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I sold a rental property this year with passive activity loss carryover (albeit using a 1031 exchange) . Am I able to claim these losses since it sold?

Forum|Forum|5 years ago
March 15, 2021
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I also made major improvements to the property this year to help it sell. If I can't recoup my passive activity losses, would it help to capitalize those improvements? Since it is a 1031, I assume the answer is no.

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Best answer by MAK70

If you did a Like-Kind exchange, the passive loss carryovers apply to the exchange property so you will not be able to recoup the loss until there is a complete disposition of the asset. You will be able to add the cost of the renovations to your basis of the property before the exchange.

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MAK70Answer

If you did a Like-Kind exchange, the passive loss carryovers apply to the exchange property so you will not be able to recoup the loss until there is a complete disposition of the asset. You will be able to add the cost of the renovations to your basis of the property before the exchange.

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schamrickAuthor

Also one followup question... I own multiple rental properties. Will I have to have a complete disposition of all assets to be able to recoup the passive activity loss carryover?

Also am I required to depreciate the primary asset (the property itself) for a rental property? I was once given advice by my lawyer that I was not required to take depreciation. Taking depreciation is not a benefit for me since it just adds to my negative cash flows and results in more passive activity losses. And now it seems as long as I keep doing 1031 exchanges and I maintain at least one rental property (which is my plan), I will never be able to recoup those losses.

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MAK70

No, you would not have to dispose of all your rental properties, just the specific one the losses are directly in connection with. With careful tax planning, you can choose when to best utilize losses on a property to minimize tax.

You are not required to take the depreciation deduction, however, when you do dispose of the property, you are required to recapture it - so if you do not claim it, you will still have to pay tax on it. Essentially the depreciation will be subtracted from your basis so if you do not have the offsetting deduction, you pay even more in taxes.

@schamrick