Tessa owned a PTP with prior$-$year unallowed passive losses of:

$$934$ in $2019.$

$$567$ in $2020.$

$$704$ in $2021.$

She sold her entire interest in the PTP in $2022$ to an unrelated taxpayer in a fully taxable transaction. How will she utilize the prior$-$year suspended passive losses on her tax return for $2022?$

She will reduce her outside basis in the PTP by $$2,205$ when she computes her total gain or loss.

The total of any current$-$year and prior$-$year passive losses will be entered on Schedule E as nonpassive losses.

Tessa will use the suspended passive losses to increase her outside basis, thereby decreasing any possible gain.

The total of the suspended passive losses will be carried forward until she has passive income.