Suspended Passive Losses at Sale or Death: 469(g) Rules (2026)

The exits in one table

Section 469(b) carries a disallowed passive loss forward to the next year as a deduction of the same activity. Section 469(g) says what happens when the activity itself leaves your hands. The answer depends on how it leaves.

The example we use

One rental, with assumptions that are ours and not typical figures: fair market value $900,000, adjusted basis $400,000 after $350,000 of straight-line depreciation, and $250,000 of suspended passive losses on Form 8582 with no current-year loss. You hold it as an individual, you do not qualify as a real estate professional, and the realized gain on a sale is $500,000 (our arithmetic, selling costs ignored). The same arithmetic applies to a limited partner interest in a fund or syndication; our Form 8582 guide covers how the pile builds up and why a limited partner usually cannot use the $25,000 allowance.

Sale: the release is a tax-return event, not an election

Publication 925 states the rule plainly: unallowed passive losses are “generally allowed in full in the tax year in which you dispose of your entire interest” in the activity, provided all realized gain or loss is recognized and the buyer is not related to you. The statute adds the character: the loss is treated as a loss “not from a passive activity”, so it can offset wages, interest and other non-passive income, not only passive income.

The Form 8582 instructions show how it looks on the return. Their first example is an overall gain: current-year net loss of $2,800 and a prior-year unallowed loss of $12,650 are reported on Schedule E line 22 while the $15,525 gain goes on Form 4797. In our example the same pattern gives a $250,000 Schedule E deduction and a $500,000 gain split by the usual rules: $350,000 of unrecaptured section 1250 gain, taxed at up to 25% under section 1(h), and $150,000 of gain at 0%, 15% or 20% (our arithmetic). Our Form 4797 guide and depreciation recapture guide cover that side.

Illustrative tax, with rates we assume: 25% on the $350,000, 20% on the $150,000 (the 20% rate applies above taxable income of $545,500 for a single filer, $613,700 joint, per Rev. Proc. 2025-32), and a 35% marginal rate on the ordinary deduction. That is $87,500 plus $30,000 of tax on the gain, less $87,500 of tax saved by the deduction, or about $30,000 of federal income tax (our arithmetic). The 3.8% net investment income tax and state tax are left out; the NIIT guide covers the first.

One limit catches people who sell at a loss. Publication 925 notes that if the sale itself produces a capital loss, “your capital loss deduction is limited”: its Carter example has a $12,000 capital loss on a partnership interest, of which $3,000 is deductible, and $9,000 is carried over as an ordinary capital loss, while the $2,000 of suspended passive deductions is allowed in full.

Death: the losses are traded against the step-up

At death, section 1014(a) resets the basis of the property to its fair market value on the date of death. Section 469(g)(2) then asks how much of the suspended loss is still needed. Losses are allowed only “to the extent such losses are greater than” the basis increase, and the statute closes the door on the rest: “any losses to the extent of the excess described in subparagraph (A) shall not be allowed as a deduction for any taxable year.” Publication 925 puts it in numbers: with a $6,000 increase and $8,000 of unused losses, the decedent's deduction is limited to $2,000, taken against the decedent's income in the year of death. See our guide to the final return and Form 1310 for who files it.

Applied to our $400,000 basis and $250,000 pile, the allowed deduction depends only on the value at death (our arithmetic: allowed = $250,000 minus the step-up, never below zero; a value under $400,000 is a step-down, not a step-up, and frees everything):

Two readings of that table, both ours. First, the step-up and the loss are substitutes: every dollar of basis increase destroys a dollar of suspended loss, and the heirs get the basis. Second, when the gain is large relative to the pile, as here, death leaves the family better off on income tax than a sale (no tax on $500,000 of gain, against about $30,000 net in the sale path above) at the cost of the lost deduction; when the loss pile is large relative to the gain, the order flips and a sale or a gift may keep more. The federal estate tax is a separate question: the 2026 basic exclusion amount is $15,000,000 per decedent (26 U.S.C. 2010(c)(3)). Our date-of-death appraisal guide covers how the value at death is proven, which here decides how many losses survive.

Gift: the loss turns into basis

Section 469(j)(6) is two sentences long. The basis of the interest immediately before the transfer is increased by the passive losses not allowed, and those losses “shall not be allowable as a deduction for any taxable year.” Publication 925 says the same: “the basis of the transferred interest must be increased by the amount of these losses.” In our example the donee receives a $650,000 basis. If the donee sells at $900,000, the gain is $250,000, and because depreciation taken was $350,000 we read all of it as unrecaptured section 1250 gain, at most $62,500 at the 25% ceiling (our arithmetic). You get no deduction. A $900,000 gift also has to be reported on Form 709; see our gift of illiquid real estate interests guide for the filing and the lifetime exclusion.

Comparing the three so far (our arithmetic, assumed rates, federal income tax only):

Like-kind exchange: what the IRS text does not say

Search Publication 925 (2025) and the Instructions for Form 8582 (2025) for “like-kind” or “1031” and you will find neither phrase. The rule has to be read from the statutes. Section 469(g)(1)(A) applies “if all gain or loss realized on such disposition is recognized.” Section 1031(a)(1) says no gain or loss is recognized on an exchange of real property held for investment solely for like-kind real property. A clean exchange therefore is not a transaction in which all gain is recognized, and in our reading the suspended losses stay suspended. Because the replacement property takes the old basis (1031(d)), the usual practitioner view, which we did not find in primary IRS text, is that the losses keep traveling with you into the new property. Confirm that with the preparer who will file the exchange.

Cash or other property received is different. Section 1031(b) recognizes gain up to the money and other property received, and 26 CFR 1.469-2T(c)(2) treats recognized gain on a disposition as passive income when the activity is passive. In our reading $100,000 of boot creates $100,000 of passive gain that absorbs $100,000 of the pile and leaves $150,000 suspended (our arithmetic). Our 1031 rules guide covers the timelines and identification rules.

Installment sale: the release follows the cash

Section 469(g)(3) applies the release only in proportion to the gain recognized each year. The Form 8582 instructions give the fraction: gain recognized in the current year divided by “Unrecognized gain as of the beginning of the current year”, applied to the overall loss not already allowed. Publication 925's example (Riley, a $10,000 gain at $2,000 a year) allows 20% in the first year and 25% of the remainder in the second.

Our example: a $900,000 price, $180,000 down and four more principal payments of $180,000, interest ignored. The gross profit percentage is $500,000 / $900,000, about 55.56%, so $100,000 of gain is recognized each year (our arithmetic). The release is:

Our installment sale guide covers Form 6252 and the interest and recapture rules, which this table leaves out. We assume straight-line depreciation, so no section 1250 ordinary recapture is pushed into year one.

Traps that stop a release

• Related buyer. Section 469(g)(1)(B) defers the release if the buyer bears a 267(b) or 707(b)(1) relationship to you. Section 267(c)(4) defines family as brothers and sisters, spouse, ancestors and lineal descendants. A sale to a child at full value therefore frees nothing.
• Partial sale. “A disposition of less than substantially all of an entire interest doesn't trigger the allowance of prior-year unallowed losses.” Selling half a rental, or some units of a fund, is a partial sale.
• A fund sells a property, not you. Publication 925 says that if a partnership disposes of all the property used in a passive activity, the losses are also allowed. If the fund sells one building out of several, your K-1 gets passive gain that can absorb losses, but no full release.
• Capital loss cap. A loss on the sale itself is a capital loss subject to the $3,000 limit (Publication 925).
• Publicly traded partnerships. The Form 8582 instructions say a partner in a publicly traded partnership is not treated as having disposed of an entire interest until the entire interest in the PTP is sold.
• Not every pile is passive. A real estate professional's rental losses are not suspended in the first place; see real estate professional status.

What a reader can do with this

• Write down three numbers per property: the suspended loss from last year's Form 8582 Part VII, the adjusted basis, and a realistic value today. The step-up table above is just those three numbers.
• Compare the death column with the sale column. If the value is far above basis plus losses, the losses are likely to be worth little at death; if basis is close to value, they are worth the full amount. A preparer can run your real figures.
• Check who the buyer is before a family sale or a sale to an entity you own part of; the relationship rules reach further than spouse and children.
• If a 1031 exchange is planned, ask the preparer in writing how the suspended losses will be carried and reported on the replacement property.
• If you plan to sell in installments, ask for the year-by-year release schedule in advance, since each year's release depends on the gain recognized that year.
• Keep the ledger for your heirs. The step-up trade works only if someone can show the executor the suspended-loss balance and the value at death.

This is analysis of public documents, not investment, legal or tax advice. Which losses are passive, the basis of an interest and the value at death depend on facts only a preparer with your returns can check.

FAQ

Sources, read and saved on October 28, 2026: 26 U.S.C. 469, 1, 267, 453, 1014, 1015, 1031, 1411 and 2010 (Cornell LII); 26 CFR 1.469-2T (Cornell LII); IRS Publication 925 (2025); Instructions for Form 8582 (2025, dated November 26, 2025); Rev. Proc. 2025-32. Publication 925 and the Form 8582 instructions are the 2025 editions, the latest we found; the 2026 edition of either may change wording. Amounts labelled “our arithmetic” are ours and use the assumptions stated above.