Q. Anne sells a rental house for $300,000 (adjusted basis of $255,000). During her ownership, $60,000...

Q. Anne sells a rental house for $300,000 (adjusted basis of $255,000). During her ownership, $60,000 of losses have been suspended under the passive activity loss rules. Determine the tax treatment to Anne on the disposition of the property.

Expert Solution

Passive activity loss rules are a set of IRS rules that prohibit using passive losses to offset earned or ordinary income. If the taxpayer does not materially participate in the activity that is producing the passive losses, those losses can be matched only against passive income. If there is no passive income, no loss can be deducted. Passive activity losses can only be applied in the current year. However, if they exceed passive income they can be carried forward without limitation; they cannot be carried back. So, for our case:

Sale of rental house for $300,000 against adjusted basis of $255,000 leads to passive gain of $ 45,000.

During her ownership, $60,000 of losses which got suspended can now be adjusted against the passive gain under the passive activity loss rules. The losses are more than the gain, therefore ZERO taxable passive gains for the current year and $ 45000 - $ 60,000 = - $ 15,000 can be carried forward to next year(s) for adjustment against any passive gain in upcoming years.

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ekkarill92 answered 2 years ago

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