Schedule E Box 43 Not Allowing Full Loss for Real Estate Professional & Further issues w Form 8582

[KMJK]

Hello,

I qualify for the Real Estate Prof Status - been receiving it the last few years. I've checked the needed boxes for that. I have selected the options for Material Participation. Active Participation has been selected for my husband.

From Forms View - Schedule E  - Box 43 has my loss at $6k, when it should be $17k. The rest of the form seems to be calculating correctly. The $17k loss shows on form 1040. I saw another post that I think hinted at this issue also, logged last year. What can be done to update box 43? A manual override does not work. It errors.

Form 8582 is "holding" most of my loss in line 2 (passive Activities) even though that loss should be reported on line 1 for Activities for Active Participation. The loss is stemming from issues I'm having in Part IV,

If I buy the "Live Tax Advice" for $60 is there a way to make sure that I get someone on the phone that is familiar with these forms enough to help?

I used a similar service that Turbo Tax had a number of years ago and did not have a very good experience - support person could not help me. In this case I would like to be able to share my screen and show exactly what is happening.

Please Advise.

Thanks

[maglib]

@KMJK 

The $25,000 maximum amount that can be deducted from nonpassive income is reduced by 50% of the amount by which the taxpayer’s modified adjusted gross income (AGI) exceeds $100,000 (Sec. 469(i)(3)(A)). Therefore, the $25,000 amount is totally phased out when the taxpayer’s modified AGI reaches $150,000. Modified AGI is AGI calculated without considering: 

• Individual retirement account deductions; 
• Interest deductions on higher education loans; 
• Taxable Social Security benefits; 
• Any passive losses allowed under the exception for real estate professionals; 
• The Sec. 250 deductions for foreign-derived intangible income and global intangible low-taxed income; and 
• Any overall loss from a publicly traded partnership.

Also added back to income is: 

• The Sec. 164(f) deduction for one-half of self-employment tax; 
• Income excluded for U.S. savings bond interest used for higher education expenses; 
• Any tax-free Olympic and Paralympic medals and prize money (determined without regard to the Sec. 74(d)(2)(A) $1 million AGI threshold); and 
• Amounts received from employer-provided adoption-assistance programs (Sec. 469(i)(3)(E) and Publication 925, Passive Activity and At-Risk Rules). 

For the phaseout, special rules apply for married taxpayers who are filing separately (Sec. 469(i)(5)). 

Strategies to maximize the $25,000 rental real estate loss allowance: Because the $25,000 loss allowance begins being phased out when modified AGI exceeds $100,000 and is completely phased out when modified AGI exceeds $150,000, tax-payers with income within or around this range can maximize the allowance with careful tax planning. Because the phaseout is AGI-sensitive, only strategies that increase either above-the-line deductions or shift income from one year to another will affect the deduction. 

To properly plan for the allowance, the following must be done before year end: (1) analyze the taxpayer’s active rental real estate activities and projected income and losses; and (2) estimate the taxpayer’s AGI. Strategies that reduce AGI may help increase the allowable deduction when taxpayers are subject to the phaseout. Deductible contributions to Keogh and simplified employee pension (SEP) retirement plans may help self-employed taxpayers reduce their AGI. Investing in tax-exempt securities or investments that defer income to later years (e.g., short-term certificates of deposit and Treasury bills) will reduce AGI. Similarly, self-employed taxpayers (using the cash method) can shift income from one year to another by timing when they bill and collect revenue. 

If you believe you still qualify, to take the loss as I can't see your return, you should go back through the rental interview and ensure you answered the questions that are relavent.

All the best.

[Mike9241]

for married couples filing a joint return, the spouses' activities can be combined to determine whether they materially participate in their rental real estate activities. thus if you materially participate so does your husband.

however, to be a REP, that spouse must separately satisfy both the more-than-50% of personal services and the more-than-750 hours tests.   (IRC Sec 469(c)(7)(B)

see what changing your spouse from active to material participation does. 

[KMJK]

@maglib 

Thanks for the response.

Real Estate Professionals are not bound to that $25,000 loss. They can avoid the passive activity loss limitations, from my understanding and based on my previous returns while qualifying for that deduction. 

[KMJK]

@Mike9241 

Hi, yep, I have tried changing him to Material Participation, but it makes more of a mess actually. With him as Active it behaves as I would expect (for his portion).

I really think there is something not correct with the logic of box 43. As mentioned, there was someone last year posting something similar. That's why I would like to get someone from Turbo Tax to actually look at what I am referring to. I've spent way too long trying to figure this out :(

[maglib]

@KMJK  The individual must still materially participate in EACH rental real estate activity for it to be nonpassive. Under Sec. 469(c)(7), however, an individual can elect to aggregate all rental real estate activities and consider all such activities as one activity for purposes of determining material participation. The election is advantageous when an individual is involved in multiple rental activities and the taxpayer would have difficulty meeting any of the material-participation tests for each activity separately. Taxpayers should give careful consideration before making the election, however, as it is irrevocable.

DId you have more than 1 property?  Did you aggregate them as a business unit?  You must select you materially participate in each activity.

https://www.journalofaccountancy.com/issues/2023/sep/passive-loss-limitations-on-rental-real-estate....

[KMJK]

@maglib 

Yep, I've been thru all of that and understand it. Have multiple rentals. All that is in place. I've had a CPA the last few years doing the taxes. 

I took them on this year though with Turbo Tax and I'm finding there seems to be some limitations with the software, I do believe.....

[maglib]

I have multiple properties and it has worked for me.  Do note that many get audited claiming each property if not combined as a business. If you have another job, it is near impossible to meet their material participation rules.  Another note, that a realtor or property manager automatically qualifies and why many active owners get their license...

[KMJK]

@maglib 

No other job......I'm the property manager, yard boy, contractor organizer, etc.......all rolled up into one. LOL

Appreciate your feedback and trying to help. 🙂

[maglib]

Do you own 100%, If not, do you allocate on your own your share? I always input my % directly as often allowing TT to do it may cause unwanted allocations. Examples my mileage is mine, so are many costs not shared. The allocation may interfere with participation questions too as: The individual participates in the activity for more than 100 hours during the tax year, and their participation in the activity for the year is not less than the participation in the activity of any other individual (including those who are not owners) for that year.
So simply put 100% and I write in the description 50% ownership....

[KMJK]

I know what question you are referring to "participation in the activity for the year is not less than the participation in the activity of any other individual", I just can not find it right now. I know I answered yes to it though. I'll need to find it tomorrow again.

Its our partnership - LLC's that are causing this issue for me. We are 50-50 partners - my husband and I. I did enter that 50-50 where it asked the percentages in the personal return. The box says its not mandatory and wont affect anything, but maybe I should remove what I entered to see if that matters. I don't think it will, but I'm game to try. I will try that tomorrow too. thx

The rentals outside of the LLC are not having any issues. It's these K-1s and the values stemming from that that are the problem. :(

[maglib]

@KMJK K-1 losses have layers of limitations.  

You must have a basis in the partnership; you must be at-risk in the business, and you must be an active participant in the business to have your K-1 losses offset other income on your tax return.  

The basis limitation is a limitation on the amount of losses and deductions that a partner of a partnership can deduct. The basis limits are the first of three limitations that are applied to Schedule K-1 losses and deductions. After the basis limits are applied, the At-Risk limits on Form 6198 are applied.  If losses are allowed by the basis and at-risk limits, the Passive limits Form 8582are applied, if applicable.  All of these questions can be answered during the K-1 entry process.   

[Mike9241]

The use of the plural in Reg § 1.469-9(c)(4) indicates that both spouses on a joint return are considered qualifying taxpayers if one spouse separately satisfies both requirements of RE pro. thus on you spouse data worksheet you must indicate that he to is a REP. 

IRC 469(c)(7)(B) REP defined

B)Taxpayers to whom paragraph applies
This paragraph shall apply to a taxpayer for a taxable year if—
(i)more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and
(ii)such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.
In the case of a joint return, the requirements of the preceding sentence are satisfied if and only if either spouse separately satisfies such requirements. For purposes of the preceding sentence, activities in which a spouse materially participates shall be determined under subsection (h).

reg 1.469-9(c)(4)

(4) Treatment of spouses. Spouses filing a joint return are qualifying taxpayers only if one spouse separately satisfies both requirements of section 469(c)(7)(B). In determining the real property trades or businesses in which a married taxpayer materially participates (but not for any other purpose under this paragraph (c)), work performed by the taxpayer's spouse in a trade or business is treated as work performed by the taxpayer under § 1.469-5T(f)(3), regardless of whether the spouses file a joint return for the year.

[KMJK]

Thanks @Mike9241 

The reason I was limiting my husband to Active participation was based on how our CPA has prepared our taxes the last few years. He only gave him Active participation. I did see in the "info links" to those questions in Turbo Tax that spouses could qualify if the other spouse met the criteria, etc just as you mention above. Changing his status still doesn't solve the issue I am seeing, though it does help the bottom line of how much is owed/returned. That's for sure.  Gonna sit down now and do some further troubleshooting.