Schedule E passive losses erroneously offset my capital gains

[of1]

Have several rental properties reported in schedule E. 

some rental properties have previous years carryover losses and some have last year’s loses. 

I sold ONE of my rental properties last year which created an expected tax event in the form of capital gain.

what i noticed is that turbotax took ALL of my rental properties loses (carryovers and past year) to offset the capital gains of my ONE sold rental property. To me it looks like a bug in the software. 

i think the software is acting as if i disposed of all my passive activity (i.e. sold all my rental properties) which is wrong. 

The correct behavior should be to apply only the sold property passive loses (carryover and last year’s) towards the capital gains of that sold rental property. 

i’d appreciate any feedback here or if some technical support can confirm this issue. 

[KrisD15]

The passive loss is your carry-over, not a carry-over of that particular rental. 

According to the Tax Advisor:

"(Sec. 469(b)). A taxpayer can apply suspended losses against passive activity income from any source, not just from the activity that created the loss."

Additionally according to the IRS:

“DISPOSITIONS: If there is an overall loss after considering current and suspended losses against gain on disposition, the loss is non-passive. See IRC § 469(g). Thus, it enters into the modified AGI computation, and will reduce income, just as another nonpassive loss would. Stated differently, both the income and the losses enter into the MAGI computation.”

[of1]

469(g) is talking about “Dispositions of ENTIRE interest in passive activity. if during the taxable year a taxpayer disposes of his entire interest in ANY passive activity”

I think i was very clear about the fact  i sold only 1 rental property and not disposing of the entire passive activity so unless i’m deciphering the wording incorrectly, i don’t think that rule applies to me. 

[ThomasM125]

When you dispose of just one of the rental activities,  the suspended losses of that activity are then allowed against the resultant gain on sale of that propety in the year of the disposal. Also, the other suspended losses are then allowed against the remaining capital gains on your tax return.

@of1 

{Edited 2/23/23 at 2:00 PM PST}

[of1]

double checked. only one property is marked as sold. 

to my surprise i tried the same thing with taxact and the result was the same. 

i am sure there is a reason why this is happening i just want to understand why. 

[RobertB4444 · Accepted solution]

Because, as @KrisD15 and @ThomasM125 have said, the suspended losses are allowed to be used in the year that you dispose of one of the rental activities.  

@of1 

[Critter-3]

@of1 

Ok ... the passive loss on the one sold rental would be captured on the Sch E  HOWEVER you must also look at

the form 8582 to see how much of the other passive losses are being allowed. Many times the released passive loss brings your income down far enought that other passive losses are also released ... the program does it correctly you just need to review the entire return. 

[BuddyonTT]

I have the exact opposite happening.  looking for why my passive real estate losses do not offset a small capital gain out of a 1031 exchange.

help please @RobertB4444 , @ThomasM125 @KrisD15 @Critter-3 

[KrisD15]

To clarify,

did you receive cash boot at closing? 

[Critter-3]

When you do a 1031 EXCHANGE  you did not technically sell the property (in a fully taxable sale ... you exchanged it for another) so the passive losses are pushed forward to the new property and are not released. 

[BuddyonTT]

yes. THE SMALL CASH BOOT WAS AT CLOSING AND PAID BY THE QI.

[KrisD15]

I believe the cash boot at closing could be offset with the passive loss carry-over, but the TurboTax program might not allow it. 

“How or when is boot recognized in an exchange? The two most common examples are cash received at the closing of the property being sold or cash received at the end of the exchange because the real estate owner purchased a less expensive property. An example illustrates how this would work. A real estate owner decides to sell his rental property for $500,000. He has a tax basis of $100,000 and $50,000 of suspended passive activity losses. If he simply sold the property outright, his $400,000 gain would be reduced by the $50,000 of PALs, leaving him with a $350,000 taxable gain. If he opted to do a 1031 exchange, he could arrange to receive $50,000 at the closing, exchange the rest and fully defer the gain. The $50,000 cash boot would be taxable, but it would be reduced by the $50,000 in PALs resulting in no gain being recognized.”

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