TAX Treatment For Carried Over Passive Losses for Real Estate Rental Activity

[Pesi S.]

Hello,

From what I have been given to understand from a CPA, he  mentions that Carried over Passive Losses from Real Estate Rental Activity cannot be utilized when you sell only one of your properties in your LLC. You have to sell ALL your properties in the LLC in order to use all the carried over passive losses. This differs from some of the videos I am seeing on YouTube. If anyone has been through a similar situation please advise.

Below is the hypothetical example he created

Person has income from a job (W2) 

He and his spouse have a LLC with holds their multiple real estate rental properties. Since they are not qualified as Real Estate professionals, this is treated as a passive investment.

You have to file separate return for your LLC and the combined rental activity profit/loss from all the properties combined will be carried over to your personal return each year

Let's say over a period of  say 10 years, Property A  had losses of 25K,  Property B of $35K and Property C of $10K. So total of $70K losses for all properties. These losses could not be utilized in any of the years since the MAGI from W2 was over $150K and hence these losses had to be carried forward/deferred each year.  There was no year with a combined rental activity income/profit too

Let's say you sold Property C last year and the gain is say $50K. You cannot utilize the carried over losses from Property C or from any of the remaining properties. All these losses will continue to get deferred till you sell the very last property in your LLC.

You sell Property B next but you still cannot utilize the loss

Finally when you sell the remaining property A, then only all the carried forward losses can be utilized. 

Question is if the final property A has gain of only $10K, then what happens to the remaining losses of $60K