Prior Year Passive Losses & REP Status

Member since 2023 · 7 posts · 3 votes

Hello All,

Hope this message finds everyone of you doing well! My question is simple and I hope some of you had some experience on that.

My wife qualifies as a Real Estate Professional (REP) in 2024, but she did not qualify as a REP last year, and our rental losses were passive in prior years. Can I deduct prior year unallowed passive losses against my W-2 or active income, or are they still limited to rental income?

To simplify: Since my wife is a REP only for 2024, is the rental loss I can deduct from my W-2 limited to 2024 losses, or can I also deduct the passive losses carried forward from 2023?

Regards

Gokhan

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Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

Obtaining REP status does not release prior passive losses.

It is now treated as a former passive activity and those prior losses can only offset income from that same activity going forward.

If a grouping election is in place the lisses apply to the grouped activity as a whole.

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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
1y
Obtaining REP status does not release prior passive losses.
It is now treated as a former passive activity and those prior losses can only offset income from that same activity going forward.
If a grouping election is in place the lisses apply to the grouped activity as a whole.
Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
Kolodij Tax & Consulting
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Gokhan Tektas
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Member since 2023 · 7 posts · 3 votes
1y
Thanks for your very clear feedback. Highly appreciated.
Does that mean I can deduct this loss from any rental profit from any of my properties or should it be just deducted from the same property income in the future year?
Gokhan
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Sean GrahamBusiness Member
Investor , CPA · Detroit, MI · Member since 2016 · 582 posts · 248 votes
1y
Quote from @Gokhan Tektas:

Hello All,
Hope this message finds everyone of you doing well! My question is simple and I hope some of you had some experience on that.
My wife qualifies as a Real Estate Professional (REP) in 2024, but she did not qualify as a REP last year, and our rental losses were passive in prior years. Can I deduct prior year unallowed passive losses against my W-2 or active income, or are they still limited to rental income?

To simplify: Since my wife is a REP only for 2024, is the rental loss I can deduct from my W-2 limited to 2024 losses, or can I also deduct the passive losses carried forward from 2023?
Regards
Gokhan
Did you do a cost segregation study last year?

If not, you could do it this year and catch up on the missed depreciation losses this year via form 3115. Those losses can be used against active income with REPS.
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Robere Istatia
Accountant · Jacksonville, FL · Member since 2015 · 33 posts · 7 votes
1y
Passive losses can only be deducted from passive income.

If your wife has REPS you can deduct those losses from W2 or active income.

You have to treat the losses as if they were in two separate buckets, passive losses for passive income. Active losses (while REPS) for active income. This is also key when losses are being carried forward, they also need to be in these buckets.

For your second question. The properties are considered on a separate basis, you can actively participate in one and passively participate in others. This still goes back to what I stated previously about the two buckets for passive and active income. Depending on a property by property basis you can determine if your wife has REPS or not, this determination will place the income in one or the other bucket.

Also @Sean Graham has a valid strategy above as well. Depending on the number of properties in your portfolio and how many your wife is considered REPS for.
Hopes this help.
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