Tax Question With Big Impact

[Mark Tanner]

How can we apply real estate losses from prior years to offset current year non-real estate income? I assume we need "real estate professional" status, but 90% of CPAs I have talked to (all with real estate clients) say that even with real estate professional status you can never take advantage of those past losses until you actually sell the properties. We have accumulated about 115k in real estate paper losses from 2016-2019 mostly due to renovations and depreciation and we never plan to never sell the properties. We would love to be able to apply those losses to my non-real estate earnings, but we haven't gotten a clear answer on how to do that. Has anyone else encountered this problem? Thanks!

[Nicholas Aiola]

@Mark Tanner The 90% of CPAs you talked to are correct - not sure what the argument was from the other 10%. REP does not free up suspended passive losses. I'll even take it one step further...

If you elect to aggregate your separate rental activities (properties) as one activity for purposes of establishing material participation pursuant to Reg. Sec. 1.469-9, you will essentially trap your suspended PALs.

You mentioned some of the CPAs you spoke to told you that you won't be able to deduct those suspended PALs until you sell a property (entire disposition). This is true under normal circumstances. However, if you make the aggregation election, which is irrevocable and unavoidable if you have a sizable portfolio, you're electing to treat ALL properties as ONE activity. In other words, selling one rental out of the portfolio is not an entire disposition because the portfolio as a whole is now the "activity".

You would have to sell the entire portfolio in order to free up the suspended PALs.

"Real estate professional" is always thrown around and so easily recommended by CPAs because it is low-hanging fruit. It sounds great on the surface but this is a prime example of when it could have negative implications.

I'm not sure how many CPAs you've spoken to already but I would recommend settling on one who specializes in real estate and can help you navigate this situation with confidence.