IRA to Roth Conversion - Passive or Active for Taxation purposes?

Question

Howdy Gang,

I am considering converting an IRA to a Roth.  I know this will trigger a taxable event.  Is this event considered an active or a passive activity?

The background of the question is: can this tax be offset by depreciation losses from rentals I own?

I am based in Westchester County, NY and not a 'Real Estate Professional' as defined by the IRS; as such my rental losses are passive.

Thanks for your input.

Joe

Wei Jie Yang · Answer

Hi guys. Let me just see if I am understanding this.

I can use my passive losses on my rental for 2019 to offset a conversion of my traditional 401k to a ROTH 401k or IRA in 2019? So long as my MAGI doesn't exceed 150K? Did I get that right?

Ashish Acharya · Answer

There are timings to convert the account. If you have loss carryover, or you have low taxable income compared to when you deferred the income or expiring credits.

Depending on your AGI, if below 150k, yes rental losses(not depreciation ) can Offset the conversion income.

Income is just a deferred ordinary income, not passive.

Being RE pro automatically doesn’t make your passive losses active.

There are ways to decrease tax impact if done correctly.

Joe Jor · Answer

@Basit Siddiqi

Thanks for the quick reply; my MAGI is above the threshold which permits the $25k loss/deduction.

As such, I believe you are saying that the rental losses could not offset the IRA conversion.

Joe

Basit Siddiqi · Answer

@Joe JorConversion is not factored for active/passive purposes.As such, you have the exception to utilize rental losses in the amount up-to $25,000 if your income is below a certain MAGI.