Be sure the box on the schedule E worksheet (box H) is unchecked on the two properties not sold

Just checked - they're not marked off. Only on the property which was sold 

Did you tell the IRS that the properties were NOT grouped?  If not, what is the disadvantage to having the PALs released with the sale of the one property?  JUST FYI, ProSeries is not a high level tax program capable of handling such intricacies automatically.  You are most likely going to need to do a manual override of the loss amounts allowed and update the loss carryover input worksheets accordingly.  THIS will NOT prevent efile.

I haven't had any of my clients sell any properities with passive losses, so you may have to call support, as the passive losses should only be released on properties sold, unless your clients income is low enough to trigger the $25000 exception

@YourTaxEdge Proffesional tax preparers do not do taxes on advantage/disavantage, but according to tax law

You will actually have to do your overrides in the Activity Summary Smart  Worksheet even though it says "Supporting information provided by program.  NO ENTRIES ARE NEEDED."  But when you do that, it will limit your losses if needed and create the correct carryovers.  Watch out when you do the QBI override on Line G in that screen, as it then wants to move it to Line H and that throws off line I.

Just because you are a "Level 15" in ProSeries and I am a "Level 1" does not mean that you know more than me.  I just don't normally have time on my hands to respond here. I am a highly respected CPA with 40 plus years of experience and knowledge and know the law better than most any preparer that you will ever come across!  I find that most preparers don't really understand the law and just THINK that things have to be done a certain way without knowing WHY they are doing them that way.  That said, I also told you HOW to fix it in a subsequent message. Or invest in a program like UltraTax that knows how to handle it properly.

What is Part 4 of the Form 8582 showing, and then does Part 1 show net income?  I haven't had this situation for quite some time, but I don't think that "grouping" is an issue when the gain on the sale of one property wipes out the losses on that property and there is still some gain left over.  Can't that gain be applied against the carryover losses on other properties?  At least that's what Google AI is telling me:

Order of Application: The sold property's carryover losses are applied against the gain from its sale. If a gain still exists, it is reduced by carryover losses from other rental properties.

Yes thats exactly what is happening as the gain is 200K and they have $130K worth of carryforward losses from all three properties so they're allowing all of them. 

8582 is getting wiped out now that they're allowing all the losses. 

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@kiranthakkar wrote:

 

I have a client who has 3 Rental Properties. He is only selling 1 of them but ALL the passive activity losses are getting released on all 3 properties. 

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I suspect they are not being "released", but they are being "used".

The one property is being "released" because it was sold in a fully taxable transaction.  That means the passive losses can be used against non-passive income.

However, Passive Losses can be used against Passive Income.  The sale of the property is creating INCOME from a Passive Activity.  The passive losses from the other properties CAN be used against that Passive Income.  That means the losses from the other two properties can be used up to the amount of the gain of the sale.

EDIT:  Well, in regard to my last sentence, I don't remember offhand how the limits apply when in combination with the "release" of the one property, but at any rate, you have a bunch of income from the sale, and the other properties losses CAN be applied against that.

To simplify - passive losses are deductible to the extent of passive income. Doesn't matter how many properties have losses if there is more than that amount of passive income from any property.

Same as many others-large passive income from the sale sucked up the PAL carryovers from the other non-sold properties.

Easy-peasy.

Freaked me out the firs time I saw this happen too. 

They dont let you store up the PALs for each individual property, once you sell one, it will apply to/from any/all.

There are actually rules in IRC Section 469 that govern whether or not your gains can suck up your PALs as you state.  IF you did not GROUP the assets and notify the IRS that they WERE INDEED GROUPED, you might not get to take the PALs of the other properties/invesments. However, as also previously stated, ProSeries software is not sophisticated enough to handle the complexity of an election to group or not group.

Because I don't have the time to do the indepth research that this question truly needs, here's what I get from Google AI in response to the question "If i do not notify the IRS of my desire not to group my rentals, are my PALS automatically used against all gains on my other properties or investments" and in reviewing it against my knowledge and experience, I see nothing here that I did not expect to see:

• Isolated Losses: A passive loss from Property A cannot be used to offset a gain from Property B.
• Suspended Losses: If Property A has a loss, that loss is "suspended" and carried forward to future years to be used only against future income from that specific property, unless the property is sold.
• Gain Recognition: If you sell a property for a gain, you must pay tax on that gain, even if your other, separate rental properties are generating losses. 

• The Election Requirement: To group, you must attach a statement to your tax return listing the properties, their addresses, and EINs.
• Consistency Required: Once you choose not to group, you must maintain that separation in future years unless there is a material change in circumstances. 
   

   

  The Tax Adviser +1

• Sale of Property: If you sell your entire interest in a specific rental property to an unrelated party, all suspended losses for that specific property are released and can be used to offset any income (including non-passive income).
• Real Estate Professional Status: If you qualify as a real estate professional, you may be able to treat your rentals as active, but you must still make an election to aggregate them to consider them a single activity for material participation purposes. 
   

   

  The Tax Adviser +2

NOT AUTOMATICALLY TRUE.  RESEARCH IRC SECTION 469 GROUPING REQUIREMENTS AND ISSUES WITH NOT GROUPING.

I did the same Google search for AI Slop and found this:

Regarding how your Passive Activity Losses (PALs) are used:
Passive Gains (Rental Income/Other Passive Income): Your PALs are automatically used to offset gains from your other rental properties or other passive investments (like a limited partnership). The IRS requires you to net all passive income and losses together first.

There are special rules for PTP's.  You can't net losses from one against gains from another.  If what you're saying is true, why would a special rule be needed for PTP's? You're saying it's the same rule for everything.  Well, OK, you're saying that AI Slop says that's the way it's done. 

And why would the 8582 show all losses are allowed?

@sjrcpa  Obviously an IRS mistake.  The people with decades of experience have been asked to leave the building.  

@BobKamman Shall you, I, Jeff, Anna, Lisa, Bill and Daniel go to the Group W bench?

It's more fun over there.

Group W bench?

But I'm going if all you guys are going .

I got lost somewhere in this thread but yes all passive losses will be used to offset the gain, not just the loss from that one property. 

@abctax55  Arlo Guthrie -  Alice's Restaurant.

I didn't think we are quite violent enough to be in group W ----------------- but tax season isn't over quite yet so there is still time to qualify.  

As a side note, that's a great song.

I already tapped out, they didnt want help, they just wanted to be told they were right.

d'oh.  Tunnel vision.

I have the same issue as the original thread

Individual is active but not a real estate professional with 30 rentals, suspended losses on all rentals, sold 2 in 2025 at a 150k gain. Proseries allowing 8582 losses from the non sold entities. 

Blue j tells me that if I didn't make a group election - the gains from the sold properties cannot offset the passive loss cf from the non-sold properties. 

Box C checked on all properties

Box H checked on the 2 sold properties 

I am not convinced the program is correct especially given the no group election language -

This thread has a lot of yes you can take the loss but what is the support given the 469 and pub 925 language that appears to be contrary.

All thoughts (group w or otherwise) are appreciated - please and thank you. 

Who/what/where is blue j?

Well, to answer my own question, 

"Tax Research AI Tool — Trusted tax research software for the world's top tax firms. The future of tax research. Go from tax question to answer in minutes with Blue J’s generative AI solution for tax."

And their headquarters are in Canada. 

Pathetic.

Bluej was recommended by the AICPA - it is the next cch or ria

@SavingTaxes Have you actually read IRC Section 469?

Passive losses allowed to the extent of passive income is pretty clear.

If you care to delve into the 469 Regulations there is probably an example that fits this.

Thank you for your response - 

Yes, I have read, understand and practiced within these rules, however, i have not seen this specific issue before.

I do not believe the gain on the sale of one rental property can be used to free up losses on the other non-sold rental properties absent a group election - see Reg section 1.469-9(e)(3). 

The Journal of Accountancy also has an article from 2024 that also discusses the separate / group election:

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I spent > 90 minutes on the phone with Proseries tech support along with their back office tax technical people and they state that the Form 8582 limitation it is being computed properly. 

The program does not allow for overrides on Form 8582 so we can't even change it if we want to unless we paper file the form. 

This isn't I am right someone else is wrong issue, rather, I don't want the taxpayer audited and paying tax penalty and interest for a deduction that he wasn't entitled to - thus my asking this group for their input. 

My input is that if CPA.com is recommending a Canadian AI startup for wrong answers on easy questions like this, then I hope they are also recommending a good malpractice insurance carrier.

What's the deal with CPA.com anyway -- it seems to be owned by AICPA, but does this let them make a profit with joint ventures while maintaining their nonprofit 501(c)(6) status?  

Bluey says he cites sources for answers.  So give us a clue, where are they finding this stuff?  

Answering my own question .

 . . CPA.com is a for-profit subsidiary and an affiliate of the American Institute of Certified Public Accountants (AICPA).   As a commercial entity, CPA.com operates as a technology and business solutions provider for the accounting profession, distinct from the tax-exempt status of its parent organization, the AICPA.

From the 2024 Journal of Accountancy article:

"If a taxpayer does not have passive income from rental real estate or other sources to allow the use of passive losses generated by rental real estate activity . . ."

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@SavingTaxes wrote:

 see Reg section 1.469-9(e)(3). 

The Journal of Accountancy also has an article from 2024 that also discusses the separate / group election:

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Why are you citing a Regulation about grouping for grouping to achieve Material Participation for Real Estate Professionals?

That article discusses that if they ARE grouped, the losses from sold property can't be used against non-passive income because the entire grouped activity was not been fully disposed.  That has nothing to do with your situation.

The sale creates income from a Passive Activity.  Losses from a passive activity can be used up to the amount of income from a passive activity.  That is why they can be used.  Grouping has nothing to do with it.

Did you ever find the answer? I have the same issue.

The software is doing it correctly.