4797 loss should be carrying forward?

[qofmiwok]

I feel like I have checked a box wrong somewhere.  In 2021, I sold a commercial real estate building at a loss.  I thought I was told that the 1231 loss couldn't be used against passive real estate income, so it would carry forward until I sold something with a gain.  But it IS offsetting schedule E/K1 passive rental income.   Should it be, or not?  TT doesn't seem to change anything when I click the active/material/passive exclusion buttons so I want to make sure it's working as it should.

Thanks

update: I found the old post and the person replying first said the loss could only be used when my interest in the Partnership that owned the building was disposed of, but then corrected himself and said it would offset Passive Income.  So I think it's doing what it's supposed to.  Is there any combination of non-active and non-material participation which would make it NOT use up the loss?

[Mike9241]

complete taxable disposition of the property results in treating it as nonpassive for all purposes. This assumes you have not aggregated the property with other commercial properties. You will see that neither the rental activity nor the loss are carried to form 8582. so the 4797 loss which would be ordinary is allowed. 

[qofmiwok]

That's interesting.  I guess I'll have to find that in the IRS booklet because several people here told me the opposite. 
FYI nobody ever asked me this before but the property was aggregated for QBI purposes and generated QBI losses.  And the losses have been getting used and carrying over onto 8582.

[qofmiwok]

What happens if I have aggregated with other commercial properties?

[Mike9241]

here's what i did as a test using desktop deluxe for 2023

1) entered two rental properties both showing rental losses

2) neither active not material participation was checked for either property

3) property 1 showed a rental loss of $35K

4) property 2 showed a rental loss of $33K and a loss on disposal of its assets of $82K - complete disposition

5) for qbi purposes both were indicated as one enterprise using rev proc 2019-38 safe harbor - this rev proc only applies to QBI not PAL (PAL and QBI are two different tax items) 

results property 1 treated as passive so none of its loss was allowed. for either PAL or QBI despite the single enterprise election

property 2 treated as nonpassive the $33K rental loss was allowed as well as the 4797 loss of $82K

I can see the logic that the loss of property 1 is not included in QBI since for PAL purposes no loss was allowed for regular income tax purposes [IRC 199A(c)(1)?]. Changing to active participation for property 1 does nothing for either PAL or QBI because my test AGI was over $150K. Lowering AGI to $100K resulted in $25K of property 1 loss allowed and for both income tax and QBI purposes.

[qofmiwok]

Cool. Thanks!