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:
No, if you do not notify the IRS of your desire to group your rentals, your passive activity losses (PALs) are not automatically used against all gains on other properties.
In fact, the opposite is true: if you do not make a formal grouping election, the IRS treats each rental property as a
separate activity.
Impact of Not Grouping Rentals (Default Rule)
If you do not file a grouping disclosure with your tax return:
- 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.
When PALS Are Used Against Gains
You can only use suspended passive losses from one property to offset a gain from a different property if you have properly grouped them together on your tax return as a single "appropriate economic unit".
- 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.
Exceptions to the Rule
- 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.
Disclaimer: Tax rules regarding grouping are complex. Consult a tax professional regarding your specific situation.
