Dear Tax Talk,
What form do I need to deduct carry forward losses from rental real estate activities?
You’ll need many forms to deduct your losses. Once you get into it, you’ll realize that you are better off having tax preparation software to guide you through the procedures. Of course, with all tax programs it’s a good idea to know what forms to expect so that you know your return is complete.
The primary form related to carry forward tax losses from rental and other passive activities is Form 8582. The form should be completed for each year of current losses as well as when you have carry-over losses that are allowed in the current year. Although the instructions say that you don’t have to file the form in certain cases, you’ll need the form and its work sheets to properly track your losses by activity. Besides, if you electronically file your tax return, the tax software decides which forms to transmit to IRS and which are kept for your records.
Form 8582 in itself is fairly intimidating. You need to know the terminology and have most of your tax return complete including computing gains on rental or passive activities. You’ll also need to know what your AGI is with certain modifications, and you’ll need to figure everything for regular tax as well as alternative minimum tax.
You’ll also have to complete the various work sheets, of which you can use up to eight. Without tax software you can be doing this for days and still probably not get it right. While the form provides you with the allowable losses from rental and passive activities, the losses are deducted on other forms. Generally, passive losses are deducted on Schedule E, pages 1 and 2, or Form 4797.
After all is figured for your regular tax, you’ll need to refigure everything for the alternative minimum tax, or AMT, on Form 6251. Generally, the main differences between the two taxes relates to the depreciation claimed. With the AMT you have less depreciation, which means you have less gain or loss upon the sale of a passive activity. These differences are reflected on lines 18-20 of Form 6251.
Unless you’re up for the one of the most confusing aspects of modern tax law (this stuff would never have worked before the proliferation of tax software), get yourself a tax program.
Ask the adviser
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.