Can Capital Gains from sale of property be used to off set income loss

[bobbornt]

I have sold property with a significant capital gain. Can I use that gain to offset significant losses from a start up business - on my 1040 return?

[Carl]

Typically, losses can only be used to offset gains from a like-kind activity. For example, if you lost money on your SCH C business, and show a capital gain on the sale of SCH E property, then no. Losses on the SCH C business can not be used to offset gains on the sale of SCH E property.

[bobbornt-gmail-c]

Thank you for responding - my first time to really reach out...

My situation more clearly:

I sold a (passive) rental property held in my solely owned LLC reported on my personal 1040 Schedule E.  The initial plan was to open a 1031 exchange escrow with an identified property. The property has a significant capital gain basis and little to no expense - just yearly income.

However, I have another rental property in the same LLC reported on my schedule E where I am the full time manager etc... participating full time owner. The second property has had significant loss due to operational expenses, CoVid shut downs (2020) and building improvements carried forward over the last three years. My income is increasing each year and will slowly decrease the operational loss.

I would like to consider the sale without the encumbrance of the 1031exchange if it would benefit me by reducing the tax liability of the capital gain with offsetting the income losses reported on Sch E.

Make sense? Possible?

[Critter-3]

The cap gain on the 4797 & Sch D do not "offest"  ordinary income directly  and they are taxed differently.  If you are using the downloaded program you can "what if" to your heart's content to see exactly how things are reported on the form 1040 and how the income is taxed.

This is my mini version of  a tutorial  that should be in the downloaded program: 

 

What is Forms Mode?

Forms Mode lets you view and make changes to your tax forms "behind the scenes."

If you're adventurous, you can even prepare your return in Forms Mode, but we don't recommend it. You may miss obscure credits and deductions you qualify for, and you may forget to report things that will come back and haunt you later.

Forms Mode is exclusively available in the TurboTax CD/Download software. It is not available in TurboTax Online.

Related Information:

• Why would I use Forms Mode?
• How do I switch to Forms Mode in the TurboTax for Windows software?
• How do I switch to Forms Mode in the TurboTax for Mac software?
• What is-the-meaning-of-all-the-different-colors-in-forms-mode
• How to delete a form

If you want to play around with different figures and tax scenarios without affecting your original return you can ….

• >>>In the TurboTax CD/Download software by creating a test copy: 
• 1.  Open your return in TurboTax. 
• 2.  From the File menu, choose Save As. 
• 3.  Give the copy a new name to distinguish it from the original (for example, by adding "Test" or "Example" to the file name). 
• 4. Click  Save. You are now safely working in the test copy and anything you do here will not affect the original. 
•  https://ttlc.intuit.com/questions/1900642-how-to-make-a-test-copy-of-your-return

• >>  use the WHAT IF tool: 
• - Click Forms Icon (upper right of screen) or Ctrl 2 (forms view) 
• - Click on the Open Form Icon 
• - In the “Type a form name.” area type What-If (with the dash), click on the name of the worksheet - click on Open Form 
• - You will see the worksheet on the right side of the screen; enter the information right into the form 
• - To get back to interview mode - click on the Step-by-Step Icon (upper right of screen) or Ctrl 1

Once you have filed successfully … you can shut off the auto updater function and then save the return &  .taxfile.

It's always a good idea to make a backup copy of your tax data file, in case your original gets lost or corrupted. Here's how:

1. From the File menu in the upper-left corner of TurboTax, choose Save As (Windows) or Save (Mac).
2. Browse to where you want to save your backup.
   • Tip: If you're saving to a portable device, save it to your computer first to prevent data corruption. Then, after completing Step 4, copy or move the backup file to your device.
3. In the File name field, enter a name that will distinguish it from the original tax file (for example, add "Backup" or "Copy" to the file name)
4. Click Save and then close TurboTax.
5. Restart TurboTax and open the backup copy to make sure it's not corrupted. If you get an error, delete the backup and repeat these steps.

If you make changes to your original tax return file, repeat these steps to ensure your original and backup copies are in-synch.

Related Information:                             

• Retrieve a Tax File from a Portable Device
• What's the difference between the tax data file and the PDF file?

AND save it as a PDF so you have access to a copy even if you don’t have the program still installed and operational :

• How do I save my return as a PDF in the TurboTax software for Windows?
• How do I save my return as a PDF in the TurboTax software for Mac?

AND protect the files :

• How can I protect the tax files on my computer?

*** Other clues to the downloaded program ***

In the forms mode ... double click  or right click on a box on a form to data source it ... sadly it doesn't work on all boxes. 

What's the meaning of all the different colors in Forms Mode?

When you look at an onscreen tax form using Forms Mode, you might wonder why one figure is blue and the one next to it is red or black.

These colors indicate the source of that data.

Color	Meaning
Blue	You entered this data, either in the interview or Forms Mode.
Black	The program entered this data or calculated this amount.
Red	This data has either been overridden or is invalid (for example, a ZIP code that doesn't exist).
Red italics	You marked this amount as estimated.
Black italics	The program calculated this amount from an amount you marked as estimated.
Purple	This information has supporting details.
Aquamarine	This data was transferred over from last year.
Green	This data was imported from Quicken or QuickBooks.
Yellow fields (Windows)	Yellow fields allow user input. Anything you enter here shows up in blue.

[Anonymous_]

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@Carl wrote:

Losses on the SCH C business can not be used to offset gains on the sale of SCH E property.

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A Schedule C net loss can be used to offset any other type of income or gain.

[Mike9241]

for the property you sold, who holding the proceeds right now? 

[bobbornt]

Escrow closes tomorrow and funds are scheduled to go directly from 1st American title to 1st American Exchange office (1031). I’m not being understood on my question… 

$325,000 was used in a 1031 sale of property A and purchase of property B. An additional $125,000 of my cash was used to complete the purchase of property B.

Now to sell property B I hope to use the original 1031 money but not my $125,000 but I think I understand the IRS wants the first funds out of the sale to be taxed as the initial $325,000’s gain if not reinvested in like property. I want to move the original $325,000 into the exchange purchasing property C and keep the $125,000 back (there is no gain on the sale of property B). My first question:

If, How?

If I can not separate funds now after dumping it in when purchasing property B… then my second question is:

Will the gain associated with the $325,000 coming into the exchange be of value against my Schedule E income losses. I have no capital gain or loss on Schedule E only operational loss and depreciation over the last few years (COVID etc.)

Any thoughts would be greatly appreciated.

[bobbornt]

If I chose to exit the 1031 exchange and simply accept the $325,000 and $125,000 in cash to purchase and pay tax of old gain!