Do you know how much in suspended passive losses you're carrying?

Question

Honest question for the long-term rental folks: do you know your suspended passive loss number off the top of your head?

Most investors I talk to don't. They know their rents, their rate, their cash flow to the dollar. But ask about the losses piling up on their return and I get a blank stare.

Here's the short version. If your income is too high for the rental loss allowance and you're not a real estate professional, those paper losses from depreciation or a cost seg usually can't touch your W-2 income. They aren't gone. They just sit there, property by property, on the Form 8582 worksheets, waiting for passive income or a taxable sale of that property.

A few ways I see this bite people. They sell and panic about the tax bill, not knowing years of losses get freed up that same year. They switch preparers or software and the carryforward quietly drops off the new return. Or they do a 1031 thinking the losses come out, and they generally don't.

So before December, go dig out last year's return and find the number. It might change what you do with a property.

Has knowing (or not knowing) that number ever changed a sell, hold or buy decision for you?

Aaron Weikle · Answer

Tracking by property is the right call, and the easiest system I've found is a simple spreadsheet that mirrors the Form 8582 worksheets but stays property specific. For each rental, you want four columns updated every April. This are going to be the cumulative depreciation taken, loss allowed in the current year, loss suspended in the current year, and the running carryforward total. Pull those numbers straight from the prior-year 8582 worksheets and your Schedule E. Takes maybe fifteen minutes per property once you have the habit. The 1031 point deserves more emphasis. Those suspended losses don't transfer to the replacement property. Instead they stay tied to your tax basis in the relinquished property and remain suspended until you have passive income or a fully taxable disposition. Investors who don't know this sometimes 1031 a property they should have sold outright, because a taxable sale would have freed six figures of carryforwards that could offset other passive income. Cost segregation properties especially need close monitoring. You can run a study in year one, book 80k in accelerated depreciation, have most of it suspended, and then forget it's sitting there. When you eventually sell, that suspended loss offsets a chunk of the depreciation recapture. but that only happens if the carryforward survived every preparer and software switch between now and then. Ask your preparer for the 8582 worksheets every year, not just the summary. If the carryforward doesn't match what you have on your spreadsheet, find out why before you're in due diligence on a sale.

Simon W. · Answer

Good post, and it's true. Most people find out what they're carrying the year they sell, and by then it's a scramble.

The thing I'd add is to track it by property, not just as one number. Form 8582 carries it forward, but when you sell one property, the losses tied to that property are what free up. If your old returns lumped everything together or you switched preparers a couple of times, it can take real work to rebuild.

So once a year I'd keep a simple sheet per property with the depreciation taken, the loss allowed, and the loss carried forward. It takes ten minutes when the return is done and saves a lot of digging later. It also helps when you're deciding which property to sell first.

Do you know how much in suspended passive losses you're carrying?

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