If you own rental property, there’s a decent chance you’re sitting on a stash of tax deductions you haven’t been able to use — sometimes for years. They’re called suspended passive losses, and here’s the part most owners don’t realize: they are not gone. They’re just parked, waiting for the right move to set them free.
If that sounds like your situation, keep reading. This could be the difference between leaving real money on the table and putting it back in your pocket.
How Losses End Up “Stuck” in the First Place
Tax law is naturally a little suspicious of rental losses. It assumes you could be generating paper losses (through depreciation, for example) without actually losing any real money. So there’s a test — the “passive loss” rule — that limits how much of those losses you can deduct each year if you don’t materially participate in the activity.
When you fail that test, your losses don’t disappear. They just get held back, year after year, until something happens to release them.
The Big Release Valve: Selling
The most reliable way to free up suspended losses is to sell your entire interest in the rental activity. Once you do, those losses come off the shelf and can offset your other income — wages, investment income, you name it — potentially creating a meaningful tax break in the year you sell.
But here’s the catch that trips people up:
- Not every sale counts. Selling to a family member, or to a corporation you or your family control, generally does not free the losses. They stay stuck with you.
- Giving the property away doesn’t work either — and it can actually shrink the value of those losses permanently, since they get folded into the recipient’s cost basis instead of being deductible against your income.
- How your properties are grouped for tax purposes matters, too. Depending on prior elections, selling one property might free its losses immediately — or it might not free anything until you sell every property in the group.
In short: the “how” and “who” of the sale matters just as much as the “whether.”
A 2026 Wrinkle Worth Knowing
Even when you do everything right and free up a large batch of suspended losses, there’s a limit on how much you can actually deduct in a single year — the excess business loss limitation. Any amount above the threshold doesn’t vanish, but it does get pushed into a future year rather than landing on this year’s return.
That means timing matters. Selling at the wrong moment could leave part of your freed-up deduction waiting even longer than it needs to.
Why This Is Worth a Real Conversation
Every piece of this — how your properties are grouped, who’s on the other side of the sale, and when you sell — changes the outcome. Get it right, and you could unlock a significant deduction. Get it wrong, and those losses stay parked exactly where they’ve been.
If you’ve been sitting on rental losses you haven’t been able to use, it’s worth finding out exactly what you’re holding and what your options look like before you make a move.
To discuss your suspended losses, contact Saunders Tax & Accounting at www.saunderstax.com or call us at 301-714-2071. Open Monday – Thursday, 9 am to 5 pm. Awarded the Hagerstown Hot List 2026 and Hagerstown Chamber of Commerce “2023 Small Business of the Year” — providing a Less Taxing Life and More Prosperous Solutions since 1984!
