Is sec1231 gain considered passive/active?

Question

I invested in a syndicate that shows 1231 gain due to sale of some of its properties. Some of the other properties in the syndicate have not been sold so it is not final K1. This shows up in box10 of K1

My CPA says I have to pay capital gains on that 1231 and I cannot offset that capital gain against any other passive losses. For instance I have yearly passive losses from my own rental property (Schedule E). I also have passive losses from other partnerships (K1 box 2).

She claims sec1231 is active capital gain even though it was done by my syndicate. Is she right?

Account Closed · Answer

*NOT OFFICIAL TAX ADVICE*

Section 1231 refers to a specific section of the U.S. Internal Revenue Code that deals with the taxation of gains and losses from the sale or exchange of business or investment property. Section 1231 gains include gains from the sale of depreciable property such as real estate, machinery, and equipment used in a trade or business. These gains can be offset by Section 1231 losses, resulting in a net Section 1231 gain or loss.

Your CPA's assertion that the Section 1231 gain from the syndicate cannot be offset against passive losses might be based on the classification of the gain. Generally, Section 1231 gains are considered as capital gains, and capital gains are subject to specific rules when it comes to offsetting them against losses.

However, whether you can offset your Section 1231 gain with passive losses would depend on a variety of factors, including the specific nature of the losses, the character of the gain, and your individual tax situation. If the gain is treated as a capital gain, it might not be directly offset by passive losses. Capital gains are usually subject to their own set of rules for offsetting against other types of losses.

It's important to note that tax laws and regulations can be complex and subject to change. The interpretation of tax rules can also depend on various factors specific to your situation. To get accurate advice regarding your specific circumstances, it's recommended to consult with your CPA or a qualified tax professional who can provide guidance based on the most up-to-date tax regulations and the details of your investments and losses.

Basit Siddiqi · Answer

Sale of a passive investment, results in passive gain.The 1231 gain should be passive which would offset against the passive losses that you accumulated.