Passive loss carryover: how suspended losses carry forward
No expiration date. How the carryover works, where to find the number and what can end it.
By Hans Goldstein, Enrolled Agent, admitted to practice before the IRS ·
How the carryover works
IRC 469(b): "any loss or credit from an activity which is disallowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year." Each year's disallowed loss adds to the pile. In the next year, passive income and any special allowance come first; what is left stays suspended again. The code sets no expiration.
The loss is allocated to activities pro rata (IRC 469(j)(4)). On Form 8582, Part VII allocates the unallowed loss to each activity, and that is the number that carries.
Where to find the number
- The prior year's Form 8582, the allocation to each activity and the worksheets.
- Your preparer's carryover or depreciation schedule, activity by activity.
- For partnerships and S corporations, the K-1 and the entity's own records. Suspended losses at the owner level are tracked by the owner.
- If you lost the records, rebuild from returns: add the disallowed amounts from each year's Form 8582 forward, and subtract any amounts used.
Do this before a sale. Without a documented number, a release can be challenged on audit, and you cannot price the deal.
What changes the carryover
| Event | Effect | Rule |
|---|---|---|
| Passive income in a later year | Absorbs the carryover | IRC 469(d)(1) |
| $25,000 allowance | Releases rental losses up to the limit | IRC 469(i) |
| Activity becomes non-passive | Offsets that activity's income first; the rest stays passive | IRC 469(f) |
| Full taxable disposition to an unrelated party | Released in full | IRC 469(g)(1) |
| Installment sale | Released by ratio | IRC 469(g)(3) |
| Death | Allowed only above the step-up | IRC 469(g)(2) |
| Gift | Added to basis, never deducted | IRC 469(j)(6) |
Common mistakes
- Losing the carryover when the return is prepared in new software or by a new preparer.
- Netting all passive activities together and not tracking by activity. The release on a sale is by activity.
- Forgetting that basis and at-risk limits come first, so a carryover may be split between amounts that are suspended under IRC 465 and under IRC 469.
- Forgetting the state: California has its own carryover (FTB 3801).
The big picture is in the complete guide. For the capital loss carryover, which is a different thing, see capital loss carryover and suspended losses.
Sources and dates
- 26 USC 469(b), (d), (f), (g), (i), (j)(4), (j)(6).
- 2025 Instructions for Form 8582.
- IRS Publication 925 (2025), Passive Activity and At-Risk Rules.
Checked against the sources above on October 30, 2026. Dollar figures are 2026 federal (Rev. Proc. 2025-32) unless the page says otherwise. Education only, not tax or legal advice for your situation.
Questions
Do passive losses carry forward forever?
Yes, with no time limit, until they are used against passive income, allowed under the special allowance, or released by a qualifying disposition (IRC 469(b); Form 8582 instructions). They can also end at death or on a gift.
How do I find my passive loss carryover?
In last year's Form 8582 (Part VII allocates the unallowed loss to each activity) and your preparer's carryover schedule. For K-1 activities, the K-1 shows the current-year amount and your own records carry the prior years.
Does a carryover transfer if I change preparers or software?
It should, but it often does not. A carryover missing from the return does not erase it, but you must be able to show it. Keep Forms 8582 and the supporting schedules for the life of the activity.
Is the carryover tracked by activity?
Yes. The unallowed loss is allocated to activities pro rata (IRC 469(j)(4)), and each activity's total is what you release when you dispose of it.
What if the property becomes non-passive?
It is a former passive activity. Its suspended losses offset income from that activity first. Any remainder continues to be treated as passive (IRC 469(f)).
Is there a California carryover?
California keeps its own carryover on Form FTB 3801. It can differ from the federal amount, because depreciation and other adjustments can differ.
Do passive credits carry too?
Yes, on Form 8582-CR, but they are not released on a sale.
Related
- Suspended passive losses: the complete guide
- Form 8582 explained
- The $25,000 rental loss allowance
- Suspended losses at death or by gift
- All passive loss guides
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Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS. He is not a CPA or attorney. Education only, not tax or legal advice for your situation.