Suspended passive losses from Rental Property A and current passive losses from Rental Property A and Passive K-1 Activity B are not being released with the sale of Rental Property C

[nomad6]

Hello,

I am new to using TurboTax, but I am trying to produce a return in the year of selling a rental real estate property for a gain. I have these current and suspended losses: 

- Rental Property A -  current losses and suspended losses

- Rental Property B (sold) - current losses and suspended losses

- Schedule K-1 - current net passive operating losses

It's my understanding from all my research that all of these losses should be unsuspended given that Rental Property B was sold at a gain in the same year. The properties are in separate Schedule E columns (they are not grouped). 

But nothing I do from Turbo Tax Mac seems to be able to release the full amount of the losses for Rental Property A or for Schedule K-1.

Can anyone help me figure out what is going on?

[Mike9241 · Accepted solution]

assuming there was a gain on disposal, passive losses from real estate would be allowed to the extent of the gain. if the k-1 is not a real estate activity, it remains subject to its PAL rules.

example

property A sold for a taxable gain of $100,000 

property A has current and suspended losses of $60,000

those are allowed in full leaving $40,000

property B has current and suspended losses of $75,000

$40,000 will be allowed and $35,000 will remain suspended (if your AGI is over $150,000 no additional special allowance for real estate activities with  active participation)

look at form 8582

yuo provided no numbers and we have no access to your return. 

[nomad6]

The K-1 is an LLC that owns a townhouse complex. I'm not sure if I'm entering the "pretend" K-1 correctly and I don't have the actual K-1 yet as this is a test for 2024 using the 2023 software, but, I know the operating losses are in Box 1 for the K-1 1065. 

 But, when I fill out a 4797 for Property C, it is not releasing the suspended losses from Property A, either. It's releasing a very tiny percentage on the 8582 form, at the bottom of the form, but both Property A and the K-1, but the vast majority of the losses for both are showing as Unallowed. Am I doing something wrong in the software? 

And, given that this would be a K-1 1065 that the sponsor told me is an "equity kicker" for a loan I'm considering making to the LLC, am I somehow entering the K-1 wrong? No matter what I do, it seems to show up as passive losses, though the sponsor tells me it should be net operating losses, and I'm not a managing member. I

It doesn't seem like it should be this confusing/complicated, but I can't seem to generate a tax return that flows such that either the suspended passive loss from Property A or the current year Box 1 losses from the K-1 are offsetting any of the capital gain from selling the real estate using 4797. 

Many thanks for any insight! I'm happy to provide an example of how I filled it out... It looks like I could attach a document or an image to this thread. Is that how people normally share it? 

Rought numbers

- 20,000 W2 income

- 250,000 from selling the investment real estate

- 150,000 from the Box 1 of K-1

- 20,000 of suspended passive losses from Property A (not sold) 

- 2,000 of current passive losses from Property A

- 15,000 of suspended passive losses from Property C (sold real estate in same year)

- 1,000 of current passive losses from Property C

- No other income 

thank you!

[Mike9241]

for the rental real estate activities is active participation checked or is material participation checked or neither?

are the rental real estate activities aggregated/grouped as 1 activity?

is  A rented to friends or relatives at below fair rental value?

active participation defined

You may be treated as actively participating if, for example, you participated in making management
decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense.
Management decisions that may count as active participation include:
• Approving new tenants,
• Deciding on rental terms,
• Approving capital or repair expenditures, and
• Other similar decisions.

material participation defined

 You materially participated for the tax year in an activity if you satisfy at least one of the following tests.
1. You participated in the activity for more than 500 hours.
2. Your participation in the activity for the tax year was substantially all of the participation in the activity of all
individuals (including individuals who didn’t own any interest in the activity) for the year.
3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as
much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
4. The activity is a significant participation activity for the tax year, and you participated in all significant
participation activities during the year for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t
materially participate under any of the material participation tests (other than this fourth test).
5. You materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not
consecutive) of the 10 immediately preceding tax years.
6. The activity is a personal service activity in which you materially participated for any 3 (whether or not
consecutive) preceding tax years.  An activity is a personal service activity if it involves the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial
science, performing arts, consulting, or in any other trade or business in which capital isn’t a material
income-producing factor.
7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and
substantial basis during the tax year. You didn’t materially participate in the activity under this seventh test, however, if you participated in the activity for 100 hours or less during the tax year. Your participation in managing the activity doesn’t count in determining whether you materially participated under this test if:
a. Any person (except you) received compensation for performing services in the management of the activity, or
b. Any individual spent more hours during the tax year performing services in the management of the activity
than you did (regardless of whether the individual was compensated for the management services)

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for the k-1 what boxes did you check for the following:

1) what type of partner?

2) for the loss on line 1 what type of activity?

3) is material participation unchecked?  (see above for definition) 

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finally, for the 8582 tell us the amounts showing up and the related line number. round to thousands. indicate loss with a minus sign.

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