Still confused about schedule 1 rental loss, HELP!

[songcai22]

I used Turbotax home&buisness desktop version. Before filling the tax, the software says that my risk for audit is high. So I saved the tax return in PDF and looked over it.

On schedule 1, loss from rental activity -$26858 was put on Line 5. Gains from selling two rental properties $19018 were put on Line4. Loss from my first year realtor business -$3445 was put in line 3.

Then everything was combined and the final loss -$9210 was transferred to 1040 line 8. The final result is my rental property loss was used to offset my W-2 income. Is this right? I thought my rental loss is passive and should be carried over to the next year. But everything was entered following the instruction of the software.

For the question about real estate professional (spend more than 750 hours + spent more than 50%), I selected "None of the above". For each of the rentals I have, I selected "No, I'm not an active participant".

I attached screenshot of the schedule 1 and 1040. 

Should I be worried about the high risk of audit? If I entered everything correctly, will I be liable for how the software calculate and generate each forms?

Thank you in advance!!

 

[Mike9241]

first what's 20Z - normally a 1099-NEC is business income subject to self-employment tax - maybe it should flow to schedule C. no way to be sure because you provided no details.   you sold a property that frees up any suspended passive losses related to that property and these offset wages and other ordinary income. audit risk is relative. 

see this link for more info from the IRS about audit risk 2019

https://www.irs.gov/pub/irs-utl/statement-for-updated-audit-rates-ty-19.pdf

audit risk by TT may be more of a marketing tool to sell you premium features.

[songcai22]

20Z is non-employee compensation from my spouse outside of his w-2 job. He did some editing for a website. It's just a one time thing.

[songcai22]

Hi Mike, thank you for your reply!

I didn't know about "sold a property that frees up any suspended passive losses". The -$26858 loss was from year 2022 and combined from several rentals. The gains of $19018 was from two different rentals.

Does that mean I can sell property A for a gain and activate the suspended losses produced by properties B, C, and D...?

So the Turbo tax software is filling out the forms correctly? I was worried because I always though rental loss is passive and can not offset active income.

Thank you!

[HopeS]

In response to your first question it depends on the following:

As mentioned by Mike9241  you can deduct your suspended losses from total profit when you sell your rental property, as long as you meet certain IRS rules. First, when selling your rental property, you must sell “substantially all” of the rental activity. For example, if you own a single rental property and sell it, you have disposed of your entire interest and can take the full deduction. However, if you have more than one rental property, deducting your suspended losses depends on how your properties are structured.

First, when selling your rental property, you must sell “substantially all” of the rental activity. For example, if you own a single rental property and sell it, you have disposed of your entire interest and can take the full deduction.

However, if you have more than one rental property, deducting your suspended losses depends on how your properties are structured.

In response to 2nd question, In general, the passive activity rules limit your ability to offset other types of income with net passive losses. However, if you actively participate in a rental real estate activity, you can deduct up to $25,000 of your rental loss, even though it is a passive activity. During the tax interview, TurboTax will ask if you qualify as an active participant. You might want to revisit the rental section of TurboTax and make sure you indicated you were an active participant. Note that as your income increases, this exception to the passive activity rules phase out. The exception decreases as your modified adjusted gross income (MAGI) goes above $100,000 and is completely phased when your MAGI exceeds $150,000

Review the links below for more information:

Rental Real Estate

Passive Loss Carryover

@songcai22