Capital Loss from Passive Activity in Real Estate
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clifmack
Returning Member

Capital Loss from Passive Activity in Real Estate

I was a partner in a partnership that owned real estate and leased a substantial portion of the real estate to a business that I was a shareholder of. I changed jobs in 2020 and sold my partnership interest in the real estate partnership back to the partnership at cost. I held the interest for more than a year.

 

Notwithstanding the sale of my partnership interest at cost, I believe the basis of my partnership interests at the time of disposition will be substantially higher than the sale price (haven't got the K-1 yet). Upon information and belief, this is due to significant principal payments on debt, which resulted in a lot of phantom income, which substantially exceeded cash distributions and depreciation (when I bought into the partnership, the property had been depreciating the same asset since the 90s, so there wasn't much depreciation to go around). Given the above, I believe I there will be a significant capital loss from a tax perspective.

 

I'm having a hard time understanding how I can utilize the capital loss from this passive real estate activity (I was on the committee that managed the real estate but I don't think that's sufficient to establish "material participation").

 

If it is a capital loss, can it be used to offset ordinary income? If not, can it be used to offset capital gains from a non-passive activity (like selling stocks)? Is there a limitation on how much I can use in a given year?

 

Any guidance would be appreciated, I'm having trouble finding answers. And apologies if any of my assumptions above are incorrect - partnership tax can be a real mystery.

3 Replies
Mike9241
Level 6

Capital Loss from Passive Activity in Real Estate

here's a link to a worksheet to compute your partnership tax basis.

https://tax.thomsonreuters.com/content/dam/ewp-m/documents/tax/en/pdf/other/quickfinder-updates/qpep... 

 

i would say the result (tax basis) you should end up with is

cash + tax basis of other property you put into it

plus or minus the net income or loss for all years ( all items on the K-1's that affect your tax basis - this would include non deductible expenses) 

less any cash + FMV of property distributed to you.   

 

you got paid X for your interest so you have a capital gain or loss. if a loss it can be used to offset capital gains from other sources such as stock sales.  in any year you can take a maximum of $3,000 as a net capital loss against other income. if the net capital losses for a year exceed that it can be carried forward.  

clifmack
Returning Member

Capital Loss from Passive Activity in Real Estate

Thank you very much for your response. And of course now I have a follow-up question.


My understanding is that this capital loss should be capable of being applied towards other capital gains in the same year, notwithstanding it being a capital loss from a passive activity. However, Turbo Tax is designating the loss as an "unallowed loss" from a passive activity. I don't think that's correct but I can't figure out where it's going wrong.


Any guidance? 

clifmack
Returning Member

Capital Loss from Passive Activity in Real Estate

Sorry - I just realized what was happening. I'll note it for anyone who runs into the same issue.

 

When recording info from my K-1, on one slide I was asked a variety of questions, one of which was something to the effect of "Did you dispose of a portion of a partnership interest?" To which I replied in the affirmative. However, I believe this question is meant to be taken literally - i.e. did you sell a fraction of your partnership interest.

 

There was another option which was something to the effect of "Did the partnership terminate?" I'm not sure that is technically correct anymore - a partner leaving a partnership no longer causes a technical termination. But for MY purposes, I disposed of my entire partnership interest and so I am no longer in the partnership. When I selected this option, it started asking me appropriate questions about the sale, confirming it was for my entire interest, etc. Once I took that route, the capital loss was properly applied against existing gains as I expected it to.

 

Thanks!

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