Received final K-1 in 2017 but didn't mark the partnership ended when the company/investment went bankrupt - do i just mark it this year?

[haolam]

I invested in a friends real-estate development project in the past and filed yearly K-1's from the passive partnership.

In 2017, it finally went bankrupt and I received a final K-1 and I marked the option saying it was a final K-1when entering the amounts for each box but did not realize I had to select the option "This partnership ended in 2017" so it didn't ask me if I disposed of it and remove the K-1 data in future year returns.

I only happened to see that this year because I invested in some oil dividend stocks and needed to enter a bunch of K-1's  when I saw my friends K-1 was still showing up. In the last few years in Turbo Tax I just skipped the K-1 section and didn't realize all the passive loss information was still just carrying over as the software just automatically transferred previous year numbers and entered everything else as 0.

When I selected "This partnership ended" for my friends K-1, it increased my refund because all the passive loss was rolled forward but I'm not sure this is how I should handle my situation.

Should I:

a) file my 2020 return like I have been - ignoring my friends K-1 and letting it rollover and then file an Amended return for my old 2018 return?

b) delete my friends K-1 on my 2020 return and then filing an amended return for my 2018 return?

c) choose the option that "the partnership ended in 2020" even though it ended previously in 2017 and take the loss carryover on my 2020 return

Can I even amend a return from 2018 and would I receive that loss refunded to me since it was large? It was a loss of over $15k, so when I choose option "c" it increased my 2020 return by $10k (I guess it still got capped)

I would prefer option c because then the software would keep track of it properly, if I file an old amendment - then i guess i would need to do a manual adjustment for carryover losses somewhere next year?

Please help me figure out how to handle the situation.

Thanks,
Hao

[Mike9241]

from an income tax standpoint, since you knew it was worthless in 2017 and you got a final K-1 you are not entitled to claim the loss in any year but 2017.   the deadline for filing an amended 2017 return ended on 4/15/2021 unless you extended 2017. if you did, you have until 10/15/2021 to amend 2017.

in addition, do you have tax basis to take the loss. real estate entities use nonrecourse financing (the mortgage)  to produce losses in excess of what the partners invest. if you have suspended losses in excess of your tax basis they are not allowed. 

taking the loss, if you have the basis to take it,  in any other year risks disallowance and the imposition of penalties by the IRS. 

why do you think you can take the loss in 2018? 

An interest in a partnership or limited liability company is not a security. with a security you would have had 7 years to amend. 

[haolam]

I'm a little confused by your reply since i'm a novice with tax information as i'm just using TT to do all my taxes and never spoke to a tax professional before. I invested over 200k in the project - it was a shopping/business center - Target store with business offices etc. It went on for over 5 years but had problems because of the economy downturn and couldn't get enough tenants etc to keep running it.

So each years k-1 showed some losses then i got the final k-1 in 2017. I actually did have to file an amended return in 2017 because they sent me the k-1 after the regular April deadline so i submitted an amended return in Oct 2018 for my 2017 return.

I dont understand the tax basis part of your reply. the partnership i invested in gave me "shares" of the LLC - i wasn't involved in any part of the mortgage or loan that they used. i just owned a percentage of the company.

So you're saying i can submit an additional amendment to my 2017 return? if i do that - will i then get a large refund back from the IRS?

And if I select ended partnership - which option do I select when it asks how it ended or was disposed? I didn't sell anything, all my shares/investment just basically went to $0 and I didn't receive anything

Thanks

Hao