Section 1231 Gains - Entering a GAIN caused my Taxable Income to go DOWN?

[richraz33]

I can't really wrap my head around this, and think something may be off.

I have a K-1 with a box 10 (Net Section 1231 gain (loss)) of +6,383.  Box being -1,879 -- so still a ~4,500 overall gain

After entering POSITIVE 6,383, my Taxable Income is going DOWN.  

I thought after entering that gain my "Federal Tax Due" would be worse, but it actually flipped to a refund.

Was a pretty vanilla K-1 with nothing crazy.   I can almost see, best case scenario having no tax change (due to offsets/carryovers), but this doesn't make sense.

This can't be right, can it?  Would love some help

[ThomasM125]

One possibilty is that you have suspended loss carryovers from a previous year or a passive loss from the current year. The sale of 1231 property (real estate or business property) can result in those suspended losses being allowed in the current year. So, after you enter the proceeds from the sale of section 1231 assets, the suspended losses are allowed and if they are more than the gain reported your income will decrease.

You would need to look on your schedule E, page two, before and after you enter the sale on your K-1 entry to see if a loss pops up when you make the entry.

[richraz33]

Hey @ThomasM125 !  Thanks so much for the help.  I looked into it, but it still seems weird.  As you recommended, I looked at Schedule E Page 2.  If I remove the sale, I get all zeros (so no losses carried over).  When I enter the sale, indeed I get some losses now.  But still, they are less.  It almost seems as if Turbotax is reversing signs?

See pic/below -- does this seem right?  Lines 31/32 being NEGATIVE (and the exact amount of Section 1231 gain -- which I put in as +6,383) just seems weird to me.

[MonikaK1]

You indicated that you had K-1 box 10 (Net Section 1231 gain (loss)) of +6,383.  Entering a positive 6,383 in Box 10 should flow through a gain.

Your previous post doesn't indicate which box had -1,879. Boxes 8 and 9a allow for both gains and losses, so you would need to enter a negative number for a loss.

It would be correct for Line 32 to show a negative number IF Line 30 (gains) is zero and Line 31 (losses) is a negative number. Line 31 is the total of all of the loss columns. The description for Line 32 states "income or (loss)", which suggests that a loss will be a negative number.

I suggest you review your Schedule K-1 entries to be sure that the negative 1,879 and the positive 6,383 were entered in the correct entry fields.

See here for the IRS Partner instructions for Schedule K-1 (partnerships).

[richraz33]

Thanks for willing to help me understand @MonikaK1 .

The -1,879 was in Box 2.  See attached/below.  These are all the relevant Turbotax entry items (I believe)

[MonikaK1]

Okay, the figures were entered correctly. In order to help you tie the figures together, you might also look for the amount of any passive loss carryforward from 2021 and how that interacts with the 2022 entries. See Form 8582, Passive Activity Loss Limitations. 

[richraz33]

OK -- I will continue to dig in more -- thanks so much for your help and pointing me in the right direction!  You are putting my mind at ease a bit more.

From what I can tell this is what is happening.  The $6,383 Section 1231gain is

1)  Going into Schedule D / Capital Gains, and getting taxed at that rate.  I have capital-losses to offset this gain -- so the move here does NOT cause a change in tax 

2)  Passive carry-losses from various investments is being realized now, which causes this $6,383 to be taken from income.

Saw this :

"

• Section 1231 gains are given long term capital gain treatment and subsequently reported on Schedule D.
• So prior year 1231 losses are therefore shown on the Form 4797 to offset current year income and reduce the amount of capital gain.  The losses are not allowed twice, they are basically used to change the tax rate of the current year gains."

[Tax2019Pay]

.

[ThomasM125]

Yes, it is correct. The gain from property sold from a rental property is passive income, since the rental activity is passive, so it is entered on Form 8582 to be netted with passive losses in the current and prior years. That is used to determine how much passive loss from the rental activity is allowed in the current year. The section 1231 gain is taxable as capital gain income, so it appears on Schedule D.