MASSACHUSETTS–How does TT handle suspended passive activity losses released in the CY due to disposition of the passive activity when those losses exceed Form 1 income?

[Joe-Dirt]

In the current year, I have suspended passive activity losses (PALs) that should be released due to the disposition of a residential rental property.  TurboTax is reporting the entire amount of previously suspended PALs on Form 1, line 7.  Additionally, TurboTax is properly ignoring the Sections 1245 & 1250 recapture related to the gain on the sale of the residential rental property for MA income tax purposes.  My issue is that the PALs are in excess of the Form 1 income that I am reporting.  Additionally, the sale of the residential rental property has triggered a long-term capital gain.  Therefore, I have a deficit reported on Form 1, line 10 and a long-term capital gain subjected to the 5.15% tax rate.  It is my understanding that any excess PAL reported on Form 1 may be used to offset income reported on Schedule B and Schedule D following certain ordering rules.  Does TurboTax automate these adjustments or will I need to deal with this manually?  Also, does anyone disagree with my interpretation of MA income tax law with respect to offsetting Schedule B and D income with excess losses/deductions from Form 1?

[Joe-Dirt · Accepted solution]

Please ignore my question above.  I feel as though I figured out the proper solution in TT.  In case anyone has this issue in the future, it appears that the best approach (or possibly the only approach in TT) is to manually make entries on the MA Schedule C-2.  I mistakenly thought that TT was identifying the manual adjustments that I made on this Schedule originally as overrides.  This is not the case and, thus, allows for the proper reporting and should avoid the e-file nightmare associated with overrides. 

[StoddardV]

I have a similar situation. I sold a rental condo in FL which I bought in 2014. For some years, my operating loss was limited $25,000 in each year. This has accumulated to a total "suspended loss" of about 50,000 over the years I owned it

TT reports this and accounts for it fine on Federal Return.

But on Massachusetts return, this suspended loss seems to be disallowed (I tried and failed to find info on this with a lot of searching so it may be this is the Mass. law). The net effect is that this $50,000 is considered Sched D income, which in MA is taxed at 5.1%. thus increasing my liability by $2550. 

Can anyone with knowledge of MA rules shed some light on this?

[MarilynG1]

@StoddardV From mass.gov:

"Carryover passive losses which you may take upon disposing of your entire interest in the passive activity to an unrelated party in a fully taxable transaction may be used to offset:

• Form 1 income
• Form 1-NR/PY income
• Schedule B income
• Schedule D income"

If your losses did not carry over from your Federal return properly, you may need to make a manual entry to report them on Massachusetts Schedule C-2. 

[StoddardV]

Thanks for your reply. You said... 

"If your losses did not carry over from your Federal return properly, you may need to make a manual entry to report them on Massachusetts Schedule C-2. "

The "suspended loss" from prior years of my rental property did not carry over from FED to MA. But I cannot tell if this is because 

A) Massachusetts will not allow the "suspended loss" from my FED return, or,

B) Massachusetts does allow it, but some reason TT did not correctly carry over to the Mass Return.

Do you have any idea if it may be A) or B) ? from my reading of 

https://www.mass.gov/technical-information-release/tir-89-2-massachusetts-income-tax-treatment-of-pa...

It sounds to me like it is B). If so, this suggests TT got it wrong (which I am dubious about)

Thanks for any feedback

[KathrynG3]

Massachusetts does allow the deduction of suspended passive losses and should transfer to Line 7 of MA Form 1. 

Please review the input for any overrides and confirm what was entered. 

For more information, see: Massachusetts: Passive Activity Losses

@StoddardV

[StoddardV]

Thanks Kathryn. Will try to figure out what setting/checkbox in TT which is preventing TT from letting take this suspended loss in Form 1 for Mass. Sounds like you know about Mass Tax Law - I appreciate you taking time to help me... Stoddard

[StoddardV]

Hi Kathryn. 

I did check everything in TT as you suggested. Line 10a on Mass. schedule D still reports a Massachusetts adjustment of -$49,882. On the TT Smartsheet "Capital Gain/Loss Differences Smart Worksheet for Line 10" Line E has the value -49,882 in blue. I cannot determine why/how TT is making that entry. It does have to do with the 'suspended loss' reported on FED return

I have read the links you provided and many more which which seem to say this "suspended loss" should be included on MA return. But TT seems to think otherwise.

I can just overwrite -49,882 in TT with 0, and then the MA + FED Schedule D are consistent. I feel uneasy doing this because it implies i know more about this than TT.

Any additional thoughts?

Thanks, Stoddard

[DaveF1006]

Make the change. If it has no impact on your return and you are able to file, proceed on. Put those worries aside in regards to knowing more than Turbo Tax. Consistency is more important at this stage.

[StoddardV]

Hi Kathryn:

You helped me earlier this year regarding  rental property I sold in FL. TT computed the gain correctly I believe on Fed return, but when it came to Massachusetts return, it handled it differently

On the MA return, it took the gain of 56,211 from the Fed return, and then "adjusted" it for MA. The nature of this adjustment is a mystery. I spent 1.5 hours on phon with TT agent, and they could not help. 

TT itself reports it on a report "Fed/State Adj" - it takes the Fed reported gain 56,211, makes a minor adjustment for differences in  

(I cannot paste the form in here but the text below is taken from that form)

(D) Accumulated Depreciation 

   (1) State 97,222

   (2) Federal 98,860

a difference of -1,638

and then adds 

   (F) Other adjustments 51,520

Now it is the 51,520 number that  TT, nor I, nor the TT human agent - can explain. 

I printed out the entire return as a PDF and searched and found the 51,520 appears only once - so its origin remains  deep mystery. But it adds a lot to my tax liability

I have read a lot about Fed/MA adjustments related to sale of rental property and from that it seems MA and Fed would treat the gain in the same way (excepting that minor difference in depreciation). 

And insights to this mystery will be appreciated. 

Thanks

Stoddard

[MCKENNA55]

Hi... Did you ever figure out why TT was not properly bringing over the Prior Year's Passive Activity Losses (PALs) to offset the calculated Capital Gain on the Massachusetts Tax Return?  Running into the exact same issue right now for my 2023 Return.  Federal Return treats everything properly and I'm getting the credit for my $118k PALs but State Return is not applying the same.   

I guess I'll go through the prior manual solutions mentioned in this thread to see if that works unless you figured out a better way for TT to do it automatically?