Passive income calculation

[Taxpayer40]

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

[Anonymous_ · Accepted solution]

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@Taxpayer40 wrote:

Turb Tax refuses to allow me to identify this as rental related

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

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@Taxpayer40 wrote:

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

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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).

[Taxpayer40]

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_]

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@Taxpayer40 wrote:

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

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

[Taxpayer40]

The sale of rental real estate at a gain is a gain under IRC Section 1231 which says will be treated as a capital gain. The gain on disposition of a passive activity is passive income under IRC 469. Therefore capital gain can be passive income. Not if the underlying asset is a portfolio  asset- then no.

[Anonymous_]

Again, Section 1231 gain is treated as capital gain while a Section 1231 loss is treated as an ordinary loss.

I believe the issue here may be that you are conflating the release of suspended passive losses upon the sale of an interest in a passive activity with using passive losses to offset capital gain. 

[Taxpayer40]

Yes- and IRS Reg Sec. 1.469-2T(c)(2)(i)(A) says the disposition of an activity is passive activity income- check it out. Very clear.  This was disposition of rental real estate and under IRC 1231 is treated as capital gain. Under 1.469-2T(c) this gain is passive income.  

someone wanted an explicit cite to authority- there you have it…

[Taxpayer40]

No- I have other passive losses that should be utilized because the disposition of rental real estate should be passive income. I understand freeing up suspended losses non complete disposition of the activity- this activity always produced income.

[Anonymous_]

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@Taxpayer40 wrote:

No- I have other passive losses that should be utilized because the disposition of rental real estate should be passive income.

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No, you cannot use your passive losses from other passive activities to offset the gain on Line 4a of your K-1.

[Taxpayer40]

If the sale of a passive activity creates passive income then that passive income is available ( like any other passive income generated) to offset passive losses. See IRC Sec. 469(d) for definition of passive activity loss. You net passive losses with passive income. So my losses from rental activity will net with the passive gain on sale of a passive activity- see prior cite for fact that disposition of  a passive activity at a gain produces passive income.

[Taxpayer40]

I know the technical answer under 469- I just need a work around on Turbo Tax to get the system to do it correctly 

[Anonymous_]

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@Taxpayer40 wrote:

I know the technical answer under 469- I just need a work around on Turbo Tax to get the system to do it correctly 

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If you need a workaround, that is a fairly good indication that you do not know the correct answer.

[Taxpayer40]

Appreciate your effort but it seems you are not fully up to speed on IRC Sec.469 and the regs there under. If you can tell me what cites are not accurate I would appreciate it- 

as far as a workaround- Turni Tax is not perfect and this is a glitch.

Without cites to the Code and Regs I don’t trust anything you say. And the Trust was created from an estate- I know the diff. 
lokung forward to some actual technical discussion…

[Anonymous_]

If the trust had been created from an estate, you might have indicated that in your original post rather than flatly stating you received a K-1 from an estate ("I receive a k-1 from an estate").

Section 469, for what it's worth, was enacted to address losses from activities in which taxpayers either do not participate and specifies which activities are de facto passive. I am unclear where you noted that passive losses can be used to offset capital gains other than scenarios where the entire interest (in the passive activity) is disposed of. 

Regardless, I am simply not interested in engaging with you further, on any level. 

[Taxpayer40]

You need to brush up on passive losses and IRC 469. Definitely don’t want any education from you in this topic! There are some good articles in The Tax Advisor that may help you.

And if you don’t want to reply to any of the posts, DON’T!! No one asked you to…but your lack of understanding that a gain from dale if a rental property which is a passive activity is available to offset other passive rental losses the taxpayer has is astounding- you should not be replying to questions without additional CPE.