Capital loss on sale of inherited land not limited to $3000

[grthorson89]

I inherited farmland with my siblings in 2013.   The farmland was being rented by an unrelated party, and my siblings and I formed a partnership to continue to manage this lease.  In 2019, we sold the farmland at a loss.  I received a 1099 S for the sale.  When I enter the information on Turbotax, under Sale of Business Property, it is deducting the full amount of the loss, not just the $3000 annual limit.  

Can anyone help me figure out why this is happening?

GT

[Anonymous]

special rules for farmland.  since it's business property (rental) the sale is reported on form 4797

Farmland used in a trade or business 
a Sold at a loss and held more 1 year flows to part 1 of the form

this flows to line 10 on schedule k of the 1065.

from there on your 1040 since it is business property sold at a loss it is treated as an ordinary loss. schedule 1 line 4

if you were not filing partnership returns that is a different matter. in any case, the loss would be ordinary.

[Anonymous_ · Accepted solution]

If you formed an actual partnership with your siblings, then you should probably have been reporting the rental income, as well as any expenses, from the farmland on Form 1065 and issuing each sibling (including yourself) a K-1.

[grthorson89]

Thank you, yes, we were reporting rental income on 1065 and were issued K-1s.  Including in 2019.  The sale was in Dec of 2019.  

[grthorson89]

So here is another tidbit that may affect your answer.  The partnership did not take title to the land (per the partnership legal contract).  The partnership did issue K-1s and each partner is considered a passive individual.  The accounting method was cash basis.

Do these have an effect on how to treat the sale of farmland?

[Anonymous_ · Accepted solution]

You should seek legal and professional tax guidance. 

Regardless, the terms of a valid partnership agreement would typically prevail over a mere formality.