is Pub 527 [2010] correct Part II

[morrisliberty]

hello.


On page 23 of Pub 527 {2010} I quote Rented at least 15 days and personal use test is met


Deductions not allowed due to the limitations of the rental income for the property are carried over to subsequent years and may be used when the property has sufficient income to cover the expenses or is sold.
I agree with sufficient income to cover the expenses but I disagree with "is sold" part. I thought any deductions carried over was lost when sold. Is the IRS saying if you sell property at a gain you can now use the carried over deductions to offset the gain on sale of home. Where am I going wrong?

[commentator]

No, the suspended losses are not lost when the property is sold. Those losses become fully deductible in the year of sale. The publication is correct.

[morrisliberty]

hello,

are you saying a dwelling unit used as a home , a home being rented for 15 days or more and personal use is more than the greater of 14 days or 10% of the number of days rented at fair rental with suspended vacation home loss carryovers under Section 280A can be used to offset the gain from the sale of the home? I do not see this in the code or regulations.



Where can I find this in the code or regulations?

[henryclay]

Where in the Code or Regs? I don't know, but the following may give you some points to start from in your search. It would be helpful if you would post the results of your quest.

If your only passive income activity is a rental property operation in which you actively participate, then a prior year suspended passive loss is used in a specific sequence as follows:

1. To offset current rental income
2. As an adjustment to basis (addition) if the property is sold
3. As a passive loss allowance against other ordinary income if otherwise allowed

If after all these opportunities, you still have an unused passive loss for the current year, then it is again suspended and carried forward.

If the property is sold, suspended passive losses are added to your adjusted cost basis, which has the net effect of reducing the taxable capital gain including the amount of unrecaptured depreciation subject to tax.

[morrisliberty]

hello,

MY question relates to a dwelling unit used as a residence and therefore is not a passive activity under Section 469 but falls under the vacation home rules of Section 280A . I believe you are correct about the passive loss rules of Section 469 relating to a 100% rental property and to a dwelling unit used as a rental property which is a dwelling unit rented 15 days or more and personal use is less than or equal to the greater of 14 days or 10% of the number of days rented at fair rental.
I believe that the vacation home carryover of deductions is not like the passive loss rules and when the dwelling unit used as a residence is sold the vacation home deductions carryover is not freed up to offset the gain from the sale of home and is lost forever in the year of sale .You are allowed to offset the rental income in the year of sale if large enough to offset the carryover deductions.

[commentator]

You pose an interesting question that will require more research.

Note that recognition of suspended losses on a rental activity is only triggered if the property is disposed of in a taxable transaction. Section 121 makes the sale of many personal residences be non-taxable.

The best outcome I can reasonably hope for is that suspended loss recognition be allowed to the extent of gain recognized (depreciation recapture and/or gain in excess of the 121 exclusion).

I'll see what I can find out.