Offsetting gains and/or recapture with suspended loss carryover

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Offsetting gains and/or recapture with suspended loss carryover

Stephanie Cristiano
Member since 2018 · 8 posts · 1 vote

I am trying to decide whether to do a 1031 Exchange or to sell an investment property outright.  I have suspended loss carryover associated with the property.  I often see general guidance such as follows:  "If you had suspended losses(losses you couldn't take because your income was above $150,000) then you should be able to utilize those suspended losses to decrease your gain."

On what tax form or worksheet, and what line, do you apply these suspended losses to decrease your gain?  Where is it described in IRS instructions?  I am looking on Schedule D and 8949, Forms and Instructions, and don't see it.

I genuinely enjoy doing my own taxes and self-educating so am hoping to not have to hire a CPA.  I know consulting with a CPA is the "right" answer.  Would love to find the answers myself and think through the scenarios.  I have done 1031 Exchanges before.  It was just the clear answer at that time because I didn't have the suspended losses.

Thanks!

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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
7y
Originally posted by @Stephanie Cristiano:

Thank you Basit Siddiqi.  Yes the losses have carried over properly on 8582.  I am just wondering how they make their way to offset gains which go on 8949.  If they supposedly offset the gains at the time is a sale, where does that show up?   I do my taxes by hand because I want to make educated decisions.  

Your confusion here is that it does not DIRECTLY offset the gains, so you won't see in on the 8949.  It becomes deductible on Schedule E (computed on lines 22 through 26) and then carried over to 1040, line 17.

It becomes deductible against your AGI and other ordinary income (including Depreciation Recapture).  Capital Gains are calculated separately and you could be in a situation where you're still paying the Capital Gains tax, even though your ordinary income and income tax are reduced significantly.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y

    @Stephanie Cristiano

    Have you been keeping track of the suspended losses?
    Passive loss calculation/passive loss carryforward is done on form 8582.

    You will not see it on Schedule D or 8949 because those deal with sale of assets/capital gains.

    If you dispose of an activity with suspended losses - it gets released through form 8582 and then ultimately schedule E.

    This is prolly on the more difficult side of tax returns. I understand you want to do it on your own but you may want to consult a tax advisor.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    7y

    @Stephanie Cristiano

    Whenever you sell a property, its entire suspended carryover loss will "un-suspend" itself. So, if you had a $50k suspended loss, you now have a $50k deduction (or "negative income" if you will). It will be deductible against any other income you earned, including W2 salaries, 1099 commissions, retirement distributions and pretty much anything else.

    Your capital gains in the year of sale are additional taxable income. So, if your capital gains are $70k, and your passive suspended losses are $50k, you only have $20k of additional income to pay taxes on.

    I'm wondering about your question "what form or worksheet." If you used the same tax software year after year, it would've kept track of suspended losses, accumulated depreciation and everything else automatically. All you need to do is to indicate that the property was sold, and the software will do everything else for you. In the end, on Form 1040, it should show, with my example, +$70k on one line and -$50k on another.

    But if you were using various software over the years or, worse, completing taxes by hand - then it is not really a DIY project.

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  • Stephanie Cristiano
    OP
    Member since 2018 · 8 posts · 1 vote
    7y

    Thank you Basit Siddiqi.  Yes the losses have carried over properly on 8582.  I am just wondering how they make their way to offset gains which go on 8949.  If they supposedly offset the gains at the time is a sale, where does that show up?   I do my taxes by hand because I want to make educated decisions.  So, I am running through hypothetical gains on the sale if I decide to sell the property outright.  I understand how the losses are calculated on 8582 and make their way onto Schedule E.  Wondering where they show up to offset the gain or depreciation recapture on a sale.   There has got to be a form / line number if the "offset" is true.  Right now I am thinking maybe the catch-all 8949 column (g) Code O- "You have an adjustment not explained earlier in this column."

    Michael Plaks, thank you for taking the time to respond.  I understand the concept.  Just trying to find it on tax forms.  Tax software is not magic.  I used software 10 years ago and got annoyed because I wanted to see the numbers working through the process and calculations, and found myself reading through the calculations and workflow afterwards anyway.  There should be a clear answer as to where this lands on the tax forms.  If investors relied only on software at year-end, they would not be able to make educated decisions prior to that.

    And I know, this is why I should have a tax adviser.

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    7y
    Originally posted by @Stephanie Cristiano:

    Thank you Basit Siddiqi.  Yes the losses have carried over properly on 8582.  I am just wondering how they make their way to offset gains which go on 8949.  If they supposedly offset the gains at the time is a sale, where does that show up?   I do my taxes by hand because I want to make educated decisions.  

    Your confusion here is that it does not DIRECTLY offset the gains, so you won't see in on the 8949.  It becomes deductible on Schedule E (computed on lines 22 through 26) and then carried over to 1040, line 17.

    It becomes deductible against your AGI and other ordinary income (including Depreciation Recapture).  Capital Gains are calculated separately and you could be in a situation where you're still paying the Capital Gains tax, even though your ordinary income and income tax are reduced significantly.

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  • Stephanie Cristiano
    OP
    Member since 2018 · 8 posts · 1 vote
    7y
    Thank you  Linda!  So I think the statement that the suspended losses can offset gains is a little misleading as I read it as the losses directly offsets gains before making their way to the 1040.  My unallowed losses and many others' losses accumulate due to income being 150k, and no allowed losses on 1040 line 17, so this in fact would not work for my scenario (and I imagine in many cases).  So, if we sell, a 1031 exchange would definitely make sense.  But this will lead to another predicament of how to utilize the suspended loss.  This was to be my last property in the "grouping with active participation" on the 8582 worksheet 1, as I'm shifting to all passive (crowdfund) real estate investments grouped in worksheet 3.  But if I don't pickup another property to have active participation and place in worksheet 1, I believe I will lose my suspended loss.  Sigh.

    Originally posted by @Linda Weygant:

    Your confusion here is that it does not DIRECTLY offset the gains, so you won't see in on the 8949.  It becomes deductible on Schedule E (computed on lines 22 through 26) and then carried over to 1040, line 17.

    It becomes deductible against your AGI and other ordinary income (including Depreciation Recapture).  Capital Gains are calculated separately and you could be in a situation where you're still paying the Capital Gains tax, even though your ordinary income and income tax are reduced significantly.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y

    Linda filled in the missing pieces to your inquiry.

    I can understand wanting to do the tax return by yourself. You see how the numbers flow and you get to save some money as well.

    But if you are going to do your own tax return; atleast get a software that will help you do it.

    I can't imagine the amount of time it would take to do a return with rental income + passive losses + sale of asset without a software. I would have to guess it would take 10+ hours if you include the help you are asking on this forum + reading all the instructions.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    7y
    Originally posted by @Basit Siddiqi:

    I can't imagine the amount of time it would take to do a return with rental income + passive losses + sale of asset without a software. I would have to guess it would take 10+ hours if you include the help you are asking on this forum + reading all the instructions.

    And it will still produce the wrong result. 10 hours or 40 hours later.

    I have over 20 years of experience, and I would not try to do it by hand. Even on a dare.

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  • Stephanie Cristiano
    OP
    Member since 2018 · 8 posts · 1 vote
    7y
    @Michael Plaks Thank you all! I might give the software another try. I just didn't like it last time I tried. It only gets tricky by hand when something new comes up for me. And, is there any way to use the software to analyze hypothetical scenarios? That's the real value in doing things by hand for me. I need to know what will happen if I sell this property outright. Not after I sell it and realize I've made a bad decision. Plus I love doing my taxes by hand. It's so fun! I feel so empowered to make good decisions when I understand this numbers game.
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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    7y

    @Stephanie Cristiano

    Depends on the software. Professional grade software that CPAs use has this feature. 

    Turbotax has "What-if" worksheet that provides some degree of planning. Not sure about other consumer-level software.

    And you missed my point. It could be fun and empowering, and you might feel that you tamed the beast, but you will never know if you received the correct result, unless you use software. There are two many rules that can trip you.

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