Using passive losses to offset capital gains

[Karen Young]

A syndication investment sold in December. The Sch K-1 was not marked "Final" because the sponsor held some money back. My CPA says the capital gain can not be offset by the passive losses because "the passive Activity must be disposed of in its entirety". Is he correct?

Mahalo nui loa!

[Charles Carillo]

@Karen Young

Possibly consider a qualified opportunity fund.

[Ashish Acharya]

We cannot conclude without actually looking at the K-1 to conclude if this can be recorded a substantially all disposition. 

A taxpayer can generally claim suspended losses only upon the complete disposition of the activity in a fully taxable transaction. However, a partial disposition can be treated as a complete disposition if substantially all of the activity is disposed of and the taxpayer can establish with reasonable certainty the carryover deductions and credits, and the current-year income, deductions, and credits allocable to that part of the activity [Reg. 1.469-4(g)]. According to the IRS Passive Activity Audit Guide, taxpayers need to keep a separate set of books and records for the disposed part of the activity to meet this requirement. 

If you had grouped this activity with your other activities, there are other implication. We just do not have enough information to help you here. 

[Michael Plaks]

@Karen Young

The short answer is that your CPA is correct. If your only passive losses are from this syndication, you may be out of luck. 

I would not get too excited about the loophole mentioned by @Ashish Acharya as it is difficult to qualify for. It is definitely something for your CPA (or another CPA if you want a second opinion) to explore, but the results are likely to be negative.

[David M.]

@Karen Young

Yeah not really sure with your syndication, but in my experience I believe your CPA is correct.  It maybe counterintuitive or opaque, but the IRS puts various types/classes of incomes into their own buckets.  You net each bucket and they generally don't meet until your 1040 form itself.

I think specifically your cpa is referring to Passive Allowed Losses (PAL).  In general, you can't just take all the passives losses on to your 1040.  So, these PAL are carried over year over year (as I recall, form 8582 so you should have one in your tax return filing).  If you have gains, they are netted against the losses each year.  So...  When you sell the property, i.e. 'dispose of your interest in its entirety,' you can realize all those PAL.  From f8589, it flows to your SchE and onto your f1040.  I think as you know, your capital gains are calc'ed on SchD and f4797 (should be the form where you report the sale of the property, which flows to SchD).

Hope that makes sense.  Its just what I know from doing my own returns.  I've never had to deal with a partnership/K-1, but I believe it doesn't change the basic principal since the k-1 is just passing along the income/losses from the partnership.

[Colton Hahn]

Agree with the other posts here. Passive losses only offset passive gains from my experience and knowledge :)

[Charles LeMaire]

To be clear:

* This is 26 US 469 (g) - Disposition of Entire Interest in a property.

* It is not really the buckets, ie. passive, portfolio, & income.