Section 743(b) Allowed as Non-Passive Deduction?

[VVBB]

Hi All,

Are there any limitations on marking section 743(b) negative adjustments as nonpassive? It is a negative deduction so would lower my taxes. The partnership did this specifically to offset capital gains with this deduction. However, Turbotax marks it as a passive deduction. I can mark it as non passive but not sure if the IRS allows for this. Your help would be much appreciated. Thanks!

[Anonymous_]

@Mike9241 ?

[Mike9241]

I assume the gain is section 1231 appearing on line 10.

is this a real estate venture then the 743(b) adjustment because of the nature of the activity will be passive

if this is another type of business venture (probably there should be a gain or loss on line 1 of part III) then do you materially participate? if so that box "materially participates" needs to be checked otherwise the 1231 gain is passive because you are a passive investor 

if the gain is on lines 8 or 9 - these are nonpassive regardless of anything else  

check to see if the gain is flowing to form 4797 Part 1 which then flows to schedule D

check to see if the 743(b) adjustment flows to schedule e page 2

[VVBB]

It appears in line 13 Other Deductions and is coded as "V"

This is a private equity fund and I am a limited partner. I used to work for the fund but not during this tax year. I did not materially participate so I assume this would be passive...however when I spoke with the fund accountant he indicated that they did the 743(b) negative adjustment in order to offset the capital gains in the fund. He suggested that I mark both of them passive or non-passive so they can offset as the fund had intended.

The issue is that when I add the cap gains they are auto marked as non passive. When I add the 743(b) adjustment it is auto marked as passive and suspended/disallowed. On Schedule E, line 28 it adds the deduction in column (g) but then also adds the exact same amount in column (h) as income. The resulting figure in line 32 is then zero. 

If I enter the K1 line 13 deduction as W Other and and them mark it as non passive, it uses the deduction against the cap gains and works properly, but I am not sure if the IRS allows this.

Thanks so much for your help. This is confusing stuff.

[Mike9241]

maybe you misunderstand what that person meant.

the capital gain remains capital gain and flows to schedule D. the 743(b) is ordinary and flows to Schedule E. thus the two do net but not a net of zero on either form.

[Rick19744]

Part of the reason this is confusing is that we don't have all the facts:

• Can you confirm that this is not a final K-1 and that you will continue to receive K-1's from this fund in the future
• Your wording "Section 743(b) negative adjustment" is confusing.  
  • A Section 743(b) adjustment reported on line 13 is a deduction against the income from the operations
  • Your terminology seems to imply that this amount is income; negative adjustment on line 13 implies to me that this is a negative amount on line 13 instead of a positive amount.  Line 13 should be a positive amount as these are deductions.
• The purpose of the Section 743 adjustment is to adjust for "gain" that you paid for when you became a limited partner.  This adjustment should continue over the length of time based on the assets it was associated with.  This won't necessarily apply to the capital gain that is passing through at this point in time.  This will apply to the overall gain / loss over the life of the fund.
• Do you have amounts in boxes 1,2 or 3?
• Make sure you are maintaining a tax basis schedule as you will need this and the sooner you begin maintaining this the better.