I saw several posts wondering why the tax liability DECREASED when a Section 1231 GAIN is present, but none ended with a clear answer. In my case, I have a partnership K-1 with:
- suspended losses from prior year (2021)
- S.1231 gain for tax year (2022), smaller than the prior suspended losses
and I also have capital losses carried forward from prior year.
TTax does the following (checked multiple times):
- Form 4797 shows the 1231 (positive) gain and hence the carried-over capital losses are offset by this gain on Sched D
- Form 8582 also shows the 1231 gain offsetting suspended passive losses for this partnership
- Sched E and Sched 1 show the gain as negative, therefore reducing the AGI and taxable income (hence reducing the tax liability as compared to no 1231 gain) – which is counter-intuitive to me, as well as to others who posted on this dilemma...
I think that the latter is done to compensate for the double offset of losses: once of prior capital losses and again of prior passive losses. I realize 1231 gains can offset capital losses, but why does the process not stop there? Rather than also offsetting passive losses and then reducing ordinary income to compensate for this second offset?
Can anyone help? Thx in advance.
