How can a taxpayer convert disallowed passive losses into tax-saving deductible losses?
If a taxpayer fails the material participation tests and has passive losses that are subject to a disallowance, there are 3 potential ways available to convert the disallowed losses into tax-saving deductible losses. These are as follows;
1. Dispose of the passive activity.
The taxpayer should sell any passive activity with current or suspended passive losses through a bona fide sale to an unrelated party. The losses become fully deductible when the activity is sold, including any loss on the disposition (subject to capital loss limitations).
2. Increase your participation in loss activities.
For an activity that is generating losses, the taxpayer should increase his or her participation to meet one of the tests listed above, if possible, so that the taxpayer would not be subject to a passive loss limitation for that activity for that year.
3. Increase the hours you participate in real property trades or business.
If the taxpayer should is engaged in any real estate activities, increase your hours to meet the real estate professional test (discussed below). As a real estate professional, any real estate losses are no longer treated as passive losses, allowing the taxpayer to deduct them in full.