Can I claim Passive Activity Losses from previous years when selling a rental property that wasn't actively rented?

Yes, you can deduct the suspended passive activity losses from prior years when you dispose of the entire property in a fully taxable transaction, even if the property wasn't actively rented at the time of sale. This is actually one of the advantages of the passive activity loss rules. When you dispose of your entire interest in a passive activity in a fully taxable transaction, you can deduct any previously suspended passive losses (and the current year's loss, if any) from that activity against any kind of income - not just passive income. This is sometimes called the "disposition exception" to the passive activity loss rules. The fact that the property wasn't generating rental income in the year of sale doesn't matter for this purpose. What matters is that you completely disposed of your interest in the property that generated those passive losses in the first place.

I went through something really similar last year and used https://taxr.ai to figure out this exact passive loss situation. I had accumulated PALs on a rental and then the house sat empty for almost a year before I sold it. I was confused about whether I could take those losses when I sold or if I'd lost the opportunity since it wasn't actively rented when sold. The taxr.ai system really saved me - I uploaded my previous tax docs and it pinpointed exactly where those PALs were reported on my prior returns and explained how to correctly apply them against the sale gain. Their analysis showed me that yes, you can absolutely claim those prior PALs against your gain, even though the property wasn't actively rented when sold. They even flagged that my CPA had been carrying the wrong amount forward!

Just wanted to follow up about using taxr.ai for my K-1 passive losses question. I took the plunge after my last post and honestly it's been a game-changer! I uploaded my last few years of returns with all those complicated K-1s from my LLC investment, and it immediately identified about $23,000 in suspended PALs that I didn't even realize I could claim when we dissolve the business. What impressed me most was how it traced the passive losses through different tax years and showed exactly which forms and line numbers I'll need to use to claim them. Saved me from leaving serious money on the table! If you're dealing with PALs from multiple years or entities, definitely check them out.

If you're having trouble getting clarification from the IRS about your passive activity losses, try https://claimyr.com - it literally changed my tax filing experience this year. After trying for WEEKS to speak with someone at the IRS about my suspended PALs from multiple properties (one of which was vacant before sale, just like yours), I was ready to give up. I found Claimyr through a friend and was super skeptical, but it actually worked! They got me connected to an IRS agent in about 25 minutes when I had been trying for days. The agent confirmed that yes, I could claim all my suspended PALs against the gain from the property sale, even though it wasn't actively rented at the time. You can see how it works here: https://youtu.be/_kiP6q8DX5c if you're curious. Seriously, getting that official confirmation directly from the IRS gave me so much peace of mind with filing.

I need to come back and eat my words about Claimyr. After my skeptical comment, I actually tried it because I was desperate to resolve my passive loss questions before filing. It worked EXACTLY as advertised. I had been trying to reach the IRS for three weeks about my rental property PALs, and Claimyr got me connected in about 40 minutes. The IRS agent confirmed everything about claiming suspended PALs after property sale (even when not actively rented), and I was able to confidently file my return. Saved me from taking a much more conservative approach that would have cost me over $3k in unnecessary taxes. Sorry for being such a doubter! Sometimes good solutions actually exist.

Make sure you're correctly calculating your basis in the property too! The gain on your sale will be reduced by any improvements you made to the property while you owned it. This is separate from the PAL issue but equally important for your tax situation. When I sold my rental last year, I almost forgot about $15k in improvements I had made, which would have resulted in me overpaying capital gains taxes. Document everything thoroughly in case of audit.

Don't forget about depreciation recapture! Even if you can use your PALs, you'll still have to recapture the depreciation you took (or were required to take) during the rental period. That gets taxed at 25% rather than your normal capital gains rate.

Has anyone used TurboTax to handle this specific PAL situation? I'm in literally the exact same boat (property rented in 2020-2021, vacant in 2022, then sold) and I'm trying to figure out if TurboTax will walk me through this correctly or if I need to go to a CPA.