Limited Partnership - Passive Losses

[JohnH]

I ran into an odd situation today and would appreciate any input. Client has owned an interest in a limited partnership since 2007. (This is not a Publicly Traded Partnership). It lost money every year and finally closed its doors in 2013.

In 2008, he reported significant income from disposition of a second limited partnership (also not a Publicly Traded Partnership). He could have offset about $12K of the accumulated losses from partnership #1 against the income from partnership #2, but he didn't do so because he thought the Publicly Traded Partnership rules applied.

Since 2008 is a closed year, he can't amend. But we are discussing whether he can retain the $12K as a part of his passive losses (added to his basis in calculating the total loss on partnership #1). I don't think he can do it, but would like to ask if anyone has a differing opinion.

[Joel]

Since partnership #1 (with the 12K passive losses) is now closed out, he can deduct the accumulated passive losses against ordinary income. Please excuse the expression "What Difference Does it Make" whether he deducted the 12K against passive income in 2008 or now deducts it against ordinary income. I don't think the tax code requires him to deduct it when there is passive income only allows the deduction.

[JohnH]

Joel: I'm actually glad to hear you say "What difference does it make?" I'd like to see him get the benefit of the $12K, but I had been operating under the assumption that he was required to use it against other passive income in the year it is possible to do so. If he is allowed to choose not to use it and retain it in basis, that solves a problem.

My thought process followed the $3K-per-year requirement for capital loss carryforwards, which must be used even if there is no tax benefit. But if this is a different set of rules, I'd be happy to include the $12K in basis if he can do so.

[Joel]

John,

The $3K-per-year had a requirement that it be entered on the tax return, but in some cases it is not lost but carried forward because the taxpayer does not have sufficient income to use up all or any of the capital loss. Check out the Schedule D carry forward tab if you have a client that you think had a wasted $3K deduction and you may find the capital loss is carried forward.

[OldJack]

I agree with John that it was deductible in the year of the loss and therefore is not carried forward.

[JohnH]

Thanks Joel for calling my attention to the error in my thinking on the $3K - I stand corrected.

And thanks to you and OldJack for the opinions on the $12K.

I appreciate both of your responses.

This mirrors my experience in researching it thus far - there is no clear guidance and varying opinions.

Another complication is the fact that this K-1 had $16K of COD income in the year of disposition.

I've found conflicting information on whether the COD income (which is reported on Line 21 of the Form 1040) can be added to the cost basis in calculating the loss on disposition of the partnership interest.