I have a rental property in a state that I used to live in and have kept it for the past few years enjoying the tax deduction of the depreciation. Unfortunately (or fortunately) my income was too high this year to take the passive deduction, so I have to let it accrue until I sell it. I am having trouble understanding the impact of the accrued deduction, however, upon a sale.
I bought the place for $210,000 in 2012
Today it is worth around $220,000
My depreciated basis is around $180,000 (I lived in half for a few years and only depreciated the 2nd unit until I moved out)
Each year I will accrue $5,000 in deferred passive losses.
Cash flow is roughly $4,000 a year after all expenses, not including reduction of mortgage balance which adds another $4,500.
My understanding is, if I sell today for $220,000, I would realize gains of $40,000 (appreciation plus recapture) on the sale.
What I can't seem to get a handle on is what happens if I sell for $220,000 in 3 years after accumulating $24,000 in deferred passive losses. Do I get to apply that to the realized gains ($40,000 - $24,000 = $16,000)? Or can I only apply that against future passive income gains? If the latter, where can I get some passive income gains to apply it against?