Passive Losses at Time of Sale

[Liz Ridgway]

I am reading BP’s Tax Strategies book and I wish I had read it sooner. This should be required reading for anyone who owns RE, even if only a primary residence.

My question pertains to passive losses. Due to the income phase out for claiming passive losses, I have years of carryover. I understand these can be claimed when the property is sold. However, I also read that the sale must represent the sale of all of your investment RE.?

Specifically, I am selling a condo in FL owned since 2007 currently worth about $120k. In 2018, we converted a SFH from our primary residence to an investment property. This home is worth $275k. Does this impact my ability to claim all remaining passive losses from the condo?

Thank you BP!

[Brandon Hall]

@Liz Ridgway your understanding is correct in that you must sell a material portion (or all) of the real estate activity in order to claim passive losses. However, this generally only applies when you make a grouping election and claim the real estate professional status on your tax returns. 

For example, if I sell Property A, and Property A has not been grouped with Property B, C, and D, then I have sold 100% of property A. Therefore I can take 100% of the suspended passive losses attributed to Property A in the year of sale. 

If, however, I have grouped (via a grouping election on your tax returns) Property A with Property B, C, and D, when I sell Property A I have not sold a material portion of the entire group. Therefore I cannot take my passive losses in the year of sale. 

If you haven't made the grouping election, any passive losses from the condo that were suspended will be able to be used. 

Though I'd look into the Sec. 121 exclusion if I were you as it sounds like you may be able to qualify.