Can property losses be carried back?
If you can’t deduct your rental losses, you can use the IRS to transfer the losses to future tax years to deduct them from future rental gains. In general, losses from passive activities that exceed income from passive activities are not allowed for the current year. You can transfer ineligible passive losses to the next taxable year. A similar rule applies to loans from passive activities.
The IRS classifies property rental as a passive activity, unless you are a full-time real estate professional. You cannot deduct passive losses from non-passive income, only from other passive income. If you have a few rents and one of them is in the red, for example, you can write off the loss of one house against the other’s profits. If the total of all your passive activity is a loss, you must pass it on.
Depreciation can result in significant tax savings, especially if you own multiple properties. The same applies if you own several properties and treat them as separate activities for tax purposes. Let’s say you expect a tax loss from selling a rental property that you have owned for more than a year. In general, passive losses can only offset your habitual income from a W-2 job or other trade or business under one of the circumstances explained below.
Passive losses on rental property that are not immediately deductible are known as suspended passive losses. However, many landlords with multiple properties combine them as one activity for tax reasons. That’s good news, because a net loss (for tax reasons) means you won’t pay taxes on your rental income today, even if you have a positive cash flow. To determine if you have a tax gain or loss, you’ll need to compare the property’s selling price to its tax base.
If you sell a rental property with locked PALs, you may be able to deduct them from sale in addition to deducting any Section 1231 losses. In order to reduce the tax burden, the provision for loss carried forward allows NOL to offset the taxes due in the third year in the second year. So if the house lost value before converting it into a rental property, you may have a low base and no tax loss. Tax rules state that you can deduct your suspended passive losses from the profit you make when you sell your rental property.
Many rental properties include so-called “pass-through companies,” such as sole proprietorships, limited liability companies (LLCs) that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes, and suburban companies. TCJA rules allow agricultural losses to be taken back for two years to immediately refund previous taxes that have been paid or transferred indefinitely.
