What happens to the passive loss carryovers from our rental property if we change the property from rental to our primary home? (2024)

‎May 31, 20194:49 PM

Because of high income limits we have not been able to deduct any rental property losses for many years. The losses keep growing and are carried over every year. If we stop renting the property and turn it into our primary residence, would we be able to claim any of the carryover losses (provided our income was reduced and met the income limits)?

In short, if we stop renting the property before we reduce our income, do we lose all the carryover losses from prior years?

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You can only deduct suspended passive-activity losses in 2 situations:

Against passive-activity income

When you dispose of the passive activity in a fully taxable transaction to an unrelated party

When you converted rental property into a personal home. The rental home had suspended passive-activity losses. So, you can continue to deduct the suspended passive-activity losses from other passive income. If you have no other passive income, the suspended losses remain suspended. Carry them forward until you sell the home in a fully taxable transaction.

You can only deduct suspended passive-activity losses in 2 situations:

Against passive-activity income

When you dispose of the passive activity in a fully taxable transaction to an unrelated party

When you converted rental property into a personal home. The rental home had suspended passive-activity losses. So, you can continue to deduct the suspended passive-activity losses from other passive income. If you have no other passive income, the suspended losses remain suspended. Carry them forward until you sell the home in a fully taxable transaction.

A question unknown is never considered in that category.

Passive losses are generally deductible only to the extent of passive income. However, current and suspended losses are fully deductible if there is a “qualifying disposition.” Under IRC § 469(g), a “qualifying disposition” requires three criteria:

1. Disposition of an entire interest (or substantially all[1])
2. In a fully taxable event (where all gain/loss is realized and recognized).
3. To an unrelated party.

If these three tests are met, losses are fully deductible against non-passive income (unless the taxpayer has basis limitations). Thus, in the year of disposition, losses allocable to the passive activity may offset portfolio and other investment income or may become part of a net operating loss."

However if IRCSection 121 applies [home exclusion ] When you sell the property, you might qualify to exclude gain on the sale. If so, the sale isn't a fully taxable transaction. So, you still won't be able to use the suspended passive-activity losses.

Generally, disallowed passive losses may be carried forward to the next tax year (Sec. 469(b)). However, if the activity continues to be passive in future years, losses are in effect carried forward until the underlying activity is disposed of (Sec. 469(g)).

<a href="http://www.irs.gov/publications/p925/ar02.html#en_US_2014_publink1000296629" rel="nofollow" target="_blank">http://www.irs.gov/publications/p925/ar02.html#en_US_2014_publink1000296629</a>

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OK >>>> If you have no other passive income, the suspended losses remain suspended. Carry them forward until you sell the home in a fully taxable transaction.

I find form 8582 and end up bottom is $ 0.00. What do I need to do with this to continue carryover of loss???

@view2

You seem to have a good handle on this, so I hope you can clarify one point:

If I have suspended losses as described (due to previous passive loss carryovers and then converting the property from a rental to personal use), wouldn't I be able to use some or all of the suspended losses to offset ordinary income in a later year if my income drops to a level such that I meet the special allowance criteria (i.e. <$150k)?

Form 8582 Line 1c asks for "Prior years' unallowed losses" and nothing I see in the instructions would prevent you from filling that in even if the property has been converted. So my expectation would be to continue to fill out Form 8582 every year after conversion until I'm either able to use the previous years' passive loss OR I dispose of the property in a fully taxable transaction.

Does that all make sense, or am I missing something? Thanks!

@timbob99wrote:

If I have suspended losses as described (due to previous passive loss carryovers and then converting the property from a rental to personal use), wouldn't I be able to use some or all of the suspended losses to offset ordinary income in a later year if my income drops to a level such that I meet the special allowance criteria (i.e. <$150k)?

Form 8582 Line 1c asks for "Prior years' unallowed losses" and nothing I see in the instructions would prevent you from filling that in even if the property has been converted. So my expectation would be to continue to fill out Form 8582 every year after conversion until I'm either able to use the previous years' passive loss OR I dispose of the property in a fully taxable transaction.

No. Line 1, Worksheet 1 and the $25,000 allowance is for rental real estate with Active Participation. You don't have Active Participation.