Question about portfolio deduction with K-1

I believe that’s for the At-Risk worksheet (Form 6198). Do you have Form 6198 in your list of forms?

​@Rick19744 

Yes, I had loss and not all my investment was at risk due to non-recourse loan addition.

The form 6198 can help Turbotax know at-risk limitation for how much loss is allowed. But for outside basis limitation for loss deduction, how does Turbotax find that out. The dialogue for K-1 only asks information I received in K-1 form, but it nowhere asks outside cost basis I am tracking. How would Turbotax know how much of loss specified in K-1 is limited by basis I am tracking?  

While the portfolio deductions may not be currently deductible, these do impact your basis and at-risk.  This is the same impact that other nondeductible items on the K-1 reduced basis and at-risk in past years as well (meal & entertainment, etc. your share reported on the K-1).

If the items are not deductible, then you should not be able to “increase” your basis and at-risk in order to be able to take additional ordinary losses (increase by not reducing your basis and at-risk).

As a separate note, who is preparing the tax return for the exchange fund?

There is an exception for the usual nonrecognition of gain upon contributions of property to a partnership under Section 721.

Did anyone look at the impact of Section 721(b)?

It’s beyond the scope of a forum such as this, but definitely needs to be addressed.

13H is investment interest expense, which is deductible on schedule A, Form 4952 (you must itemize) but the deductible amount is limited to investment income any excess is a carryover. 13 AE is portfolio deductions which are no longer deductible for federal purpose but some states with a personal income tax still allow it. Input is done on the federal k-1.

at risk can at time be different than tax basis. net losses are limited to the lower of basis or your at-risk amount. Form 6198 only computes at-risk amount.

sorry basis and at-risk go down by non-deductible items like 13AE and even 13H if you don’t itemize or the deductible amount is limited. This which also include nondeductible expenses on line 18 and distributions on line 19  

Under IRC Sec 721 since no gain or loss is recognized upon acquiring the interest for that stock. That’s an issue that will be address later

TurboTax does not calculate basis only at-risk - Form 6198. 

So here’s how it works. you beginning basis and at-risk is your tax basis in the stock. You add net income and subtract net loss as reflected in the capital account analysis. You also subtract any distributions (this might create a problem because you stock basis and its FMV differ). Here’s what is not clear from the Form 6198. Since this seems to be the first year you invested in the partnership you at-risk amount goes up by your share of the ending liabilities of that partnership that qualify to be included in at-risk.

 Amounts Not at Risk You are not considered at risk for any of the following.

1. Nonrecourse loans used to finance the activity or to acquire property used in the activity. However, you are considered at risk for qualified nonrecourse financing secured by real property used in the activity of holding real property (other than mineral property).

2. Cash, property, or borrowed amounts used in the activity that are protected against loss by a guarantee, stop-loss agreement, or other similar arrangement (excluding casualty insurance and insurance against tort liability).

3. Amounts borrowed for use in the activity from a person who has an interest in the activity other than as a creditor or who is related under section 465(b)(3)(C) to a person (except you) having such an interest. However, this does not apply to (a) amounts borrowed by a corporation from a person whose only interest in the activity is as a shareholder of the corporation, or (b) amounts borrowed after May 3, 2004, and secured by real property used in the activity of holding real property (other than mineral property) that, if nonrecourse, would be qualified nonrecourse financing. See Pub. 925 for definitions.

4. Any cash or property contributed to the activity or to your interest in the activity that is: a. Financed through nonrecourse indebtedness or protected against loss through a guarantee, stop-loss agreement, or other similar arrangement; or b. Borrowed from a person who has an interest in the activity other than as a creditor or who is related under section 465(b)(3)(C) to a person (except you) having such an interest. However, this does not apply to (i) amounts borrowed by a corporation from a person whose only interest in the activity is as a shareholder of the corporation, or (ii) amounts borrowed after May 3, 2004, and secured by real property used in the activity of holding real property (other than mineral property) that, if nonrecourse, would be qualified nonrecourse financing. See Pub. 925 for definitions.

Built-In Gain and Loss Property - the difference between the contributing partner’s tax basis in the asset and it’s fair value
A “built-in” gain or loss is the difference between the fair market value (FMV) of property and its adjusted tax basis. By contributing property with a built-in gain or loss, the contributing partner effectively defers recognition until the property’s disposition or until another triggering event.

Built-In Gains
• Example: Partner A contributes stock with an FMV of $200,000 and a basis of $100,000; there is $100,000 of built-in gain. Under §721, no gain is recognized on contribution. If the partnership later sells the stock for $210,000, the built-in gain of $100,000 (plus any additional appreciation) is recognized and specially allocated back to Partner A under §704(c).
• Accelerated Recognition: Certain transactions (e.g., distributions to other partners or subsequent property sales) may trigger recognition of the built-in gain earlier than expected under regulations aiming to preclude shifting built-in gain to other partners.

Built-In Losses
• Example: Partner B contributes stock with an FMV of $80,000 and an adjusted basis of $120,000; there is a $40,000 built-in loss. The partnership’s inside basis remains $120,000, but for tax accounting and future allocations, that $40,000 built-in loss is associated with Partner B. Should the partnership sell the property at its contributed value of $80,000, that $40,000 loss is allocated to Partner B.
• Loss Limitation: If the partnership is unlikely ever to sell the property for an amount lower than $120,000, Partner B’s built-in loss essentially remains unrecognized (and effectively “stranded”) within the partnership. Additionally, Congress has enacted provisions to limit the recognition of a built-in loss if the property has significantly declined in value before contribution, restricting potential tax benefits.