"Net long-term capital gain (loss)" and "Passive long-term capital gain (loss)" on K-1 input screen?

puravidapto · ‎04-29-2024

I have a K-1 (Form 1065) of a partnership "AMINO CAPITAL III, LP", which is a venture capital firm. My client is one of the investors. On the K-1, there is "Net long-term capital gain (loss)" item of $300.

The K-1 input screen has "Net long-term capital gain (loss)" and "Passive long-term capital gain (loss)" as shown below:

If I put the amount in "Net long-term capital gain (loss)", it is treated as a capital gain alone.

If I put the amount in "Passive long-term capital gain (loss)" as shown in the image, in addition to capital gain, the same amount of Schedule E rental loss will be allowed. i.e. it has three effects:

(1) Capital gain

(2) Schedule E loss allowed on form 1040

(3) Schedule E loss reduction

Questions are:

(a) what is the difference between "Net long-term capital gain (loss)" and "Passive long-term capital gain (loss)"?

(b) Should I put the amount in "Passive long-term capital gain (loss)" or "Net long-term capital gain (loss)"?

(c) Why does "Passive long-term capital gain (loss)" have this complicated three folds treatment?

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PhoebeRoberts · ‎04-30-2024

1) One is passive, one is portfolio.

2) If the footnotes to the K-1 indicate it's passive, I treat it as such. Otherwise, I assume it's portfolio.

3) That's how passive income (and losses) work.

View solution in original post

puravidapto · ‎04-30-2024

Besides rental property, are there other examples as passive capital gains?

Suppose there are not rental loss carryover, one rental has 3000 loss, another rental has a capital gain 1000 (suppose no rental loss on second rental for simplicity), what needs to be reported are:

capital gain 1000
rental loss allowed 1000
remaining rental loss 2000 carryover (suppose income is more than 150k)

Is this right? Thanks.

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PhoebeRoberts · ‎04-30-2024

Personally, I've never prepared an entity return where I took the position that there was passive capital gain other than on the sale of rental real estate. But I can reasonably rely on the footnotes of the K-1 someone else prepared, and that's good enough for me!

I'm not gonna prepare a hypothetical Form 8582 using nothing but words in a chat box. That's what Form 8582 is for!

IOpine

If I understand your question correctly, it is of utmost importance to determine the taxpayer's relationship to the entity. Is this activity passive to the taxpayer? If so, the items of income, gain, losses, and deductions are passive. Based upon my understanding, passive vs. nonpassive is determined at the taxpayer level. The answer to this question would be quite relevant to determining what information you give your software.

IOpine

Please qualify the above statement with the fact that portfolio income can be determined on the entity level and thereby the income will not be subject to the passive activity rules. Nevertheless, if that is not portfolio capital gain income per the entity level, the passive activity rules may come into play based upon the taxpayer's nonexistent material participation in the activity.

IOpine

My limited partnership bought a fugazi air condition for a Section 212 residential rental property and sold it 6 months later with no depreciation taken. $10,000 short term capital loss pass down via Schedule K-1, Box 8. $10,000 Portfolio capital loss straight to Schedule D or $10,000 passive capital loss straight to FORM 8582?