Sale of a Rental Condo with Suspended Passive Losses and NIIT
Derek, a single taxpayer, has $240,000 of W-2 wages and $10,000 of interest income in 2024. He owns one rental condominium, which he actively managed. His income is too high for the $25,000 passive loss allowance. On September 1, 2024, he sold the condo in a fully taxable transaction to an unrelated buyer and recognized $60,000 of §1231 gain. He had $50,000 of suspended passive losses from the condo, no other passive activities, and no other income or deductions. Derek's marginal ordinary rate is 35%, his long-term capital gain rate is 20%, and his MAGI exceeds the $200,000 single threshold for the 3.8% net investment income tax. He asks whether the suspended losses can offset his wages, what his AGI is, and how much NIIT he owes.
1. How much of the $50,000 suspended passive loss is deductible in 2024, and what is Derek's AGI?
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Under §469(g)(1), a completed disposition of the entire passive activity in a fully taxable transaction to an unrelated person triggers the suspended losses. The $50,000 suspended loss is allowed in 2024. It first offsets the $60,000 passive gain from the condo, leaving $10,000 of net passive income. Because there is no excess loss, nothing offsets Derek's wages. AGI = $240,000 wages + $10,000 interest + $60,000 gain − $50,000 loss = $260,000. The $10,000 net rental income remains passive and is included in AGI.
2. How much net investment income tax does Derek owe?
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NII = $10,000 interest + $60,000 gain − $50,000 allowed passive loss = $20,000. MAGI = $260,000; threshold = $200,000; excess = $60,000. NIIT = 3.8% × lesser of $20,000 or $60,000 = $760. The $240,000 wages are excluded from NII but increase MAGI, so the threshold is exceeded.
3. How would the answers change if Derek had $90,000 of suspended passive losses instead of $50,000?
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All $90,000 would be allowed under §469(g): $60,000 offsets the condo gain, and the $30,000 excess is deductible against nonpassive income such as wages. AGI = $240,000 + $10,000 + $60,000 − $90,000 = $220,000. For NIIT, NII = $10,000 + $60,000 − $90,000 = −$20,000. NII cannot be less than zero, so NIIT = $0. The excess loss reduces NII but cannot create a negative NIIT. The $30,000 excess still produces an ordinary deduction against wages for income tax purposes.