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I am asking this question in anticipation of doing my 2003 taxes next year and I have not seen an answer on this board. If I have more than $25k in passive activity losses ("PAL") from rental real estate, I know that I have to carry them forward to future years. But what happens to those carried-forward PALs when I sell the property? Do they offset capital gain on the sale? If so, am I limited to $25k or can I take all carried-forward PALs at the time of sale?

When you sell the property, any and all carried-forward PALs become "active" losses and are reported on Schedule E and carried to line 17 on Form 1040 (2002 version). Technically, they don't offset the capital gain from the sale, but offset other ordinary income. Your long term capital gain from the sale will still be taxed at the appropriate tax rates (long-term capital gain, depreciation recapture, etc.)

Ira
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