How can a huge loss in box 2 of my K1 not generate a large reduction in my tax liability on Turbo Tax?

[dgrogan01]

I entered a large negative number into Box 2 of Turbo Tax for my K1 from an Oil and Gas Partnership. I was expecting my total tax liability to reduce by a large amount from this entry, it did not move at all.  What am I doing wrong? Can Turbo Tax handle Oil and Gas Partnership K1?

[AnnaB · Accepted solution]

Box 2 on Schedule K-1 reports rental income (loss) which is generally considered to be a passive activity.  Losses from passive activities can only be used to reduce other passive income (most commonly income reported on Schedule K-1 for partnership and S-Corporation investments).  However, there is an exception for rental losses that allow a loss for active participants up to $25,000.  This is eliminated if your modified adjusted gross income exceeds $100,000 (or $75,000 if married filing separately).

Any unused passive losses carryover to future years to offset future passive income.  When your interest in the partnership is sold or disposed of, you can take all losses carried forward in the year of disposition.

Please refer to the link below for more information regarding passive loss limitations specific to rentals.

https://www.irs.gov/publications/p527/ch03.html#en_US_2015_publink1000219118

Yes, TurboTax can handle Schedule K-1 for a partnership and based on the fact it is a rental loss, you may not be doing anything wrong.

[ckl9988]

Question about box 2 losses - if AGI is over 150K can we deduct in entirety especially if one is an active participant (real estate professional)?  

[ThomasM125]

If you are a real estate professional, you can deduct the full loss, but you also may need to pay self-employment tax on future income.

[Tax2019Pay]

Hi AnnaB:

Can Schedule K-1 box 2 loss offset the gain from selling a rental property?

Can Schedule K-1 box 2 loss offset the gain from investment income such as gain from selling stocks or mutual funds?

Thanks.

[RobertB4444]

Yes, the box 2 loss from rental real estate can offset any gains from other real estate income.  It can also offset regular income.  However capital gains income is used to offset other capital gain income and the loss in box 2 will only offset the net from schedule D.

[Nashguy]

Hi, 

I'm filing late for 2022 because I was waiting on my K1's to be completed. I have a real estate business that I am actively managing more than 500 hrs/year. I had a sizable business loss (Box 1) and a sizable rental real estate loss (Box 2) due to first year refurbishment and startup activities. I've been inputting into TT each box as separate K1s and the business box 1 loss flows against my 1040 and results in a good tax savings, However, no matter how I input box 2, I never see a reduction of my owed tax. My income is a pension that is around $150K.  Any idea why I'm not seeing a benefit for this box 2 loss? 

Thanks, 

Nashguy

[tagteam]

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@Nashguy wrote:

Any idea why I'm not seeing a benefit for this box 2 loss? 

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You are seemingly running into the passive activity loss limitation (i.e., generally, passive losses can only be used to offset passive income).

Further, you most likely have exceeded the upper income limit to take advantage of the special allowance for active participation.

See Publication 527 (2020), Residential Rental Property | Internal Revenue Service (irs.gov)

[Nashguy]

Thanks for the quick reply - I thought the same thing but I am actively managing the property and I think I'd qualify as a Real Estate professional. Would that make a difference? It doesn't seem like TT will consider me an active REP...I don't see where to input that.

[tagteam]

Even if you qualify as a real estate professional, you must materially participate in your rental real estate activities in order to avoid passive loss limitations; active participation is insufficient.

See https://www.irs.gov/publications/p527#en_US_2020_publink1000234059

[Nashguy]

I would qualify as a real estate professional according to the IRS guidelines. I actively and materially participate in all aspects more than 750 hrs/year. If I manually put the loss on line 43 of my schedule E, it still does not affect my owed tax. Is it because my AGI is over $150K? (pension primarily)

[tagteam]

You first need to qualify as a real estate professional and then also need to materially participate in your rental real estate activities.

Simply qualifying as a real estate professional (e.g., more than half of personal services performed in all trades or businesses were performed in real property trades or businesses, and (2) more than 750 hours of services were performed in real property trades or businesses) is not sufficient.

If you do qualify and materially participate, then you most likely will have to move the figure entered on your Schedule E from the passive column to the nonpassive column in Part II since you entered the figure from a K-1. 

[Nashguy]

So I think I have two ways of approaching the Box 2 loss on my K1 form. 

1. Passive loss that will only reduce my passive income. This year I have no passive income but this loss will carry forward to next year (and years beyond that?)

2. Non-passive loss that reduces my 1040 schedule E income if I qualify as a Real Estate professional. This will reduce my tax burden this year. 

From all that I've researched, it looks like I qualify as a real estate professional as the owner/operator of both a realty company and my engineering services company (who pays rent to the realty company and occupies a portion of the building) but I don't want to miss-step here. 

Can you offer some advice on the correct approach?

[tagteam]

Read Section 469(c)(7). Are you certain that you meet those requirements?

https://www.law.cornell.edu/uscode/text/26/469

If so, your loss is non-passive. Otherwise, your loss is passive and will be carried forward to the next tax year.

[Nashguy]

This is what I'm trying to determine. Here's my situation, I own a real estate company that bought an office building and spent most of last year refurbishing the property. I spent well over the 750 hrs actively managing the property including collecting rents, maintenance/property management, showing the property and vetting potential renters. I also have a guy who works for me full time doing the books and looking for the next property and helping manage this property. 

I also run an engineering services company that I spend more time with - 1500 hrs last year.  The engineering company is located in the office building and pays rent to the real estate company. 

It seems like I could qualify as a real estate professional but if the passive loss rolls forward and offsets future passive income, which I expect from the rental activities this year and beyond, I rather not raise any concerns. On the other hand, I don't want to miss-step if I am truly required to identify as a real estate professional. 

Thanks for your advice!