Real Estate Passive Loss Carryforward

[nolanm]

Need to advise client on sale of real-estate:

Property has $120k passive losses carried forward. After sale and accounting for expenses and expenses, depreciation taxes recoup etc. property sale will realize $30k of losses.

TP has no passive income and stock l-term capital gains of around $6k in 2021. 

Is it correct that the balance of realized real-estate losses of $21k just carry forward for future year offsets, or are there any rules / regs that apply to this type of capital loss?

Thanks for the help 

Nolan

[taxiowa]

First of all, how does a property have $120K of passive loss carry forward.  And then to boot have a loss on sale of $30K. I would have fired them as clients long ago, because some bookkeeping does not seem right.

But in answer to your question, there is a box on the schedule E worksheet up top that says check me if the client has a total taxable distribution of property.  Then all previous losses will also be recognized.

[joshuabarksatlcs]

RE: First of all, how does a property have $120K of passive loss carry forward.  And then to boot have a loss on sale of $30K. I would have fired them as clients long ago, because some bookkeeping does not seem right.

@taxiowa Perhaps you're in a prosperous state like CA, and this would be far fetched.  How about a rental, say, in Coalville, UT, after the coal business went dry?  Or, perhaps Gary, Indiana? 

If the TP had high income and couldn't deduct the 25K per year, OR had other rental loss with high mortgage interest and depreciation, 12K of PAL for ten years would be $120K.  "The bookkeeping not seemed right" bit could be inconclusive.

Anyway, your implied comment that the passive loss would be freed up and fully deductible (Then all previous losses will also be recognized) is right on.  The sale should be marked "EDPA" - Entire disposal of Passive Activity.

Regarding the loss in the sale, it's a 4797 loss and NOT subject to capital loss rules.  The whole shebang $30K is deducted as an ordinary loss, assuming it was not challenged as a rental activity.  So the TP would end up the following, as related to the info given.

Rental loss (Sch E)  $120K

Form 4797 loss $30K

Capital gain $6K

[Gordoncrom]

Joshuabaksatlcs - good post; helped point me in the right direction.

For the Pro Series 2021 Schedule E worksheet, the specific box to click is in the area "check all that apply", just below the days rented at FMV entries.  Specifically it's box H, and titled "Complete taxable disposition - See Help". 

A word of caution:  if you go to the help, you will find the criteria that is needed to call this a complete taxable disposition.  In my client's case, he sold the property to a related party, which disallows claiming all the previous disallowed passive losses.  Disposition using a like kind exchange, as well as selling under an installment agreement also disallow taking the entire loss.

Regarding huge disallowed losses, my client is the "victim" of Covid policies.  He had tenants who did not pay their rent for a couple years.  Because of those policies, he couldn't evict them.  The lease had him paying all the utilities, and other expenses, as well as the mortgage, taxes, depreciation, etc.  In his case, he was also a high income taxpayer, and up disallowed passive losses were ~$65K. 

[nolanm]

Thank you for the insights @Gordoncrom