Question

Passive loss recapture

Forum|Forum|5 years ago
February 19, 2021
1 reply
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I rent a condo/warehouse to my son and incur a small loss each year which is not deductible because my income in retirement is too high. In 2020 I had no RMD's so my income dropped like a rock. In addition I gifted the condo/warehouse to my son in May 2020. Turbotax is allowing me to take $9,800 in suspended passive losses this year presumably because my income is below $100,000. Does this sound right or have I not entered the factc correctly in Turbotax?

ColeenD3

No, this is not how it should be handled. Please see this answer from Rick19744:

You have a fairly complicated transaction here so I will provide some guidance:

If you have suspended passive activity losses, these losses will only be deductible when a taxpayer has a fully taxable transaction / disposition.
A gift of property is not a fully taxable disposition and as such, does not allow you to free up your suspended losses.
If the taxpayer transfers his interest in a passive activity by gift, any suspended passive losses generally increase the recipient's basis in the activity. This basis increase is deemed to occur immediately before the gift.
When property that is acquired by gift is ultimately disposed, the FMV limitation rule comes into play.
The donee's adjusted basis for computing loss on the sale is the lesser of carryover basis (which would include the suspended losses) from the donor, or FMV at the time of the gift. In this case, if the property was sold at a loss any suspended losses added to the basis that exceeded the FMV at the time of the gift will be lost.
To eliminate the asset from your records, just record this as a sale with no gain or loss; selling price equal to your adjusted basis at the time of the gift.