rental loss

[TAXMAN]

In looking at a 2012 filed return, the rental loss on sch e was about 36K. However in checking form 8582 I found the entire loss being allowed as CPA included gains from 6252 that were reported on the form 4797 from previous sale of another rental. I cannot ascertain if this position is correct. What would you say?

[mcb39]

I would say that it is not correct.  What I am reading is that "Up to $25000 in passive losses from rental real estate can be deducted each year against nonpassive income.  Rental income is treated as passive income.  I think that the sale of property would be considered nonpassive.

 

[TAXMAN]

I was thinking the same way UNLESS the character of the gain retains its passive status through out the collection period. That I think may be clue. Any thoughts?

[jklcpa]

1 hour ago, mcb39 said:

I would say that it is not correct.  What I am reading is that "Up to $25000 in passive losses from rental real estate can be deducted each year against nonpassive income.  Rental income is treated as passive income.  I think that the sale of property would be considered nonpassive.

 

The $25K allowance is the special allowance for rental real estate with active participation and also has income limitations depending on the filing status. The OP didn't give us enough information to determine that.  Prior and current year PALs of a particular passive activity are allowed in full in the year of complete disposition, but if the taxpayer has other rentals with losses, those would not be allowed.

The gain on sale is not passive income. It is considered portfolio income, and the loss on the activity isn't allowed because of the gain, but because it was completely disposed of.  The property could have been disposed of at a loss, and the PAL's and current year loss would still have been allowed because of its complete disposition.

33 minutes ago, TAXMAN said:

I was thinking the same way UNLESS the character of the gain retains its passive status through out the collection period. That I think may be clue. Any thoughts?

See my statement above. The gain on sale is not passive income.  You might find that reviewing the definitions of portfolio, investment, and passive income to be helpful, as well as the instructions for Form 8582. Those instructions are quite extensive and give a lot of information that you may find userful.

[jklcpa]

I had time tonight to re-review the classifications myself, and so I'm taking back what I said about the gain being portfolio income. I have edited my post above with strikethroughs so that it has the correct information. Gain from the disposition of the passive activity would be passive income, and I believe that the gain recognized on the installment basis each year would also continue to be passive income as well.

I'm sorry for the misinformation I gave earlier that I now believe was wrong.