K-1 passive losses not deducted from K-1 capital gain

[Goodwins1]

The partnership sold its primary investment, resulting in a capital gain, but the partnership did not end. The significant passive losses were not deducted against the capital gain. The tax professional I spoke to said that Turbotax Home & Business was incorrectly not allowing the deduction, resulting in large amount of tax owed. How do I fix this, so I can file an amended return that actually deducts the passive losses (including past passive losses) against the capital gain?

[tagteam · Accepted solution]

Your tax professional may be in possession of facts of which you did not state in your question.

Generally, however, passive losses are disallowed to the extent those losses exceed passive income.

See https://www.irs.gov/taxtopics/tc425

[Critter-3]

If your partnership has capital gains and passive losses they do NOT negate each other ... they are different ... passive losses can only negate passive income not capital gains. 

[Anonymous]

bad mistake. should have consulted a pro when you were about to sell the property to see if the partnership needed to be liquidated in order for you not to encounter the problem of having passive losses and a capital gain that is not passive.  thus you end up with a situation where you get taxed on the gain but those losses will remain suspended until the partnership folds.   of course there could be facts you have not revealed that could change what I have said.   why wasn't the partnership liquidated?  at the end of the year what was left in the partnership?  maybe you pro is looking at info we don't have and is taking the view that for practical purposes the partnership was liquidated.  (could be different if for an LLC because the state law may require the filing of dissolution paperwork). if it's his opinion that the partnership was liquidated, let him prepare the amended returns a final return for the partnership and amended returns for the partners. 

[Goodwins1]

Tax pro says that liquidation isn't required for passive losses to be deducted against capital gain. Says that Turbotax is calculating it incorrectly. I checked with another independent tax pro (had to pay him of course) and he verified that partnership sale/liquidation was not necessary to deduct passive losses against capital gains. I am inclined to believe them and am looking for how to change my return through Turbotax to reflect it.

[Goodwins1]

By the way, the partnership is more of a holding company for businesses, not property. The business that was sold made up the vast majority of the partnership but not all of it.

[Goodwins1]

Answers to your question:

Partnership was not liquidated because one small business within it was still being operated.

[Goodwins1]

I'm sorry I didn't explain the situation better. The capital gain is a result of the disposition of a business within the partnership. The passive losses, including past passive losses carried forward, are only those attributed to the business that was disposed of through a sale. The tax pro I consulted said that these passive losses are deductible against the specific capital gain of the sold business.  

[tagteam]

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@Goodwins1 wrote:

I checked with another independent tax pro (had to pay him of course) and he verified that partnership sale/liquidation was not necessary to deduct passive losses against capital gains.

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You might want to ask the tax pro exactly how the return should be prepared (e.g., where on the return (which form(s)) would be used to report the passive loss). 

Typically, excess suspended passive losses are not released until there is a complete disposition in a fully taxable transaction to a unrelated third party.

[Goodwins1]

Thanks. I'll check back with him. He explained that his "professional" version of Turbotax offered different capital gains options, one of which was disposition of a business within a partnership. He explained that "his" Turbotax would then allow past passive losses related to that business to be deducted. I wasn't looking forward to paying him the $1600 he wanted to file my amended return, so was hoping TurboTax home and business offered a similar option. Do you think he may be misinformed?

[Critter-3]

There is NO professional version of TurboTax ... he must be using one of the INTUIT professional programs.  And if he wants $1600 to amend a return then you need to find a better option. 

[Goodwins1]

Thanks for the clarification. I'm currently looking for a better option.