Should I file prior year late return to secure rental loss?

[Summer2021]

My new client didn't file his 2019 tax return due to income lower than the filing threshold.    However, he had substantial rental loss due to water damage to the rental property.  Insurance coverage was not sufficient to cover his repair, not to mention depreciation and property tax expenses.

Will you suggest him to file a 2019 return in 2022 to secure the loss deduction?  What is the downside to file a late 2019 return at this time?  No taxes will be due except for late filing penalty.

Can he just add the loss carryforward from 2019 to his 2021 Schedule E?

Really appreciate your insight.

[qbteachmt]

I'm pretty sure the IRS doesn't like it when something is kept secret, then you try to use it later.

"My new client didn't file his 2019 tax return due to income lower than the filing threshold."

What about reconciliation of the two RRC payouts in 2020? Didn't he file for 2020?

[Summer2021]

Yes he did file 2020 tax return.  However the prior CPA didn't put in the carryover loss for him.

[qbteachmt]

So, you are missing continuity for 2019 and 2020 rental activities?

[Summer2021]

That is correct.

[jeffmcpa2010]

Can he just add the loss carryforward from 2019 to his 2021 Schedule E?

Are you talking about a "Passive Loss Carryforward".

I would probably prepare and file the 2019 return, then update the 2020 return for the carryover, If there is no tax affect I might just keep a copy of the relevant changed forms in the file, rather than amending 2020 if there is no tax affect., and update the passive carryover schedule to reconcile into 2021.

But I have to be honest, Amending 2020 or just changing the schedule, That answer would probably change from day to day.

[qbteachmt]

You would gather 2020 data on that rental, to see if there is any loss or income. The damage that resulted in lost rental activity in 2019 may not have carried into 2020. If you don't prepare 2020, you don't how 2019 impacts that activity or what carries over to 2021. That's why I used the word "continuity" as in, the activity continued over all these years, so each year gets evaluated and is a link in the chain.

[rbynaker]

Start with the math.  Couldn't there be a scenario with active participation where the rental loss results in an NOL that would need to be carried back?  Congress has flip-flopped so many times I can't keep track of which years can only be carried forward and which have to be elected-out of carry-back.

[TaxGuyBill]

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@rbynaker wrote:

Start with the math.  Couldn't there be a scenario with active participation where the rental loss results in an NOL that would need to be carried back?  Congress has flip-flopped so many times I can't keep track of which years can only be carried forward and which have to be elected-out of carry-back.

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I have stuck in my mind that it can't create a NOL.  But offhand, I don't have any citations for that.  😂

[sjrcpa]

An allowed rental loss (say using the $25,000 exception) can create an NOL. It all depends on what else is on the return.

[TaxGuyBill]

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@sjrcpa wrote:

An allowed rental loss (say using the $25,000 exception) can create an NOL. It all depends on what else is on the return.

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Okay, it seems you are right and my memory is mixing something up again.   😂

Thank you!

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[qbteachmt]

"It all depends on what else is on the return."

What return? We don' need no stinkin' return...

Ha ha ha ha ha ha...

[sjrcpa]

I'm 1 and 1 in the memory game today. 😊