Am I understanding suspended passive losses correctly for my real estate investments?

Thanks for the clarification. So if I understand correctly, when I sell Property A which has $30k in suspended losses, and I have a $25k gain on the sale, I'll first use $25k of the suspended losses to offset that gain, leaving $5k that would become non-passive and usable against my W2 income? Also, what happens if I have multiple properties with separate suspended losses and I only sell one of them? Do I only get to use the suspended losses associated with the specific property I sold?

Your understanding is exactly right. Using your example, the $25k would first offset the gain, leaving $5k that becomes non-passive and can offset your W2 income. For your second question, you only get to free up the suspended losses associated with the specific property you sell. The IRS treats each rental property as a separate passive activity. So if you have Property A with $30k in suspended losses and Property B with $20k in suspended losses, and you only sell Property A, then only the $30k in losses from Property A would be freed up. The $20k from Property B would remain suspended until you either generate passive income or sell Property B.

I'm curious - does this work for people who have passive losses from things besides real estate? I have some partnership investments that generate losses but I haven't been able to use them against my income.

How accurate was it compared to what actually happened when you filed your taxes? The last thing I need is software giving me false confidence and then getting hit with a surprise tax bill.

Yes, it works for all types of passive activities, not just real estate. I know it handles partnership interests, S-corps, and basically any investment that generates a K-1 with passive income or losses. The system is specifically designed to track all those carryovers properly. In terms of accuracy, it was spot-on for me. The projections matched exactly what my CPA calculated when I filed. What I found most helpful was that it explained everything in normal language while still showing me the technical details. My situation involved some depreciation recapture that I hadn't fully understood before, and it laid it all out clearly.

Wait, how does this actually work? They somehow get you to the front of the IRS phone queue? That sounds impossible given how understaffed they are.

Sorry but this sounds like BS. I've called the IRS dozens of times and no way they're giving specific tax advice about complex passive loss scenarios over the phone. They usually just direct you to publications or tell you to talk to a tax professional.

They use a system that continuously redials and navigates the IRS phone tree until they secure a spot in the queue, then they call you when they have an agent on the line. It's not cutting in line - it's just automating the frustrating process of calling repeatedly until you get through. Regarding tax advice, I was actually surprised too. I got connected to someone in the individual tax department who was quite knowledgeable. They didn't give "advice" per se, but they did explain the regulations about passive loss limitations and when suspended losses become deductible. They confirmed that losses are tracked per activity and clarified which forms I needed to complete. Not all agents are equally helpful, but I got lucky with someone who really knew their stuff.

That's a really good point I hadn't considered. I'm expecting a potential promotion with a sizeable salary bump in the next year. Would it make sense to try to time the property sale to coincide with that first higher-income year?

Absolutely! That would be perfect timing. If you know you're going to have a higher income year coming up, that's exactly when you want those suspended losses to become available. Just make sure you're past the 1-year mark for long-term capital gains treatment on any appreciation of the property. Another thing to consider is looking at your other deductions that year. If you're already going to have large deductions from other sources in the same year (like major medical expenses), you might want to separate the events so you don't "waste" any of your passive losses by pushing your taxable income too low.

Converting to a primary residence complicates things. When you convert a rental to a primary residence, the suspended passive losses remain suspended until you sell the property. However, when you eventually sell, only the portion of the property that was used as a rental will trigger the release of suspended losses. The IRS will require you to allocate the gain between rental use and personal use based on the periods of each. The suspended losses can only offset the rental portion of the gain. And if you qualify for the $250k/$500k exclusion, that further complicates the calculation.

This is incredibly helpful information about installment sales and NIIT! I had no idea that suspended losses would be released proportionally with installment payments rather than all at once. That completely changes how I'm thinking about potentially seller-financing one of my properties. Quick question - when you say the losses are released in chronological order (oldest first), does that mean if I have suspended losses from multiple years on the same property, I need to track which specific year each loss came from? Or is it just that when I have multiple properties, I use the oldest property's losses first? Also, the NIIT point is huge for me since I'm right at that income threshold. So freed-up passive losses would reduce both my regular tax AND potentially help me avoid the 3.8% NIIT on investment income?