NOT "Materially Participate" in the rental, was it attempted to be rented this year (are you talking about 2024?)?

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RustyShacklefordAuthor

Employee

In the interview, I say I "actively participate", due to owning at least 10% and making major management decisions.

The other test, of being a real estate professional, I can't come close to meeting, at least according to the Turbotax interview concerning "real estate professional". But looking at IRS publications, it does look like I DO pass this test for "material participation": You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual. (Although the 100hr figure is a little tough to justify).

Kinda seems like Turbotax may have steered me wrong ;-(. OTOH, if the only advantage of amending is to not have to mess with this $5k carry-over, and if I can figure out another way to handle it, then why bother ?

Yes, I talking about the tax return I'll soon file for 2024. The $5k carry-over is from 2023.

A

AmeliesUncle

I could be wrong, but as far as I know TurboTax does not guide you for this circumstance at all, and the only way to do it is to go into the "Forms" mode to manually check the "other passive exceptions" box on the "Schedule E Wks".

If the loss was non-passive, you can't carry it over to your 2024 return. The only way to benefit from the $5000 loss it to amend.

For amending, you first need to figure out which year(s) would need to be amended. On your 2023 tax return, was any amount carried over from previous years? If so, you would amend all previous years that incorrectly gave a carryover to the next year.