Unused depreciation from previous years not being used to offset new positive passive income in 2021

[tbolduc1]

I put a residential rental property into service in 2019 and claimed a ~$37K special deduction for interior upgrades.  With the annual depreciation alone, this property produces a small passive loss.  In 2019, 2020, & 2021 I also received passive income from a K-1 real estate investment.  The rental loss offset the gains for a net $0 taxable amount.  However, in 2019 and 2020 I had lots of unused depreciation to carry forward. 

In 2021, the passive gain in the K-1 investment exceeded the passive loss realized in 2021 so I had expected turbotax to use the carried depreciation from the previous years to net this to zero.  TT-Premier did NOT do this and instead I now show a modest taxable passive gain.

Both the rental property and the special deduction were entered as formal assets in 2019 TT-Premier and those assets are automatically being carried over into 2020 and 2021.  Why is unused depreciation from the previous years not being used to offset passive income realized in 2021?  What is the recommended workaround?

FWIW, I've used the TT-Premier desktop edition for all three years in question and my MAGI is >$150K so I'm not talking about offsets to active income.  I'd just like my passive holdings to continue to net out to a $0 amount for 2021 and beyond which they should given that I haven't used a penny of the one time "special depreciation" amount from 2019.

[Mike9241]

we can't see your return 

the unused losses from 2019 and 2020 are not depreciation per se. you for each property you end up with a net passive loss or profit. they are netted and if a net loss some or all may be allowed if your adjusted gross income is less than $150,000. any unallowed loss is carried forward but it is not identified as depreciation just as a passive loss which shows up on form 8582.  so look to form 8582 to see what's reported.

In 2021, the passive gain in the K-1 investment exceeded the passive loss realized in 2021 so I had expected turbotax to use the carried depreciation from the previous years to net this to zero.  not quite right it would be the passive loss carryforwards that would be used to net to zero.

again look at form 8582 to see what's being reported.

if the K-1 is  from a publicly traded partnership (Part 1 box D would be checked) that passive gain can't be used to offset the passive losses from your personal rental activities and won't even show up on form 8582

[tbolduc]

Interesting...  Form 8582 looks correct to me.  Unused losses on line 1d offset passive gains on line 2d!  Great, but here's where I'm still confused.  TT's QBI Deduction Summary is showing net positive income (for rental loss + K1 gain) instead of $0.  This net positive QBI is being carried to line 13 of my 1040.  Should I be able to claim a non-zero QBI when 8582 says my allowed losses on line 11 exactly match my passive gains?

BTW, I have now signed in from within TT, so perhaps you can see my return now?

[ThomasM125]

A QBI loss may be allowed against other QBI income on your return even if it is greater than the passive losses allowed against ordinary income. So, it is possible that you don't have a QBI loss carryover from the previous year even though you have a passive loss carryover. That would explain why you may have QBI income but no net rental income in the current year, as income for QBI purposes might not be limited due to prior year passive loss carryovers.

No one but you can look at your return for security reasons.

[tbolduc]

When using TT 2021, I answered "no" the the QBI safe harbor question.  The next screen asks "Is this Qualified business Income?".  I answered "Yes" after reading the content at the hyperlink in that page which includes "There is one instance where this type of activity is definitely a trade or business. Rents or royalties that are paid to a trade or business that is also at least 50% owned by the same person (or people) who owns the property generating the rents or royalties are automatically defined as a trade or business."  Since I am a 100% owner of this property, I interpreted this to mean that I should answer "Yes" to the QBI question even though this is a passive activity for me demanding less than 250 hrs per year.  Note that this is property is not held in an LLC or other structure - the rent is paid directly to me.

Before we delve any further into the QBI question from my past post, please confirm that I am interpreting the quoted passage correctly.

Also, good to know that you don't have direct access to returns.  I was surprised by Mike9241 's response which began "we can't see your return" which I thought was an odd thing to state unless you were inviting me to somehow share access to my return for assistance in addressing the question.  I obviously misinterpreted his meaning which I guess was just a statement of the obvious.  🙂

[ThomasM125]

Based on your description, it seems the rental income would qualify for QBI treatment. You don't have to qualify for the safe harbor to treat the income as QBI, it is just an option that gives better protection in case of an audit.

@tbolduc

[tbolduc]

Thanks for the answer on eligibility to claim QBI.  So back to the original issue.

 Form 8582 is correctly showing that unused depreciation is offsetting the other passive gains this year making my net taxable passive income $0.  Yet, TTP is ALSO asking me if I want to categorize the rental property as QBI eligible.  So here's what's confusing me.  If I tell TTP to NOT treat the rental property as QBI, my tax liability DROPS!  The QBI deduction summary uses all of the passive gains from the K1 investment giving a larger QBI exemption amount, but ALSO ends up lowering my total federal tax bill.  This election seems to have no impact on state obligations.  In both cases, my AGI and standard deduction remain unchanged - however the exemption amount INCREASES if I select "no" to the QBI question for the property.    

Is this a bug?  How can selecting "no" to the QBI treatment question possibly lower my tax obligations? 

[ThomasM125]

I believe you may have a loss on the rental property in 2021. If so, when you treat it as QBI property, it reduces your QBI by the amount of the loss, thus reducing your QBI deduction which increases your taxable income.

[tbolduc]

Thanks and I understand that aspect of the QBI calculation. What concerns me is that TTP is including Form 8582 where it is allocating unused depreciation to offset the positive passive income from the K1. So I'm not paying any federal tax on the passive income! BUT, TTP is still calculating a positive QBI exemption for the same positive passive income. Is this sort of "double dipping" allowed? If I don't owe any fed taxes on that income due to offsetting depreciation, then is TTP calculating the QBI correctly for the K1 income or should this be $0?

[tbolduc]

Can someone shed some light on this for me - should TTP be providing a QBI exemption on passive income which has been fully negated by unused depreciation on form 8582?

[AmyC]

See QBI FAQ. A rental is generally QBI. The negative QBI builds up to take out positive QBI. See Rental QBI FAQs.