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Pioneer
Posts: 1
Registered: ‎04-16-2018

Sold of 1 of several rental properties - which PALs can be used to offset capital gains ?

Despite searching the IRS forms & pubs and googling, I cannot find a straight answer to this question.   I have 3 rental properties and in 2017 I sold one of them.   All 3 rental properties had varying amounts of PAL's (passive activity prior year unallowed losses).   Pub-925 "Dispositions" and 8582 both state that PAL's are not limited in the year one disposes of the passive activity.  

 

In particular, the first page of 8582 states the following:

"PALs not allowed in the current year are carried forward until they’re allowed either against passive activity income, against the special allowance, if applicable, or when you sell or exchange your entire interest in the activity in a fully taxable transaction to an unrelated party.   For more information, see Pub. 925, Passive Activity and At-Risk Rules".

 

What is not clear is if ANY prior year unallowed losses are no longer limited OR just for the one passive activity (property) that was sold/disposed of.  

 

In other words, in the year of selling Property "A"...

 

(Interpretation #1)

The PAL's of all 3 properties ("A", "B: and "C") are no longer limited by 8582, and I can use all 3 PAL's in full that year.  

OR

(Interpretation 2)

Only the PAL from property "A" is no longer limited by 8582, while the PALs of properties "B" & "C" are still subject to the limitation imposed by form 8582 ? 

 

My Thanks for any assistance in this question.