Passive income calculation

Forum|Forum|3 years ago
May 11, 2023
2 replies
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I receive a k-1 from an estate which historically had rental income from renting a building which has always been treated as passive income-and turbo tax treated properly.. The building was sold in 2022 by estate and the capital gain was reported on the k-1 (Form 1041) line 4a. This was capital gain from selling a rental property. (The trust is allowed to pass out Cap Gain as the trustee distributed all the proceeds to the 4 owners and intended for the gain to be taxed to beneficiary of the trust)

Turb Tax refuses to allow me to identify this as rental related - it changes the type of activity to "other" - II have other passive losses that will offset the passive gain- clearly the gain is passive under 469 and just because capital gain does not mean it is not passive. Anyway there does not seem to be a way to override the amount of passive income on the 8582. I would like to get the benefit of the capital gain rates. I changed to reporting the gain as "Net Rental real estate income" line 7 of the k-1 and it then works properly as passive income- but I lose the benefit of cap gains rate ( and probably an IRS notice for not following the k-1) Any help would be appreciated.

JIm

Best answer by Anonymous_

@Taxpayer40 wrote:
Turb Tax refuses to allow me to identify this as rental related

TurboTax refuses to allow that treatment because figures that appear on Line 4a are treated as capital gain.

@Taxpayer40 wrote:
...clearly the gain is passive under 469 and just because capital gain does not mean it is not passive.

Clearly, it is not. Capital gain is not treated as passive income under Section 469.

Your best bet is to contact the administrator/executor of the estate (or whomever is responsible for preparing the 1041) and inquiring as to how the transaction was handled on the return. Often, the sale of rental real estate will result in Section 1231 gain and depreciation recapture (unrecaptured Section 1250 gain).

Anonymous_Answer

Level 15

@Taxpayer40 wrote:
Turb Tax refuses to allow me to identify this as rental related

TurboTax refuses to allow that treatment because figures that appear on Line 4a are treated as capital gain.

@Taxpayer40 wrote:
...clearly the gain is passive under 469 and just because capital gain does not mean it is not passive.

Clearly, it is not. Capital gain is not treated as passive income under Section 469.

Taxpayer40Author

Level 2

Yes it is a 1231 gain- I agree. IRC Section 1231(a) says "such gains and losses shall be treated as long-term capital gains or long-term capital losses, as the case may be." So, on the 1041 k-1 there is no line for 1231 gain but the preparer of the estate tax return puts in the footnote attached that it is a "passive capital gain". There should be a place to reflect that the gain is passive.

Anonymous_

Level 15

@Taxpayer40 wrote:

.....the preparer of the estate tax return puts in the footnote attached that it is a "passive capital gain".

There is no such thing as "passive capital gain".

Mike9241

Level 15

@Taxpayer40 from the 1041 instructions

Gains or losses from the complete or partial disposition of
a rental, rental real estate, or trade or business activity that is
a passive activity must be shown on an attachment to
Schedule K-1. to me this would only make sense if the gain/loss was to be treated as passive.

so probably showing it on 4a was wrong but then there would also be the issue of section 1250 recapture.

i tested Turbotax by entering rental real estate on schedule E and sold at a gain - total disposition. also enter another non real estate passive activuity loss (200,000) partnership business - no disposal. turbotax handled this as per the reg 1.409-2(T). gain on bldg including deprecition recapture $164,166, land gain $25,000, current year profit $20,417, PAL c/o $50000. the 8582 showed the 164,166+25000+20417 = 209,583 on line 2a. the 200,000 loss on line 2b and the 50,000 PAL c/o of 50,000 on 2c. Since the net is a negative $40.417 this ws disallowed

the returns forms and schedules showed the following Schedule D $189,166 (bldg + land gain)

schedule E page 1 $-29,583 current year profit offset the PAL c/o

schedule E page 2 partnership $-159,583

thus the net reported was $0

evidently Turbotax there is noway Turbotax can handle the trust reporting properly.

either that or Turbotax is not correctly handling the real estate reporing in the retunr i did becuase it inluded the capital gain as passive

I'll offer a work around at your own risk

create a partnership k-1 using trust name an ID #

om 11i enter the capital gain

then in the subschedule you enter it at non-portfolio LTCG . this will carry the amount to the 8582 as passsive

you would also enter the section 1250 gain on the k-1 - 9c

and then in the subschedule for 9c on line 2 - this is needed so 1250 gain is properly reported

*********************************

if there is no 1250 gain on your k-1 then I question whther the property was a passive activity rather than an investment.

Mike9241

Taxpayer40Author

Level 2

Thanks ! Excellent analysis- you went above and beyond- I will take a look and maybe add a disclosure statement so the IRS is fully aware of why reporting differently than the 1041 k-1. Appreciate the help.