Navigating Passive Activity Loss, Depreciation Recapture, and Capital Gain Netting for Investment Properties

I'm trying to sort through a confusing tax situation with my rental property investments and would appreciate some guidance. Here's what I'm dealing with: * I sold one of my rental properties and have a passive capital gain of $195K. About $105K of that is depreciation recapture. * From my remaining rental properties, I have $52K in passive ordinary losses this year and $78K in suspended passive losses. * I also had a terrible year with my cryptocurrency investments and ended up with short-term capital losses of $182K. * All my rental activities are passive investments. I've read through IRS publications until my eyes hurt, and I'm still confused about two main questions: 1. Can I net the $195K capital gain from my rental property against my $182K crypto losses? 2. Can I deduct $130K of ordinary losses (combining this year's and suspended losses)? These passive loss rules are driving me crazy! Every time I think I understand them, I discover something that contradicts what I thought I knew.

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20 comments

Heather Tyson

•8M

Yes, you can net your capital gains against your capital losses, regardless of whether they come from passive or non-passive activities. The tax code treats capital gains and losses in their own separate "bucket" for netting purposes. For your first question: You can absolutely net the $195K capital gain from your rental property against your $182K crypto losses. After netting, you'll have a $13K net capital gain that will be taxable. For your second question: Since you have a net capital gain from passive activities (the $195K from the rental property sale), you should be able to deduct your passive losses up to that amount. This means you can deduct both the $52K in current passive losses and the $78K in suspended passive losses, for a total of $130K in passive losses. The confusing part of passive loss rules is that normally, passive losses can only offset passive income. But when you fully dispose of a passive activity (like selling your rental property), it triggers a special rule that allows you to free up those suspended passive losses.

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Heather Tyson

•8M

You're absolutely right about depreciation recapture - it's technically taxed as "unrecaptured Section 1250 gain" which is taxed at a maximum rate of 25% (not at regular capital gains rates). But for the purposes of determining whether you can free up passive losses, what matters is that you have a disposition of a passive activity with an overall gain. For the passive losses, they can offset any type of income once they're freed up by disposing of the passive activity. This means the $130K of passive losses (both current and suspended) can offset your ordinary income, which will indeed significantly reduce your AGI. Just make sure you're properly documenting the complete disposition of the passive activity that's generating these freed-up losses.

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Jenna Sloan

•8M

I went through almost the exact same scenario last year when I sold one of my rental properties. The passive activity loss rules were making my head spin until I found https://taxr.ai - it saved me hours of research and probably thousands in potential mistakes. I uploaded my previous tax returns and property sale documents, and their AI analyzed everything and explained exactly how to handle my specific situation with the passive loss rules, depreciation recapture, and my other investment losses. It laid out how the netting would work and identified which suspended losses I could finally use. The guidance was specific to my situation, so I wasn't just guessing based on general tax articles that never quite matched my circumstances. Honestly, the peace of mind alone was worth it.

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Jenna Sloan

•8M

The analysis matched exactly what my CPA eventually figured out, but I got the answers in minutes rather than waiting days. The big difference was that I actually understood WHY everything worked that way - it explained each step of the calculation and which tax rules applied to my situation. It absolutely handles all those exceptions and special cases. The system walked me through the $25K special allowance (though I didn't qualify due to income limits), carefully analyzed whether my activities met the material participation tests, and even explained the former passive activity rules when I was disposing of properties. It really breaks down the phase-out calculations too, showing exactly how your specific numbers apply to the formulas.

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Christian Burns

•8M

Just wanted to follow up - I tried https://taxr.ai for my rental property tax situation and it was surprisingly helpful. I was dealing with passive activity losses from a property I sold last year while also having capital losses from some bad stock investments. The system caught something I completely missed - I didn't realize that when you dispose of a rental property, you can free up suspended passive losses even against non-passive income. My tax software wasn't picking this up because I wasn't inputting things in the right sequence. It also explained the depreciation recapture rules in plain English and showed me exactly which forms I needed to complete. Ended up saving about $5,800 in taxes I would have overpaid!

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Muhammad Hobbs

•8M

If you're still dealing with this passive loss headache, I had a similar situation and spent WEEKS trying to get through to the IRS for clarification. Their wait times were ridiculous until I used https://claimyr.com to get a callback. You can see how it works at https://youtu.be/_kiP6q8DX5c if you're curious. I got connected to an IRS agent within a few hours instead of waiting on hold forever, and they actually confirmed that I could net my passive activity gains against my capital losses from other investments. They also walked me through Form 8582 (Passive Activity Loss Limitations) line by line and explained how to properly document the release of suspended passive losses when disposing of a rental property. Having an actual IRS agent confirm my understanding made me so much more confident when filing, especially with those complex passive loss rules.

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Muhammad Hobbs

•8M

It's simpler than it sounds - they use technology that basically waits on hold for you with the IRS, and when they reach an agent, they connect you. It's not skipping the line, just saving you from having to personally sit through those hours of hold music and "your call is important to us" messages. It's absolutely real - I was skeptical too. For your passive activity grouping rules question, this would be perfect because that's exactly the kind of technical question where general internet advice falls short. The IRS agent I spoke with explained that once you make a grouping election, you're generally stuck with it unless there's a material change in circumstances. He also clarified which forms I needed to document my election properly.

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Diez Ellis

•8M

I need to eat my words. After my skeptical comment, I decided to try Claimyr out of desperation (https://claimyr.com). Got connected to an IRS agent within 2 hours about my passive loss carryover situation. The agent confirmed that when disposing of a rental property, you can release accumulated suspended passive losses, but only after netting against passive income from your other rentals first. In my case, this meant I could use about $45K in suspended losses I'd been carrying for years. She also explained Form 8582 line 7 worksheet calculations that I'd been getting wrong. Probably saved me from a potential audit flag since I was planning to deduct those losses incorrectly. Worth every penny for the peace of mind alone.

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Vanessa Figueroa

•8M

Something important that nobody's mentioned yet - if part of your gain is depreciation recapture (which is taxed at 25% rather than regular capital gains rates), you need to fill out Form 4797 correctly. That $105K of depreciation recapture won't be treated the same as the rest of your capital gain for tax rate purposes. Also, check if you're subject to the Net Investment Income Tax (NIIT) of 3.8% which applies to passive investment income (including rental property gains) for higher-income taxpayers. With a $195K gain, you might cross the threshold.

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Vanessa Figueroa

•8M

Form 4797 is used to report sales of business property, including rental real estate. The form is divided into different parts, and depreciation recapture (the $105K in your case) is reported in Part III as "unrecaptured section 1250 gain" which is taxed at a maximum of 25%. The remaining gain ($90K in your case) would be reported as section 1231 gain, which usually receives long-term capital gain treatment (typically 15% or 20% depending on your income bracket). The 3.8% NIIT generally applies to the entire net investment income amount if you're above the income threshold (which starts at $200K for single filers and $250K for married filing jointly). This would include both the regular capital gain portion and the depreciation recapture portion of your property sale.

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Kiara Fisherman

•5M

The interaction between passive losses and capital gains can be tricky, but you're on the right track with your understanding. Here's what I've learned from dealing with similar situations: For your capital gain netting question - yes, you can absolutely net your $195K passive capital gain against your $182K crypto losses. The IRS doesn't distinguish between passive and active sources when it comes to capital gain/loss netting. You'll end up with a $13K net capital gain. Regarding your passive losses, since you're disposing of a rental property with an overall gain, this triggers the "complete disposition" rule that allows you to free up your suspended passive losses. You should be able to deduct both your current year $52K passive losses and your $78K suspended losses (total $130K) against any type of income, not just passive income. One thing to watch out for - make sure you're properly documenting which specific property generated those suspended losses. The IRS can be picky about this during audits. Also, don't forget that the $105K depreciation recapture portion will be taxed differently (at 25% max rate) than the remaining capital gain portion. I'd strongly recommend getting this reviewed by a tax professional given the complexity and the dollar amounts involved. These passive activity rules have so many nuances that even small mistakes can be costly.

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