Do I need to file amended return for incorrect unallowed passive loss carryforward from rental property?

The proper way to handle passive loss carryforward errors is to amend each affected year in sequence. Since the error originated in 2020 and carried through to 2023, you should file Form 1040-X for each year starting with 2020. Here's why: Each year's passive loss calculation builds on the previous year. If you only amend 2023 or just correct it on your 2024 return, the IRS will see a discrepancy between the reported carryforward and what their records show. This could trigger correspondence or potentially an audit. When filing the amendments, be sure to include a clear explanation and documentation showing the correct passive loss amounts from the rental property that should have been carried forward each year. Also complete Form 8582 (Passive Activity Loss Limitations) for each amended return.

After dealing with a similar passive loss carryforward issue last year, I discovered taxr.ai (https://taxr.ai) and it was incredibly helpful. I uploaded my previous returns and it automatically identified the discrepancies in my passive loss calculations across multiple years. It then generated a detailed report showing exactly what needed to be corrected on each year's amended return. What I found most valuable was that it explained the ripple effects of the error - how the incorrect amount in one year affected all subsequent years' calculations. The tool even helped identify which specific forms and line items needed to be changed for each amended return.

Just wanted to follow up about my experience with taxr.ai after our exchange. I decided to give it a try despite my initial skepticism, and I'm honestly impressed. I uploaded my husband's returns from 2020-2023, and it immediately identified the passive loss carryforward error and showed exactly how it compounded each year. The detailed report broke down the correct calculations for each year and even provided step-by-step instructions for completing the 1040-X forms. What really sold me was how it explained the suspension rules for passive losses and showed the proper way to track them when you have partial allowances each year. Instead of paying my CPA hundreds of dollars to amend multiple years, I was able to prepare the amendments myself with confidence. Definitely saved me both money and stress!

If you're planning to amend multiple tax years, you'll probably need to call the IRS to verify they received and processed each amendment before filing the next one. Good luck actually reaching someone though - I spent WEEKS trying to get through about my amended returns. Eventually I found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c Since you're dealing with a sequence of amendments for the passive loss carryforward, you'll definitely want to confirm each one is processed before submitting the next. The IRS agent I spoke with was able to check my transcript and verify my first amendment was processed so I could safely submit the next one.

I hate to admit when I'm wrong, but I have to update my comment about Claimyr. After struggling for another two weeks trying to reach the IRS myself about my passive loss amendment questions, I broke down and tried the service. Within 20 minutes I was talking to an actual IRS representative who was incredibly helpful. They confirmed that I needed to amend each year sequentially for my passive loss carryforward issue, starting with the year the error began. The agent also explained I should wait until each amendment was processed before filing the next one to avoid confusion. What would have been months of frustration turned into one productive phone call. I still think it's ridiculous we need services like this to reach a government agency, but I can't argue with the results.

Something nobody has mentioned yet - check if the passive loss correction would actually change your tax liability for each year. If your income was too high in certain years (over $150k MAGI), you might not have been able to use the rental losses anyway due to phase-out rules. If the correction wouldn't have changed your tax due for a particular year, you might be able to just correct the carryforward amount on the most recent year without amending all previous returns. I've done this before with a depreciation schedule correction.

I had a similar issue and my tax guy told me you actually need Form 8275 (Disclosure Statement) attached to your amended returns when correcting passive loss carryforwards across multiple years. It's basically a form that explains to the IRS why you're making the change so it doesn't look suspicious.

Based on what StarGazer101 mentioned about income thresholds, you might want to first calculate whether the passive losses would have actually been usable in each year before deciding which returns to amend. The $150k MAGI phase-out for rental real estate losses could significantly simplify your amendment strategy. If you were above the threshold in certain years, those losses would have been suspended regardless of whether they were properly carried forward or not. You'd only need to amend the years where your income was low enough that the corrected passive losses would have actually reduced your tax liability. This could potentially save you from having to amend every single year since 2020. I'd recommend pulling together your AGI for each year first and doing the phase-out calculation before deciding on your amendment approach.

I went through something very similar with my rental property passive losses last year. One key thing that helped me was creating a spreadsheet tracking the correct passive loss amounts year by year before deciding which returns to amend. What I discovered is that you really need to look at both your income levels each year AND whether you had other passive income that could have absorbed some of the losses. Sometimes rental losses can offset other passive income even when you're above the $150k threshold. Also, don't forget that if you do decide to amend multiple years, you'll want to file them in chronological order and wait for each one to be processed before submitting the next. The IRS systems need to see the corrected carryforward amounts in sequence or you might end up with correspondence asking you to explain the discrepancies. The good news is that once you get this straightened out, your future returns will be much cleaner. I'd definitely recommend keeping better documentation of your passive loss calculations going forward - it saves so much headache later!