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Situation: During the last decade, I have accumulated significant losses from a rental property; the deductions I can get for that in every year are very limited, so there is pending carryover.

Issue: When I sell the property now, all those losses become deductible immediately; resulting in a large taxable income reduction.

Sounds good, but is not optimal - the deductibles are either higher than the annual gross income, or nearly as high; so by applying them in one year, I am 'wasting' a part of them.

I would rather apply only 1/3, and in the following two years the other 1/3's respectively (or something like that). This would result in low taxes for multiple years, instead of one, which adds up to more benefit because of tax progression.

Question: Is this possible directly? If not, is it possible through some creative (but legal) process?

One idea I had is to rollover a pre-calculated amount of 401(k) to 401(k) Roth in the same year; this would result in having to pay tax for that amount, removing part of the effect of the sale. That does not distribute the effect over multiple years, but at least gets me some future tax-free Roth money.

[I understand that I might need to see a CPA for this, to fine-tune it really. I am looking here for info about known and proven general approaches to the situation, in any]

  • Don't forget, you had depreciation, so your basis is far lower than when you bought the place. Are you sure that once you adjust for this, there's still a loss greater than your whole income? – JTP - Apologise to Monica Mar 5 '17 at 1:36
  • yes. I am planning to sell in 2017, but I tested it by typing it in as a 2016 sale in TurboTax. Unless I get a 25% raise these days... – Aganju Mar 5 '17 at 11:26
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    If you don't offset it with income, which would give you the most control, it's not 'wasted' for Federal tax: you have a Net Operating Loss which you can 'carry back' to the previous 2 years (getting a refund) and/or 'carry forward' to the next 20 years (eliminating or reducing tax then); see pub 536 on IRS website. You have only a limited choice as to the years, but you do get the benefit or at least most of it. State income tax may differ. – dave_thompson_085 Mar 5 '17 at 19:21
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First, I believe that you can't just divide the losses over a number of years. I know that would be ideal as it might let you use the losses to only offset 25% income. A loss that gets you below zero taxable income would carry forward to the next year.

That said, I think it would be a great strategy to use the loss to offset a Roth conversion, in your case, from the traditional 401(k) to Roth 401(k). Keep in mind, as you've seen from using the 2016 tax year TurboTax, you should be able to make a fairly good estimate for your 2017 return. This could effectively use all of the loss to offset 25% income.

I'd look at the current projection and convert say 75-80% of the target amount immediately, then in November when the 2017 software comes out, convert the rest to get as close to your goal as you can.

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