When previously disallowed PALs cancel capital gains received on a K-1, are Sch D capital gain carryovers still affected?

[user9320]

I have a question regarding capital losses reported via K-1 from a passive investment.

Last year's return includes passive losses from two separate investments (Investment 1 and Investment 2), totaling $15000. These losses were originally reported in Box 2 of their respective K-1s.

For the current tax year, a new passive investment (Investment 3) reported a $2,500 capital gain in Box 8. Proconnect applied some of the previously suspended losses from the first two investments—these appeared on Schedule E, line 28, and flowed through to Schedule 1, line 5, ultimately offsetting the $2,500 gain on the 1040.

The $2,500 gain is also reported on Schedule D, line 5, which ended up reducing an existing short-term capital loss carryforward. Is this the correct behavior? If capital gains from a passive activity cause suspended losses to be released, should those gains still be deducted from an existing capital loss carryover?

[Accountant-Man]

Yes, the capital gains are not "offset" by the losses. The losses are ALLOWED on Sch E, and the gains should be on Sch D and can then be offset by the ST CL carryover.

CORRECTED-box 8 on K-1 is portfolio gains, not passive gains, therefore should not be allowing passive suspended losses on Sch E.

I need more info.