Sold my rental property in 2023. Had it for 3 years. Chose active participant as I met the requirements. Did a huge remodel and had many capital improvements (ex. new roof)(not just expenses). But as a result turbotax took my 150k in capital improvement losses> transferred to Schedule 1 Line 4> which transferred to my 1040 Line 8. Then, the 1040 combines my 135k Long term capital gain from SchD > to1040 Line 7 WITH my investment property capital improvement losses (1040 Line 8). I have no ordinary or investment income this year so I thought that means I would be in the 0% long term capital gains tax bracket. Form 4797 Sale of Business Property was also used by turbotax. Was it calculated this way because I chose "active participant?" I thought the capital improvements should be with the asset on schedule D and only applied to the cost basis, not offsetting other income. If I change to NOT be active participant, will Turbotax then combine the capital improvement losses with my long term capital gain and NOT carry the losses over to other income on Schedule 1?
Or is it because when they say "the 0% LTCG rate applies if your income for MFJ is less than $89,250" ...that its not talking about just W2 income but they 1st add your long term capital gain to your total income on 1040 line 7, so even with no W2 income, if your long term cap gain from sale of rental property was like $200,000 profit, they would 1st add that to your other income and then you would then be above the $89,250 amount and thus have to pay a long term capital gains rate. Or does the LTCG chart mean that if you had zero w2 income, and $1,000,000,000 in LTCG profit from sale of rental property, you would pay 0% long term capital gains rate???
