I want to recognize all of you who have put forth input into this issue. I know that it is quite complex given that it involves ordinary business losses/carry overs, depreciation recapture, short and long term capital gain loses/gains/carry overs, passive real estate losses/carryovers, trust loses/carry overs, and ordinary/earned income. It involves over 15 forms and worksheets in each return. I spent 4 hrs comparing two different returns with the only difference being the sale of the house. I corrected the error that I had made in that I had to account for the selling of all capital upgrades involved with the house - a helpful hint.
The bottom line is that while I think the program did the correct thing in using all forms of "losses" to bring the taxable capital gain from the house sale to zero, although I have some issues with the methodology. I think it fails terribly in the fact that it uses the residual of all forms of losses from "zeroing out" the house sale to be used agains "earned income", to bring my total tax to zero for the year.
I have dealt with these issues for over 30 years using Macntax/Turbo tax without a single audit. Unless someone can quote the IRS rule allowing for passive losses to offset earned income (understanding the 25K offset for MAGI under 150K) and/or capital losses to offset more than 3K of earned income, then this program has an error. I would not file this return as produced due to this error.
The good news is that this was a modeling event to look at how much carry forward losses would be left if I did a sale v. a 1031 exchange in 2022.
Again I am happy to screen share and discuss this issue. The simple answer as provided above is true and correct and I agree and understand, however it fails to grasp the full complexity of issue - it is much more than just passive losses offsetting passive gains.
