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Help with NOLs from rentals in final year of an estate

Level 1

I'm getting a diagnostic stating the rules below

469(j)(12)Special Rule for Distributions by Estates or Trusts

If any interest in a passive activity is distributed by an estate or trust—


The basis of such interest immediately before such distribution shall be increased by the amount of any passive activity losses allocable to such interest, and


Such losses shall not be allowable as a deduction for any taxable year.

This is an estate with several rental properties and huge losses carrying forward. This is the final year and the remaining properties are being distributed. Currently, it has NOLs flowing through on the K-1. The rules seem fairly straight forward, but I'm not sure how to show this on the return. Should I take the NOL and divide it between the rental properties by adjusting the basis up then use an override to get rid of the NOL carry forward?

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2 Comments 2
Level 15

469(j)(12) is for passive losses, not Net Operating Losses. It is possible to have both.

The basis of the real estate distributed is increased by the unused passive loss.

NOLS on a final return should pass thru on the K-1s on the line designated for that.

Level 1

That was confusing me at first as well, but see research below.

"An excess business loss is the excess of your aggregate business deductions for the tax year over the sum of:

  • Your aggregate business income and gains for the tax year, and
  • $250,000 or $500,000 if you are a married joint-filer.

The excess business loss is carried over to the following tax year and can be deducted under the rules for net operating loss (NOL) carryforwards. "

The initial estate return had a $212K sch E loss and a $73K loss on sale of rentals equaling a $285 NOL. 

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