Special allowance of rental properties $25000 is more than my income, creating negative AGI.How can i elect to allow using just enough passive loss to offset the AGI to 0

[yc0716]

Hi all, i am qualified for the special allowance of rental properties $25000 as i am a active participant to my rentals.  On form 8582, it's showing i can allowed $25000 of passive loss to offset ordinary income.  But my ordinary income is only $3k, so it's creating a negative AGI of $21K.  Negative AGI doesnt have the loss carry forwad benefit.  How can i elect to allow using just enough passive loss to offset the AGI to 0?  The system seems to default it to $25000 only and i cant override the amount.

Does that mean I am losing the $22K loss that exceeded my ordinary income, that it was used for no benefit??  This is on my 2016 fed return, do i need to amend it?  Or is the IRS smart enough to know I shouldnt need to use all $25K special allowance but $3k, so I still have $22k passive loss unallowed to carry forward to next year?

[TaxGuyBill]

The entire $25,000 is allowed, and you can't choose to take a smaller amount.

You will then have negative income on your tax return.  That is called a "Net Operating Loss" (NOL), which is a separate carry-forward.  TurboTax should notify you of that, and give you an option to "waive the carryback" and carry it to next year.

Other options to "waiving the carryback" would be to amend your 2015 (and possibly your 2016) tax returns to use the NOL.  You could also use Form 1045 to use it on this year's tax return, but TurboTax does NOT support that form

From what I understand, TurboTax also does NOT calculate the actual amount of the NOL that can be carried forward (or back).  You would need to manually calculate that, or you may want to go to a tax professional.

https://www.irs.gov/pub/irs-pdf/p536.pdf

[yc0716]

@TaxGuyBill  i did some research online, negative AGI is not the same as NOL? negaitve AGI just means no tax due for that year but i dont get the benefit of carrying the loss back or forward to other tax years.
 Are you sure about this NOL? how many years can the NOL be carry back and forward?  Does it expire?


From the PDF, it looks like the NOL can be carry forward for the next 20 years.  Where is the '"waive the carryback" from Turbotax - cannot find it??  thank you so much.

[TaxGuyBill]

A NOL means you have a business or rental loss that results in negative income (Line 41 of your Form 1040).

Yes, I am sure about the NOL.  For 2017 tax returns, it can be carried back for two years, and/or it can be carried to the next year (up to 20 years forward (for future readers, starting in 2018, NOLs can usually no longer be carried back).

As for where in TurboTax, I have no idea.  Have you gone through the entire interview?  It should be near the end (it won't know you have negative income until after you have gone through all income and deductions).

[yc0716]

Since i do not want to deal with the NOL and lost the passive loss, and that i have enough from standard deduction to bring the AGI to 0 without using the 25000 special allowance, i think my option is to amend the return and remove the active participation status.  is this amendment ok?  I do qualify for active participant, but i dont want the special allowance, is there any way to opt out? if not, is it ok if i amend the return to remove the active partcipant status?

also, if i need to amend 2016 return, can i file 2017 return using the correct figures that i know of as if the 2016 return is amended first, get 2017 file first, then amend 2016?  or do i have to amend 2016 first, have that sorted out and accepted by IRS, before i can file 2017?    for mortgage reason, i am asked to file my 2017 return right away, thats why the urgency.  thanks!

[TaxGuyBill]

NO, you can't "opt out" or lie on your tax return because you don't want it.

Is this on your 2016 tax return?  If so, it is too late to "waive the carryback".  The ONLY way to use the NOL is to amend your 2014 tax return to use it.  In the event the NOL is not used up in 2014, it would carry to 2015, then 2017.  However, I suspect that the NOL will probably be used up in 2014 or 2015, in which case it won't affect your 2017 tax return at all.

[yc0716]

@TaxGuyBill  why is it too late to "waive the carryback"?  do i need to submit whether i want to waive the 1st year there is an NOL to use?  so now my only option is to amend 2014, and 2015 return, then 2017?  

so do i need to amend the historical years return first, before i can file the 2017 return with the right numbers even i know what are the right numbers to put now?

The entire $25,000 is allowed, and you can't choose to take a smaller amount. - is this by an IRS rule that we either allowed the whole $25k or nothing?  or a turbo tax system thing?  

Thanks!

[TaxGuyBill]

It is a Tax Law thing that you must take the entire $25,000 if you are able to.

It is an Tax Law thing (or possibly an IRS thing) that it is too late to "waive the carryback" on a 2016 tax return.

Yes, you need to amend 2014 to use the NOL.

If you do the calculations and you are sure that the NOL will NOT be used up by amending your 2014 and 2015 tax return, yes, you can file your original 2017 tax return with the proper NOL.  However, it is possible the IRS won't fully process it because they see an unexplained NOL.  As long as you need to go through the calcuations to determine what the NOL is, you might as well file the 2016, amended 2014, and amended 2015 tax returns.  However, as I said before, if the NOL will be fully used on your your 2014 and/or 2015 tax return (do they have at least $25,000 of income?), the NOL does not affect your 2017 tax return, and you will be fine with filing your 2017 tax return.

Considering your large number of questions and the fact that TurboTax does not calculate the NOLs, you may consider going to a tax professional.

[yc0716]

@TaxGuyBill  at this point i need to rely on me and turbotax and this community... too late to go to the tax professional now.    The negative AGI is the beginning NOL, and the work for me is to merely calculate how much of that I can offset to 2014, and the remaining NOL balance to offset 2015 or future years is what turbotax cant track, correct?  thats easy i can do that calc myself.  

[eduardo2]

Since I will not have any taxable income in 2018, I have been trying to do some advance planning and research this circumstance ... since I too will have no use for the Special Allowance deduction on a prior year rental property loss carry forward.  I have yet to explore further for other ramifications, but it appears the "Special Allowance" cannot be taken if you are married and file separately.  This seems like a terribly absurd path to pursue for the sole purpose of avoiding an expense deduction, but it may be a viable and better path than forcing the deduction in low tax years.  In addition, or as an alternative, I am also looking at doing an IRA to Roth Conversion to offset the tax losses.  (When I can use it, I can't.  When I don't want it, it seems to be forced upon you.)  I would be very interested in any other follow-on suggestions and/or thoughts.  Thanks.