@AmeliesUncle wrote:
I haven't looked at the rules specifically for this situation, but I think the OP is correct.
Passive Losses offset Passive Income. I would THINK the taxable "boot" from 1031 exchange of a PASSIVE property would be considered as Passive Income. I don't see why it wouldn't be passive. Assuming that is the case, the Passive Losses would offset that Passive Income.
Regardless, TurboTax will generally treat boot as being taxable as capital gain or ordinary income (recapture, per Sections 1245/1250, at rates no higher than the Section 1250 rate) in a transaction where any gain is fully deferred.
I am not certain how to indicate to the program that boot received should be offset to the extent of suspended passive losses. Typically, the program will release those passive losses upon a fully taxable transaction and they will wind up on Schedule E as a deduction. The program does a lousy job (or none whatsoever) of linking Schedule E, Form 8824, and, if applicable, Form 8582.
Again, the OP should contact Support for further assistance as there may be some methodology for input in this scenario (most likely involving Forms Mode).
As a final note, passive income is derived from passive activities and, as a result, such income is limited to income from rental activities and businesses in which the taxpayer does not materially participate. The sale of business or investment property does not generate passive income.
