Reporting loss from a Final K-1 on a passive investment---Help!!!

[davidsilverman2-]

I received a "Final" K-1 for a passive investment I made that turned out to be a total loss.  I invested $20,000 in this project (my basis) but the Final K-1 shows an Ordinary Income loss of $125,000.  I'm not sure how that is possible on a $20,000 investment.  In order to claim the loss on my tax return (i.e. so that it is not limited to passive gains), I Quick-Zoomed to enter disposition of partnership info which took me to the Additional Info sheet for the K-1.  In Part II, I entered the sales price of 0 on Line 5 and my basis of $20,000 on Line 7.  The result is a Long Term Loss of $20,000.  That seems right.  But the 1040/Schedule E reflects a loss of  $125,000, which seems wrong considering the amount of my investment.  Am I doing something wrong?  Or do you think the K-1 is incorrect???

[PatriciaV]

Schedule K- 1 is reporting your share of the partnership ordinary loss for the year. If you don't have sufficient basis in the partnership to claim the entire amount of allocated loss, the excess will be carried forward to future years as a passive loss carryover. The carryover will be applied to passive income in future years.

The loss from the dissolution of the investment is a capital loss, some or all of which may be deductible this year (depending on other capital gains also reported on your return). Again, if you don't have capital gains to offset the loss from this investment, any excess will be carried forward as a capital loss carryover. You can claim up to $3,000 of capital losses each year until the carryover is used up.

[davidsilverman2-]

Patricia, that would make complete and total sense if the $125,000 loss were reported as a capital gain/loss.  But it is not....it is shown as an ordinary income loss on the K-1, which doesn't make sense considering my $20,000 investment in the venture.  But because it is reported as ordinary income loss, TurboTax is allowing a deduction this year for the full amount...$125,000.  That doesn't seem right, especially since I reported my basis as $20,000 in Part II of the K-1 Additional Information form.  Shouldn't TurboTax be limiting my deduction to that?  

[Rick19744]

A couple of comments:

• Not sure how long you have had this investment, but have you maintained a tax basis schedule?
• If you have not indicated if this K-1 is associated with an S corporation or a partnership.
• I am going to assume this is a partnership.
• Do you have any suspended passive activity losses from this activity?
• What does your K-1 box L show as beginning of the year capital account?
• In Part III is there any income reported in any of the boxes?

[davidsilverman2-]

Rick, here are the answers to your questions:

1)  I have had this investment since 2020.  I made one $20,000 investment at the time and there has been no activity (either distributions or additional investments) since then.  

2) It is an LLC.

3) No suspended loss or any other activity from this LLC since inception.

4) Box L shows $20,000 as Beginning Capital Account.  It also shows (125,786) as current year (loss) and $105,786 as "Other Increase" with no explanation.

5) The only figure shown in Part III is Ordinary Income (Loss) of (125,786).

Now what???

[davidsilverman2-]

Rick, I've answered your questions....can you follow up with whether I can take the big ordinary income loss deduction TurboTax is giving me???

[davidsilverman2-]

Rick/Patricia/Anyone????   Here is another summary of the issue:

I received a "Final" K-1 for a passive investment I made that turned out to be a total loss.  I invested $20,000 in this project (my basis) but the Final K-1 shows an Ordinary Income loss of $125,786.  I'm not sure how that is possible on a $20,000 investment, but I have been assured that is correct.  In order to claim the loss on my tax return (i.e. so that it is not limited to passive gains, of which I had none), I Quick-Zoomed to enter disposition of partnership info which took me to the Additional Info sheet for the K-1.  In Part II, I entered the sales price of 0 on Line 5 and my basis of $20,000 on Line 7.  The result is a Long Term Loss of $20,000, which is accurate.  But the 1040/Schedule E reflects a loss of  $125,786, which reduces my taxable income by that amount, theoretically saving me many thousands of dollars in taxes, which would be awesome if true.  Is that correct?

Additional notes responding to “Comments” from Rick19744:

1)  I have had this investment since 2020.  I made one $20,000 investment at the time and there has been no activity (either distributions or additional investments) since then.  

2) This is an LLC.

3) No suspended loss or any other activity from this LLC since inception.

4) Box L shows $20,000 as Beginning Capital Account.  It also shows (125,786) as current year (loss) and $105,786 as "Other Increase" with no explanation.

5) The only figure shown in Part III is Ordinary Income (Loss) of (125,786).

So I REALLY NEED SOMEONE TO TELL ME:  Is TurboTax correct that I can claim the $125K ordinary income loss shown on my K-1 for this investment???

THANK YOU!!!

[davidsilverman2-]

Patricia, I am still waiting for an answer. 

Here is another summary of the issue:

I received a "Final" K-1 for a passive investment I made that turned out to be a total loss.  I invested $20,000 in this project (my basis) but the Final K-1 shows an Ordinary Income loss of $125,786.  I'm not sure how that is possible on a $20,000 investment, but I have been assured that is correct.  In order to claim the loss on my tax return (i.e. so that it is not limited to passive gains, of which I had none), I Quick-Zoomed to enter disposition of partnership info which took me to the Additional Info sheet for the K-1.  In Part II, I entered the sales price of 0 on Line 5 and my basis of $20,000 on Line 7.  The result is a Long Term Loss of $20,000, which is accurate.  But the 1040/Schedule E reflects a loss of  $125,786, which reduces my taxable income by that amount, theoretically saving me many thousands of dollars in taxes, which would be awesome if true.  Is that correct?

Additional notes responding to “Comments” from Rick19744:

1)  I have had this investment since 2020.  I made one $20,000 investment at the time and there has been no activity (either distributions or additional investments) since then.  

2) This is an LLC.

3) No suspended loss or any other activity from this LLC since inception.

4) Box L shows $20,000 as Beginning Capital Account.  It also shows (125,786) as current year (loss) and $105,786 as "Other Increase" with no explanation.

5) The only figure shown in Part III is Ordinary Income (Loss) of (125,786).

So I REALLY NEED SOMEONE TO TELL ME:  Is TurboTax correct that I can claim the $125K ordinary income loss shown on my K-1 for this investment???

THANK YOU!!!

[PatriciaV]

Yes, passive losses can be used to offset any other income in the year that you dispose of an investment.

You may need to contact the firm that prepared Schedule K-1 for an explanation of "Other Increases" since this could explain the large loss for the year.

@davidsilverman2- 

[Mike9241]

We can't answer your question. You are only allowed to deduct losses to the extent you are at risk or have tax basis, whichever is lower. To start with, your at-risk/basis amount is only $20K. What that other addition of $105K as shown in schedule L is, we don't know. Thus, we don't know if it adds to your at-risk/basis. It may merely be a plug to zero out your capital account and not give you basis or increase your at risk amount.  if correct. this would limit your loss deduction to $20K 

[davidsilverman2-]

Patricia, I did contact the accounting firm and they said the "Other Increase" was just an "accounting tool" used to zero out my capital account.  So it appears I can use the full $125,000 ordinary income loss to offset taxable income.  Right?

[davidsilverman2-]

TurboTax is allowing me to deduct the entire $125K ordinary income loss shown in the K-1.  In order NOT to do that, I would have to overwrite something, and I'm not sure what that would be or how to do that.  Can you provide guidance on that?

[davidsilverman2-]

Patricia, to further elaborate, TurboTax is giving me the full $125K ordinary income loss deduction.  In order NOT to take it, I would have to overwrite something in TurboTax, and I'm not sure what that would be.  Help!

[davidsilverman2-]

Mike, one more clarification:  The company that owned this failed investment started other projects in which I had also invested.  All of their properties were foreclosed on in 2024.  When I asked about the large ordinary income loss shown on this particular K-1, I was told the following:  "It looks odd at first, but it is correct. It's a tax loss, not a cash loss. It comes from the foreclosure and overall losses being allocated based on ownership %. Silver lining."  Does that change your response about how much of that large ordinary income loss can be used to offset other income?  Again, I correctly showed my basis in this project as $20,000 on the K-1 Additional Information form in TurboTax, but TurboTax is still giving me a deduction for the full $125,000 loss shown in the K-1.  I would have to overwrite something or make some other adjustment on the K-1 to change that.  Guidance please???

[davidsilverman2-]

No further comments?  Should I take the deduction they are giving me or override something in TurboTax?