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Losses from K-1 (ordinary business losses) don't seem to reduce taxes due to offset capital gains on stock sales (passive income)?

I have about $2k of passive losses from a K-1 LLC (Form 1065). I also have about $3k of capital gains from the sale of a stock I had held in 2019. I had entered the 2019 Cap Gains from the stock sale in TurboTax first and saw my tax return results (owe Federal but State refund, net result is I owe about $1,300). I would have thought that once I entered my K-1 losses (all of which are at risk) from the private investment that I would be able to use those passive losses to offset the capital gains tax but my return results didn't change at all. Would appreciate some guidance on how to utilize those K-1 losses against the passive income from the cap gains.

 

Thanks!

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Accepted Solutions
DavidD66
Employee Tax Expert

Losses from K-1 (ordinary business losses) don't seem to reduce taxes due to offset capital gains on stock sales (passive income)?

You can't use your passive losses reported on a K-1 to offset capital gains from investments.  You can only use your passive losses to offset passive gains (stock investments are not passive).  You can carry over the unused passive loss.  When you dispose of the investment in the LLC you can take the passive losses to offset any gain on disposal or to offset ordinary income.

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9 Replies
DavidD66
Employee Tax Expert

Losses from K-1 (ordinary business losses) don't seem to reduce taxes due to offset capital gains on stock sales (passive income)?

You can't use your passive losses reported on a K-1 to offset capital gains from investments.  You can only use your passive losses to offset passive gains (stock investments are not passive).  You can carry over the unused passive loss.  When you dispose of the investment in the LLC you can take the passive losses to offset any gain on disposal or to offset ordinary income.

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Losses from K-1 (ordinary business losses) don't seem to reduce taxes due to offset capital gains on stock sales (passive income)?

So if you have ordinary income from a W-2(dayjob) and you have passive losses from a K-1(ordinary business loss from an investment asset); does the passive loss reduce your income on your 1040?  When i entered my information into TT; nothing changed?  It seems to want to carry the loss fwd to next year????  Please advise?  Thanks.

 

Greg

Losses from K-1 (ordinary business losses) don't seem to reduce taxes due to offset capital gains on stock sales (passive income)?

Mine was the same. The k-1 passive loss didn’t reduce my taxable income or my capital gains on stocks. As the poster above said it only offsets other passive losses but you can carry it forward.

Losses from K-1 (ordinary business losses) don't seem to reduce taxes due to offset capital gains on stock sales (passive income)?

David: Can losses from K-1 offset the gain from the sale of a passively managed rental property? Thanks

RobertB4444
Employee Tax Expert

Losses from K-1 (ordinary business losses) don't seem to reduce taxes due to offset capital gains on stock sales (passive income)?

@Tax2019Pay  If you are able to take the passive losses this year and you have ordinary gain this year from rental income then yes, the losses would offset those gains.

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Losses from K-1 (ordinary business losses) don't seem to reduce taxes due to offset capital gains on stock sales (passive income)?

Hi Robert or other experts:

 

Can carried forward/accumulated K-1 losses (losses from passive investment in apartment communities) over the years offset the capital gain from the sale of my rental property this year?

 

A general question is: what can carried forward K-1 losses offset?

 

Thanks

 

ThomasM125
Employee Tax Expert

Losses from K-1 (ordinary business losses) don't seem to reduce taxes due to offset capital gains on stock sales (passive income)?

If you sell a rental property that has suspended losses, you can deduct those losses in the year you sell the property. But capital losses cannot be used to offset passive losses. So if you mean you are selling the property that has the suspended losses, you will deduct the full amount of the losses against ordinary income, and then report capital gain income separately from the gain on sale of the property.

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Losses from K-1 (ordinary business losses) don't seem to reduce taxes due to offset capital gains on stock sales (passive income)?

Dear Experts:

I would like to follow up with a revised question.

In this example:

1. Jack has disallowed carryforward K-1 passive losses from prior years and K-1 passive losses from 2022.  These were passive losses from limited (S corporation) partnerships (investments A and B).  Investments A and B were not sold in 2022.

2. Jack sold a rental property C (he was not a real estate professional) in 2022.  He had some rental income losses in 2022.  He also had disallowed carryforward passive rental income losses from the prior years.  Jack sold the rental property with a net gain of 100k (taking into consideration of sale price, adjusted cost basis, selling expenses and recapture of depreciations).

3. Jack had a loss of 30k for selling stock D in 2022.

4. Jack filled Form 4797 for sale of the rental property, which transferred the information to Schedule D.  Schedule showed a gain = 100k (net gain for sale of the rental property C) - 30k (loss from selling stock D) = 70k.  Is this correct way to handle this?

5. Can the K-1 passive losses (losses from 2022 and disallowed losses from prior years) for Investments A and B be used to offset the 70k mentioned above?  If so, how will you handle this in TurboTax?

 

Thanks

GeorgeM777
Expert Alumni

Losses from K-1 (ordinary business losses) don't seem to reduce taxes due to offset capital gains on stock sales (passive income)?

We will repeat your questions below, followed by our response.

 

Jack filled Form 4797 for sale of the rental property, which transferred the information to Schedule D.  Schedule showed a gain = 100k (net gain for sale of the rental property C) - 30k (loss from selling stock D) = 70k.  Is this correct way to handle this?

 

Yes, the sale of the rental property resulted in capital gain income and the sale of the stock resulting in a capital loss.  Capital losses will offset capital gains.  To the extent capital losses exceed capital gains, the excess capital loss is carried over indefinitely.  Although, capital losses can offset up to $3,000 of ordinary income ($1,500 of ordinary income if married filing separately).

 

Can the K-1 passive losses (losses from 2022 and disallowed losses from prior years) for Investments A and B be used to offset the 70k mentioned above?  If so, how will you handle this in TurboTax?

 

No, because you have not sold investments A or B.  The rule regarding when passive losses can be characterized as losses not from a passive activity essentially happens when a taxpayer disposes of their entire interest in the passive activity.  Note, that if you should sell the A or B investment in the future, your ability to deduct any suspended losses will depend on whether you have a basis in these investments.  If you have no basis, then any suspended losses cannot be used to offset future income.  In other words, the loss becomes permanent.  Thus, for timing purposes, you might want to make sure you have a basis in investments A and B.  You can review your basis information on the Schedule K-1s you receive from the general/managing partner. 

 

@Tax2019Pay 

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