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You cannot deduct passive losses if you do not have any net income from your property rental for the tax year. Passive losses cannot reduce your income from wages, but you can defer the losses to future tax years or deduct any losses carried forward when selling the rental house that generated the loss.
The short answer is that it depends on a few factors. However, itâs likely that the suspended passive activity losses can be claimed as there will be a complete liquidation of the taxpayerâs entire interest in that single rental activity. Are passive activity losses âfreedâ upon liquidation? Itâs technically possible for passive activity losses to be âfreedâ upon liquidation if each property is treated as a separate activity per IRC Section 469(c)(7)(A)(ii). However, the definition of entire interest depends on the specific facts and circumstances of the case.