Can you deduct unused rental losses in a bankruptcy?
LAW: Under IRC § 469(g), current and carryforward passive activity losses are fully deductible in the year of an entire disposition in a fully taxable transaction to an unrelated party. A qualifying disposition may create a Net Operating Loss (NOL) which can be carried back. See IRC § 172
Once the amount of Cancellation of Debt (COD) income is determined, IRC § 108(b)(2) requires the taxpayer to reduce tax attributes in the following order:
(A) Net operating losses (NOL);
(B) General business tax credits
(C) Minimum tax credits
(D) Capital losses;
(E) Property basis;
(F) Passive activity loss and credits THIS IS RENTAL REAL ESTATE UNUSED LOSSES CARRIED FORWARD.
(G) Foreign tax credits
Summary conclusion
Suspended passive losses must first be applied against any relief of indebtedness (debt cancellation). If the debt forgiven under section 108 fully absorbs current and suspended passive losses nothing is deductible on the return.
The same logic applies to NOL’s.