Capital losses from sale of property owned by partnership

[qofmiwok]

In 2020 we sold a building at a loss.  We didn't get a credit for the capital losses because they were passive and we needed passive capital gains to offset them.  In 2021 they got carried forward.  Now I'm starting 2022 taxes and we still have no passive capital gains, so I was assuming they would carry forward to 2023.  But TT is using some of those losses against ordinary passive income.  I'm assuming some box on the K1 is checked wrong somewhere.  Where should I look?

Thanks 

[tagteam]

Was this a rental owned by the partnership?

Typically, losses from the complete disposition can be recognized (assuming there was a fully taxable sale to an unrelated third party). Was that reflected on your K-1?

I will page @Rick19744 for input.

[Carl]

I note it being assumed the building as rental real estate. If it was not, then let it be known please. Otherwise, the information provided will probably be wrong.

[tagteam]

---

@Carl wrote:

I note it being assumed the building as rental real estate.

---

Nothing is being assumed. Hence the initial question as to whether the property sold was a rental.

[qofmiwok]

Yes, the property sold was a commercial building.  The partnership owned 3 commercial buildings and now owns 2. 

[NCperson]

@qofmiwok - I wouldn't overlook the possibility that the software has a bug; it's still early and many forms are not 'final'.

[tagteam]

@qofmiwok 

I am more concerned with your 2020 K-1 (1065) and how your share of the loss was reported.

For example, if the partnership sold a commercial (nonresidential) building that was being rented to a third party, your share of the loss should likely have been passed through to you on your K-1 (specifically, on Line 10).

[qofmiwok]

The losses were reported on the K1's, and the K1 worksheets in TT are doing the calculations about which ones are allowed and which ones continue to carry forward.

Note this is the answer I got in October 2021 when I was using TT to estimate taxes thinking I was selling selling the house that year.  I was surprised the losses from selling that property weren't offsetting the gains from selling my house.  I was asked if I or the entity owned the property.  I answered: 

It's a passthrough entity (partnership) and the entity has sold the property.  Are you saying the losses must be carried until the entity is dissolved or has a capital gain?
And was told:  "Yes. that is the law. until your interest in that partnership is terminated (either by selling your interest or the partnership terminated)  or there is a passive capital gain (1231 gain) or even ordinary passive income the 1231 loss remains suspended. if you actively participate, a lower standard than material participation, then up to $25,000 of losses would be allowed if your modified adjusted gross income is less than $150,000. see form 8582."

  
So what seems to be happening now is the passive 1231 loss is being used against ordinary passive income, so maybe that's what it's supposed to do?

[tagteam]

@qofmiwok 

This is somewhat confusing. You should have been able to recognize the 2020 loss and, as a result, I was wondering how the transaction was reported on your 2020 K-1.

If you have your 2020 K-1 available, look at which lines are populated and post them here (or at least hypothetical numbers). 

[Rick19744]

There are a number of things going on here:

• As stated by @tagteam we don't have visibility to your K-1's and returns to see how everything is being reported and exactly what is being reflected on the K-1's.  This is key in being able to determine what can be used and when.
• We also don't know how you responded to questions regarding activity level, as this impacts the utilization of passive losses.
• I think your question in October 2021 is addressing your question, as it indicated that if you have ordinary passive income, this will be used to offset some of the Section 1231 losses carried over.
• Since we don't have access to all the facts, it may be in your best interest to meet with a tax professional and provide this individual with all your past returns, explain the situation and make sure you have filed correctly in the past, which would allow you to file an accurate return going forward.

[Critter-3]

HELLO EVERYONE ... SINCE THE 2022 PROGRAM IS STILL NOT FULLY FUNCTIONAL MUCH OF THE PROGRAM WILL NOT BE SHOWING THE CORRECT PRIOR YEAR INFORMATION.

What you need to do is wait until those sections are functional and look at everything then  and possibly start a new tax file to transfer the information again.

How do I transfer last year's return into the 2022 TurboTax for Mac software?

Transfer last year's return to 2022 TurboTax for Windows

When transferring a .tax file, what information carries over to my return?

A LOT of the program is not functional yet mostly due to the IRS not being ready ... they have not yet issued all of the  final forms or instructions for many things so the software companies "punt" for right now until the true game can commence ...

 These first releases of the program are usually very buggy and will require MANY updates before it becomes fully functional which usually will not happen until late January or sometime in February depending on the forms you need.  So patience will be needed as the IRS has not even announced when the 2022 filing season will start yet. 

Although TurboTax may  allow you to e-filed some returns as early as 1/4/23 (IF the forms in your return are ready for filing … see info below)   they are NOT actually sent to the IRS.  TurboTax stores those early filed returns in a holding “POOL”   until the IRS opens for business and “drains the pool”  for processing ...   only then will you get an e-mail telling you if the return was accepted or rejected by the IRS.  

Only the simplest returns can be transmitted to TurboTax early.    Some forms will not be finalized until Jan 25 and some later than that.

https://ttlc.intuit.com/questions/1908854-forms-availability-table-for-turbotax-federal-products-exc...

Why does TurboTax allow early filing?  Because their competitors do - It is a marketing ploy to capture market share.

Filing early with TurboTax before the IRS opens  is a really BAD IDEA for many reasons...

1) If you discover something that is wrong on your return, receive a W-2 that is different, receive some other tax document that was not on the return that you filed then there is NOTHING that you can do about it other than wait to see if the IRS accepts or rejects the return after they open.  If rejected you can correct and file again, but if accepted then the only remedy is to amend which can take 4 months to process.

2) You must remember to check back after the IRS opens (or check for an e-mail) to confirm that the IRS has accepted or rejected the return.  If rejected, then it was never filed at all and must be corrected and re-filed.  Every year many taxpayers that file early, forget to check back and only discover months later that they never actually filed because if was rejected by the IRS but they had forgotten about checking back after filing with TurboTax.

3) While the IRS does conduct some pre-opening tests and does accept some returns early (ONLY for TESTING purposes), they will not actually  process those until after the official opening date.  There is a reason to test and that is to discover any problems with it's systems.  A couple of years ago a test went bad and several thousand "test" returns were lost.   The IRS was able to recover those but it delayed refunds for some by months.

There is no real advantage to file before the IRS opens  but there are several disadvantages to do so.

When will my forms be ready?

Historically, IRS tax forms start becoming available in January, with a few stragglers (most notably Form 1040X) getting finalized in February.

State tax forms can become available for filing any time between December and late February, depending on the state and the tax form.

For specific forms and dates, refer to the Forms Availability Table for your TurboTax product, see the related information below.

Can I Still Work On My Return Before My Forms are Ready?

Yes, according to the following:

Federal Taxes
You can still work on your return and finish most of it. Once your forms become available, we’ll create the forms and include all of your info.

You’ll only be able to e-file or print your return once the forms are available.

While you’re working on your return, we’ll ask if you want to receive email updates when your forms become available.

State Taxes 
If your forms aren’t available, you’ll get a message asking you to return once they become available.

While you’re working on your return, you’ll have a chance to let us know you want to receive email updates when your forms become available.

Related Information:

  IRS forms availability table for TurboTax individual (personal) tax products

• State forms availability table for TurboTax individual (personal) tax products

[qofmiwok]

That's really good to know, and a bummer.  I always start around this time so I can make year end decisions, and I have never re-imported and started over after getting updates.  TurboTax should warn you about that.

[qofmiwok]

Yes you are right, I didn't post all the details.  And sometimes things didn't even happen the way my question might say because I'm just doing what-if scenarios, such as which year is best to sell a property.  
Most important to this discussion:  The LLC/partnership had a lot of negative combined rental income in 2020 due to Covid, and it was 2021 when it sold the building at a loss and also had a net operating loss.    

It was during scenario planning of when to sell my primary residence which has a large capital gain, that I saw that those gains weren't being offset by the LLC capital losses.  And now I'm seeing that more losses are going against current year income that I expected (and wanted unfortunately.)

[qofmiwok]

Only complete dissolution of the partnership, correct?  Not just an individual property?