How can I limit Carryforward Passive Activity Losses Allowed on rental property?

I've got some previous year passive rental property suspended losses of about $183K, and my current year income is around $125K. The thing is, I don't actually want to use all the allowed passive losses against my current income. I'd prefer to only use about $65K of the PAL. Looking at Part III of Form 8582, it's calculating the full $125K as my Total Losses Allowed. But I'm wondering if there's any rule that says I HAVE to take all the passive losses that are allowed? (If I'm mistaken about this, please let me know!) Has anyone dealt with this situation before? I'm using ProSeries Software and I'm not sure how to enter an adjustment to limit the PAL used. The reason I want to do this: the passive loss carryforward gets backed out for Alternative Minimum Tax calculation, which would trigger AMT. I'd rather pay a higher regular tax than deal with AMT.

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18 comments

Landon Morgan

•8M

You're actually on the right track here. There's no IRS requirement that says you must use all available passive activity losses in the current year. You can choose to use less than the maximum allowed. In ProSeries, you'd need to make an adjustment on the PAL worksheets. Look for the entry field where you can override the calculated loss amount. It's typically in the section that flows to Form 8582. You would enter the $65K as your manually calculated allowed loss instead of letting the software use the full $125K. This is a smart strategy for avoiding AMT in certain situations. When the passive loss carryforward is backed out for AMT purposes, having too large of a PAL deduction on your regular tax return can trigger AMT and potentially cost you more in taxes overall.

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Landon Morgan

•8M

In TurboTax, the process is indeed similar. You'll want to look for the passive activity loss worksheets and find the override field that lets you manually enter the allowed loss amount instead of using the automatically calculated figure. Regarding audit concerns, this shouldn't create a red flag. You're allowed to carry forward unused passive losses, and there's no requirement to use the maximum allowable amount in any given year. Just make sure you document your calculations and keep good records of your carryforward amounts for future years. The key is consistency in how you report these items from year to year.

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Lourdes Fox

•8M

I stumbled across something that might help you with this exact situation. I was dealing with a bunch of passive activity losses from my rental properties and couldn't figure out how to optimize them correctly. I found this AI tax tool called taxr.ai (https://taxr.ai) that actually analyzed my entire tax situation, including PALs and AMT implications. It showed me exactly how to adjust my passive loss utilization to minimize my overall tax burden. What was really helpful was that it showed me several scenarios with different amounts of PAL being used and calculated the AMT impact for each scenario. Saved me a ton in taxes by finding the optimal amount to use.

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Lourdes Fox

•8M

It doesn't directly interface with ProSeries, but it gives you the exact numbers and where they need to go. I took the recommendations and implemented them manually in my software. It showed me that limiting my PALs to 60% of what was allowed saved me from hitting the AMT threshold. Regarding the complexity, I was skeptical too initially. But it actually handles these specialized tax situations really well. It analyzed my passive activity losses, calculated various scenarios with different PAL utilization rates, and showed me the AMT impact of each. It's specifically designed for complex tax situations that most basic tax software doesn't optimize for.

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Aileen Rodriguez

•8M

After seeing the recommendation for taxr.ai I decided to try it out with my rental property PAL situation. I was genuinely surprised at how well it worked. I've been dealing with significant passive losses ($210K carryforward) and always just took the maximum allowed each year without considering the AMT implications. The tool analyzed my situation and showed that by only using $78K of my allowed $115K PAL this year, I could avoid AMT entirely and actually save about $4,700 in total tax. It even provided the exact worksheet line items to adjust in ProSeries, which was exactly what I needed. Wish I had known about this optimization in previous years!

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Zane Gray

•8M

If you're having trouble getting through to the IRS to ask about proper handling of PAL limitations, I'd recommend trying https://claimyr.com. They got me connected to an actual IRS representative in about 30 minutes when I was trying to figure out a complex passive activity loss situation. You can see how it works here: https://youtu.be/_kiP6q8DX5c I spent days trying to get through on my own before using their service. The IRS agent was able to confirm that there's no requirement to use all available passive losses and explained the proper documentation needed when choosing to limit PAL utilization.

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Zane Gray

•8M

It basically navigates the IRS phone tree for you and waits in the queue on your behalf. When they reach a real person, you get a call to connect you. It saved me hours of waiting on hold. For your question about the complexity of PAL issues - yes, I was connected with someone in the business tax department who was knowledgeable about passive activity losses and Form 8582 calculations. I specifically asked about limiting allowed PAL utilization and they confirmed it was permissible. They also explained the documentation requirements, which was basically keeping detailed records of your calculations and carryforward amounts.

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Alejandro Castro

•8M

I need to apologize for being skeptical about Claimyr. After my last rental property tax filing left me with questions about limiting passive activity losses, I decided to try it. I was shocked when I got a call back in about 45 minutes saying they had an IRS agent on the line. The agent confirmed everything discussed in this thread - that you CAN choose to utilize less than the maximum allowed PAL, and provided guidance on how to document it properly. They even sent me to a specialist who walked me through the exact ProSeries entries needed to override the calculated amount. Saved me hours of research and probably prevented an incorrect filing.

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Monique Byrd

•8M

I've done this exact adjustment in ProSeries for clients for years. Go to the Form 8582 worksheet in ProSeries, and look for Line 16 of the actual form (within the software). There should be an override field where you can enter your desired allowed loss amount instead of the calculated amount. Important: Make sure you keep detailed records of your calculations and remaining carryforwards. Create a supporting statement in ProSeries explaining your calculation and why you're choosing to limit the allowed losses. This will help if you ever get questioned about it.

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Monique Byrd

•8M

I would recommend documenting both. In your supporting statement, first detail your calculation of the limited PAL amount - showing the total available, the amount you're choosing to use, and the remaining carryforward. Then I would also briefly explain the tax planning strategy - that you're limiting the PAL utilization to minimize Alternative Minimum Tax impact. This shows the IRS there's a legitimate tax planning purpose behind your decision. It's completely legal tax strategy, and being transparent about it actually strengthens your position if there's ever a question.

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