1231 Losses

[ElMendo]

For Tax Year 2023, I am a limited partner in Partnership A whose only asset is a limited partnership interest in Partnership B.  Partnership B has/had only two activities...a vacant lot and a large commercial development project.   Partnership B could no longer fund the cash needs of the development project and sold it to the project lender at a loss in 2023.  The purchase price was the outstanding loan balance.   My K-1 for 2023 from Partnership A includes a 1231 loss on line 10 of 120,000.  My tax advisor assures me that the 1231 loss can be recognized in 2023 and is not a passive loss because the activity was disposed of by Partnership B.  Turbotax Premier has no provision to recognize this loss currently and carries it over to future periods. 

   An instruction box for Form 8582 (Passice Activity Loss Limitations) indicates:   "Schedule E Rental Real Estate Property without Active Participation:
If the Schedule E has all of the following conditions: (1) The Property Type is other than "6 Royalties" (2) The "Active Participation" box is not checked (3) The "Other Passive Exceptions" box is not checked and (4) If there is a current year gain and the Property Type is not "5 Land" or "7 Self-Rental".  

I can not find the "Other Passive Exceptions " box.  Does it exist and if so where?  Will this allow me to recognize my 1231 loss in the 2023 tax year?  If not, is there another way to enter this transaction on TurboTax and recognoze the loss in 2023?  (I have seen other threads that indicate that TurboTax can not handle the transaction properly.  Find it hard to believe because lesser tax software such as TaxSlayer handles this simply beacause the asset was sold.)

[Mike9241]

use a second k-1 for the 1231 loss and any other lines on the k-1 that relate to this activity. indicate complete disposition. This would not be proper if an aggregation election was in effect. 

[ElMendo]

Good thought and I think I have enough info to provide the numbers.  However, Turbotax only provides the option to dispose of a partnership interest rather than a partnership activity.  Does  that distinction matter to the IRS?

[ElMendo]

I triesd your suggestion.  I disposed of the entire partnership covered by the k-1.  It did not work.  No 4797 was generated and the 1231 loss was not recognized currenty, but carried forward.  I then reversed the disposal and checked the boxes to be a real estate professional and the results were correct.....1231 loss was recognized currently as ordinary loss.  Overrode the Schedule E entry re: real estate professionals.  It would require that I paper file but that does matter to me.  Does this make sense?   

[JotikaT2]

Paper filing gets your returned filed, but it just takes longer to process than an electronically filed return.  As long as you file your return by the extended due date, there should not be an issue.  Please see this link for guidance on printing your return for filing.

[Mike9241]

unless the partnership activities are being aggregated (treated as one activity) the loss on disposition should be allowed.  This should be the same treatment as if a taxpayer directly owned multiple rental properties and did not aggregate them. on complete disposition in a fully taxable transaction of any of them losses should be allowed and actually not treated as passive. 

however, Turbotax does not have a good way of handling this at the partnership level except to use a second    k-1 and then you have to answer certain questions in a certain way to have the loss allowed

1) partnership was ended in 2023 = check the box. yes. I know it's not absolutely correct since it seems partnership B continued with the other property, but the IRS does not see this answer.

2) complete disposition - check the box

3)sold partnership interest - check the box. this is also not absolutely correct but the iRS does not see your answer

4) enter dates you can use 12/31/2023 if you don't know date of sale of the property

5) for sales information all boxes should be entered as zero

[ElMendo]

Mike2491-

I split the K-1 into two pieces and followed the procedure that you laid out to enter the transaction into TurboTax,   It worked perfectly.   The 1231 loss did not show up on Form 8582 or Schedule E, but did appear on the now generated  Form 4797.  The 1231 loss now flows thru to reduce 2023 taxable income.  Thank you so much for your help and follow thru on this.