I have 3 limited partnership K-1s that have unallowed passive losses for this year and carried over from last year. I also have one other limited partnership K-1 that has $60,000 on line 10 of the K-1 for a section 1231 gain. My question is in regards to the form 8582 for Passive Activity Loss Limitations that turbo tax automatically fills out. In section V of the Form 8582 Turbo Tax places that $60,000 section 1231 gain in Part V column "a" which is for net income. Column "b" and "c" of part V have net passive losses. When Turbotax transfers those over to part I, line 3 becomes positive so then all my unallowed passive losses become allowed losses. Is this the correct way to handle this capital gain from line 10 of the K-1?? It seems to me that the $60,000 is really a capital gain which Turbotax correctly includes in Schedule D and it should not be included in part V of form 8582 as income. I thought that column "a' was only for passive income since the form 8582 is all about passive loss limitations. I'm concerned Turbotax is not handling this correctly and the IRS will not allow it. Is this K-1 capital gain on line 10 really a passive income since it is in a passive activity K-1?
Yes. If you did not materially participate in the activity or it is a rental activity and you are not a real estate professional then it is a passive activity and the gain or loss is passive and goes to form 8582 and will be combined with all other passive activities. Here are the partners instructions for form K1 for reference. See the Passive Activity Limitation section, "Effect of determination" paragraph.