I'm selling a rental soon and want to understand how suspended passive losses work, at disposition can you fully deduct W2 income? https://www.irs.gov/taxtopics/tc425

Forum|Forum|1 year ago
February 11, 2025
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I have will have a loss of 30K from the first year after deducting my mortgage interest and depreciation from rental income, and expect to continue to show loss the 2nd year. If I sell after the first year, will those 30K losses be released for me to deduct for my W-2 income? Would it also offset the 25% tax on depreciation recapture?

MinhT1

Suspended passive losses cannot be used to offset depreciation recapture.

But you can fully deduct these suspended passive losses when you sell your rental property in a qualifying disposition, meaning they can offset ordinary income.

Under IRC § 469(g), a “qualifying disposition” requires three criteria:

1. Disposition of an entire interest (or substantially all)

2. In a fully taxable event (where all gain/loss is realized and recognized).

3. To an unrelated party.

In order to release the suspended losses, there must be a complete disposition to an unrelated party in which all gain or loss realized is recognized. In other words, the gain or loss must be recognized, but not necessarily included in gross income.

Please read this IRS document for more information.

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lisaistaAuthor

I am getting a Form 8582 to capture my passive losses this year, if I am unable to sell the rental until the following year will the passive losses accumulate year over year? i8582

From the website you linked, it says after Entire Disposition I should just report the losses on Schedule E correct?

"If you have an overall loss when you combine the income and losses, don’t use Form 8582 for the activity. All losses (including prior year unallowed losses) are allowed in full. Report the income and losses on the forms and schedules normally used." i8582

So when I sell I just need to re add in the rental income for both years and losses for both years? I don't need reference or attach Form 8582?

Thank you!

AmyC

Employee

1. Yes, you will get a form 8582 that will carryover for as many years as you own the house.

2. You report your rental gain/loss on Sch E from the rental. You have assets associated, like the house, that are being depreciated on form 4562. You will mark the disposition there for calculating depreciation to that point. Then the sale goes to Form 4797 for the sale of the asset.

3. No, you don't add the rental income and losses again. You have the form 8582 that will carry to that year holding the information for you.

4. You will not have a form 8582 the year you sell the house since it will be used up. You will just be using the prior year's 8582 to make calculations.

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