I may owe an apology for asking this question because a search on Google indicates that some version of this question has been asked (and answered) numnerous times in the past. But none had the same details as I have, so here goes. In 2004 I converted a townhouse I had been living in into a rental property. I intend to sell it when the lease expires this year. To put round numbers on things, I will sell the property for a $15000 gain over my purchase price which I can exclude because when I sell I'll have lived in the property for 2 of the previous 5 years. But I still have an additional $6000 gain due to the recapture of depreciation that I have to deal with. At the time of sale I expect to have accumulated $6000 in passive loss carry-forward that I have been unable to deduct due to my AGI in 2004. My question: can I use the $6000 passive loss to offset the $6000 capital gain? Looking at the tax forms and publications, it appears that I'm hosed and that I can only use the $6000 passive loss to increase the basis of my property, which still leaves me with the $6000 recapture of depreciation. On the assumption that I'm hosed, I should be able to reduce the amount of recapture due to the fact that some of the depreciation was not deductible because I couldn't claim the passive losses (which includes depreciation). About 1/3 of my passive losses are depreciation, so would I reduce the recapture to $4000? Or can I say that all of the disallowed passive loss was from the $6000 depreciation and avoid paying capital gains altogether (wishful thinking)? Thoughts and references would be appreciated,
-Will