Wife and I have been trying to use the real estate professional feature in FreeTaxUSA. We have been real estate professionals (REPs) since retiring from W-2 jobs in 2023, but in the years before we were REPs, we accumulated over $120,000 in suspended passive activity losses (PALs). As REPs, we don't aggregate activities, and instead let each house operate as it's own activity and we materially participate in all of them. We have 4 rental houses("activities") and we pass one or more of the 7 material participation tests for each activity. And of course I'm passing the overall 750 hour / more-than-half tests because of other real estate activities I do. Three of the four houses operate at a loss on schedule E. There's our background — below is the issue.
The Issue
We notice that when we "turn on" real estate professional, ALL of the previous years' suspended PALs that we enter for the particular house are taken against ordinary income irrespective of whether or not there was any gain on that particular activity in the current year. All the suspended PALs seem to just add in on schedule E and flow right through to 1040 thereby wiping out all those suspended PALs and deleting a big chunk of taxable ordinary income. I don't think this is correct.
What I think is correct is that suspended losses from years we were not real estate professionals stay suspended. This is because the suspended losses were pave when they were generated and will retain that character. Being real estate professionals in 2025 can not re-characterize PALs that were passive in, say 2019, to active. (Although, I believe there is a special rule for REPs that if an activity does show a gain, suspended PALs from that activity can offset that actual gain — this wouldn't apply to us this year however.)
Is there some place I can designate that the suspended PALs I enter for the houses were from a time when we were not real estate professionals?
