If a taxpayer converts a personal residence to rental property, he can deduct expenses against rental income. The basis for depreciation is the lesser of the adjusted basis or fair market value at the date it is converted to rental property. If the taxpayer does not materially participate in and actively manage the property, the losses from rentals are treated as passive losses and cannot be deducted in the current year. They are suspended and carried forward and can offset rental income of future years but any resulting loss is not deductible and is carried forward.
If a taxpayer continues to have non deductible passive losses, they accumulate and can be offset against the gain on the sale of the property. If the gain on the sale exceeds the cumulative non deductible losses, a question arises as to whether the gain is taxable and Read more