As you know, the rental property rules have prevented you from deducting your passive losses in prior years. That’s the bad news.
The good news is that you release suspended losses when you sell one or more of the properties that are creating the losses. This is true regardless of whether you sell the property at a gain or a loss.
The number one thing to know is that although any gains or losses from the disposition of a passive activity are passive, such gains or losses retain their tax characteristics.
Often, the passive loss rules create taxpayer confusion. I’m writing this letter to make sure that you know we can help you understand these rules and help you put them to work reducing your taxes.
Let’s say you sell at a profit one of your rental properties that has been generating suspended passive losses. Here’s a possible result:
- The gain on sale is taxed at tax-favored capital gains rates.
- Because the property is not grouped with other properties under tax law, the sale releases all suspended losses on this sold property.
- If the gain is greater than the suspended losses on the property sold, your excess gain releases suspended losses on the other properties.
The released suspended losses are ordinary losses that you apply against all other income.
So, in this scenario, you would have the best of all possible results: long-term capital gains and ordinary losses.