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Possi

SUSPENDED LOSSES ON SOLD RENTAL

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My client who sold the rental at a gain has suspended losses and I don't see it balancing anywhere. 

The 4797 is showing the overall gain of $174,928 with no regard to the suspended losses. That lands on page 1, line 6. 

The Sch E worksheet shows an overall gain of $130,250, reflecting the current year loss, plus the suspended losses. (All reducing the gain on the sale by $44,678.)

But, that's where the easter bunny stops. 

He is being taxed on the overall gain with no regard for those suspended losses. 

Where, exactly, should the suspended losses land on the tax return? I thought the loss would have been on Sch 1, line 5. 

It isn't anywhere. 

I wonder if it's a problem with the software or if it's a problem with my brain? This just isn't making sense. 

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I believe it should show as allowed on the 8582 and the loss should flow through as allowed on sch E

its been a bit since I have done  one of these but seems there is a spot to flag the rental as disposed of

 

jeff

 

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Did you mark the Sch E as "disposed of"?   The suspended losses, current losses, and the gain on sale should all flow onto the form 8582.

Yes, what JHaymaker said. We were typing at the same time.

 

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3 minutes ago, jklcpa said:

Did you mark the Sch E as "disposed of"?   The suspended losses, current losses, and the gain on sale should all flow onto the form 8582.

 

There's the problem. The 8582 isn't kicking in. 

I'll keep working on it after I close the office. 

I did click the box for sold property. So it must be something else. Thanks for the guidance. 

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15 hours ago, Abby Normal said:

The box says 'complete disposition of a passive activity' on Sch E.

I use Taxwise. 

I need to study this more and see why this 8582 isn't biting. The numbers are on the form, but not anywhere else. I'll repost when I figure it out. 

Now, where are those BIG GIRL panties? 

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The 8582 line 4 has income, over $88k, and if that line shows zero or higher, the instructions are not to use this form, all losses are allowed. 

The 8582 definitely recognizes it and reduces the gain, but then it says "don't use this form" and "report the losses on the forms normally used." Ok, what? Where?

So, where do these suspended losses eventually land? I will need to force the entry, but don't know where to put it. 

 

22 hours ago, Abby Normal said:

The box says 'complete disposition of a passive activity' on Sch E.

I use Taxwise. 

I need to study this more and see why this 8582 isn't biting. The numbers are on the form, but not anywhere else. I'll repost when I figure it out. 

Now, where are those BIG GIRL panties? 

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1 hour ago, Hahn1040 said:

they should be on  the E added to this year's losses

look on line 22

I just looked again, and the Sch E is netting the suspended losses for 2 properties (he has 4 properties, but only one sold) and showing a total loss of $86k. Not to worry... it's not like it's  GOING anywhere. ugh

This is not working right. I've done lots of these and none of them are as messed up as this one is. I'll call TWise on Monday and see what they say. I'll also send them the return. This isn't right. 

Thank you so much for your help. 

 

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1 hour ago, Possi said:

I just looked again, and the Sch E is netting the suspended losses for 2 properties (he has 4 properties, but only one sold) and showing a total loss of $86k. Not to worry... it's not like it's  GOING anywhere. ugh

This is not working right. I've done lots of these and none of them are as messed up as this one is. I'll call TWise on Monday and see what they say. I'll also send them the return. This isn't right. 

Thank you so much for your help. 

 

I can't see what you are seeing. Are you sure it's incorrect?

When a current rental is entirely disposed of and sold at a gain, that gain is considered passive income.**   That means that the taxpayer has current passive income, and current and prior suspended passive losses will be allowed up to the amount of passive income.  All current and suspended losses being carried from prior years would be included in this calculation on the 8582, not just the losses from the one property sold. 

 

**  The reg  is Temp. Regs. Sec. 1.469-2T(c)(2)(i)(A) (1) & (2) that basically says that gain or loss from disposition retains the character of the activity the asset was used in.  In other words, because that property was used as a rental that is a passive activity, the gain will also be considered passive.  Similarly gain or loss from sale of an investment asset that generates portfolio income would be considered nonpassive portfolio income. 

Quote

2) Treatment of gain from disposition of an interest in an activity or an interest in property used in an activity -

(i) In general -

(A) Treatment of gain. Except as otherwise provided in the regulations under section 469, any gain recognized upon the sale, exchange or other disposition (a “disposition”) of an interest in property used in an activity at the time of the disposition or of an interest in an activity held through a partnership or S corporation is treated in the following manner:

(1) The gain is treated as gross income from such activity for the taxable year or years in which it is recognized;

(2) If the activity is a passive activity of the taxpayer for the taxable year of the disposition, the gain is treated as passive activity gross income for the taxable year or years in which it is recognized; and

 

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10 hours ago, jklcpa said:

I can't see what you are seeing. Are you sure it's incorrect?

When a current rental is entirely disposed of and sold at a gain, that gain is considered passive income.**   That means that the taxpayer has current passive income, and current and prior suspended passive losses will be allowed up to the amount of passive income.  All current and suspended losses being carried from prior years would be included in this calculation on the 8582, not just the losses from the one property sold. 

 

**  The reg  is Temp. Regs. Sec. 1.469-2T(c)(2)(i)(A) (1) & (2) that basically says that gain or loss from disposition retains the character of the activity the asset was used in.  In other words, because that property was used as a rental that is a passive activity, the gain will also be considered passive.  Similarly gain or loss from sale of an investment asset that generates portfolio income would be considered nonpassive portfolio income. 

 

That is correct, and I totally get it. With your help, I have narrowed it down to the Sch E being wrong. I have had at least 3 other sales of rental properties this year alone, and they have all been smooth. However, none of those had suspended losses. In the past, the suspended losses flowed real sweetly to the Sch E allowing a large loss on the E and a gain on the sale. 

Something is wrong with the way this Sch E is computing. You have confirmed that for me. 

I redacted the screen shot of the Sch E and worksheet for you to see. In the worksheet, it is grabbing "Prior year AMT unallowed loss" from the first 2 properties, it appears, as the "AMT carryforward loss to 2020" is zero on both properties. 

The only loss on Sch 1 Part 1, line 5 is from Sch E line 21, is $3893. I have no clue. That figure is totally wrong. 

I am stepping out of here today, and I hope you are, too. If I have not properly redacted these forms, you know what to do! ABORT! LOL

Thank you for looking at this. I think it's a software glitch, as I have done these before with no problem. Let me know if you agree. And if so, I will override some figures to get where I need to be. I really don't want to do that because this is a high risk return. There are 4 rentals, all swimming in different water, different states, different times. And one of my high $$ clients. Not many of those. 

nav sch e wksht.pdf nav sch 1 part 1 line 5 loss.pdf

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Could where you've checked that he did not actively participate in the other two rentals have something to do with it?

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17 hours ago, joanmcq said:

Could where you've checked that he did not actively participate in the other two rentals have something to do with it?

No, the other rentals are still cooking and shouldn't have become part of the suspended losses allowed. I have sent this to TWise and they are looking at it. I'll update when I get a response.

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@jklcpa

I finally resolved this. I just have one question hanging out there. 

So, on this Sch E, he had $85k of income on page 2 from his S corp K1 which washed out the losses I was looking for.

It was the K1 INCOME I wasn't expecting and didn't have that in my little brain. 

My question is this. He had 2 properties with around $45k EACH in suspended losses. The gains from the S Corp K1 seem to be allowing all those suspended losses to come to the ballgame and be washed out by the K1 gains. So there will be zero carryforward losses next year, even though there will still be one rental that had them this year.

I've never seen this, so is this right? Do those active gains offset the passive losses? 

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Passive income does not have to come from the same activity to offset passive losses.   It just has to be passive income.  Are you sure his K-1 from his S Corp is really throwing passive income?   

Tom
Modesto, CA

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No, it is non-passive. He is a physician and started his own business working for other facilities while in the military.

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49 minutes ago, BulldogTom said:

Passive income does not have to come from the same activity to offset passive losses.   It just has to be passive income.  Are you sure his K-1 from his S Corp is really throwing passive income?   

Tom
Modesto, CA

Yes, that's what is happening. 

 

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But does the tax program think that it is passive?  The software that I use has a box on the K-1 that if i forget to check for active participation, the K-1 is treated as passive.  It  has been a long time since I used Tax Wise and I don;t remember  how that worked and it might have been different then anyway. 

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Possi, if there are gains on the K-1 that are related to the non-passive activity of being a physician, then those gains would also be NON-passive.   I agree with Gail that you should have a way to tell the program to NOT allow those gains to offset the losses.  

Only the gain on the sale of the one rental should be what is allowed, so that should be the amount of the losses used, and the rest of the losses should carry forward. 

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2 minutes ago, jklcpa said:

Possi, if there are gains on the K-1 that are related to the non-passive activity of being a physician, then those gains would also be NON-passive.   I agree with Gail that you should have a way to tell the program to NOT allow those gains to offset the losses.  

Only the gain on the sale of the one rental should be what is allowed, so that should be the amount of the losses used, and the rest of the losses should carry forward. 

Well, since he was actively participating in the sale of the rental, getting it ready and actually selling it, I did put that rental as active participation. Not the other. Just the rental that sold is active. 

The K1 is definitely non-passive and is clearly indicating that in the program.

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I think we aren't communicating fully here.

All the rentals are passive.  The distinction of "active" or "materially participating" each have their own limits on losses, BUT losses should be allowed in full on the property that was fully disposed of regardless of the designation.  The gain may also be sufficient to allow some, or all, of the losses on the other rental because that is also a passive activity loss.

The K-1 activity for his physician business is non-passive income and does not factor in to the passive losses allowed.    In your first post today concerning the K-1 income you wrote this: "the gains from the S Corp K1".   Are there some sort of gains on the K-1, or does the K-1 only show ordinary business income in box 1?

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OK, I looked back at the pdfs you posted.  Is there a 4th rental with income of $3,091?

I think this return is probably correct.  Property A had a current loss of $1850 plus the suspended losses bring it to a total of $44678.  There's some sort of worksheet you referred to that is netting all of that with the gain from its sale of $174928 to arrive at a positive number left over from the gain to apply to the other rentals that also have losses (current and prior coming forward). That number is 130250. That figure is what is allowing the carryforward suspended loss on property B to be deducted in this year.

That positive balance is allowing the current loss on property B plus its suspended losses to also be utilized in 2019.  Those losses total $45231

Then there are properties with net income: property C of $165, and another that isn't shown on the schedule you shared that must have income of $3091,

All of that nets out to the loss allowed of $86653   (-44678,  -45231, +165,  +3091)

The other schedule you shared was Schedule 1, line 5 showing a net loss from all Schedule E activity that would include the K-1 activity.  The figure on line 5 is -3893.   Does the K-1 for being a physician have ordinary income in box 1 of $82760 that is shown on page 2 of Sch E? 

 

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14 hours ago, jklcpa said:

 

OK, I looked back at the pdfs you posted.  Is there a 4th rental with income of $3,091?

The other schedule you shared was Schedule 1, line 5 showing a net loss from all Schedule E activity that would include the K-1 activity.  The figure on line 5 is -3893.   Does the K-1 for being a physician have ordinary income in box 1 of $82760 that is shown on page 2 of Sch E? 

 

Yes, there is another rental with income of $3091.

Yes, the K1 for being a physician does have ordinary income in box 1 of $82760 on page 2 of Sch E. 

Holy Cow. I completely get it now. Judy, thank you so much. This was confounding me, no matter what I was looking at. I just could not pull it together. Yes, that 130,250 is what pulled  both suspended losses up front, and I see it now. 

I looked back at another with suspended losses that I did a couple of weeks ago, and it was so smooth. This one involved so much more with multiple properties and the K1 physician income.

Thank you so very much. I could have trusted the software and let this go, but I HAD to understand it all. I never let the software simply fly. And your help is a game changer. 

I appreciate you! 

❤️

 

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