Can I use New NR client LT Capital Loss Carryover of $36K from 2016NR reported on Form 4797 to reduce rental income in 2018? New to Proseries 18. Help!

[Franck]

New NR client has LT Capital Loss Carryover of $36K from 2016NR reported on Form 4797 (involuntary conversion). In addition, during same year, NR client had unallowed passive activity loss of $12,366.  In 2017, NR client $12,100 allowed passive loss. He’s new client to me.  His 2018 NR return shows $10K rental income (ln 18 1040NR) and after QBI ded $2K, taxable inc $8K.  Client owes $810. That's when I'm told about 2016 LT Capital Carry over loss.  Didn't see the 2016 return prior to starting my work.

Q: 2016&2017 returns done by same preparer on Proseries (competent folks).  I don’t see carryover amount on 2017.  I used the 2017 carryover wks to figure out carryover amount. I get $0. Loss was from RE investment gone bad (ponzi scheme).

Can I use that to reduce income in 2018?  Do I need to amend ‘17?

Thanks.

[itonewbie · Accepted solution]

You mentioned NR a number of times but did not clarify whether your client is a nonresident alien or corporation.

Based on the limited information you provided, it would appear this is in relation to USPRI under FIRPTA.  If so, is there a §871(d) or §882(d) election to treat the rental income as US-ECI?

Assuming the LTCL was from the disposition of USRPI, it would be treated as US-ECI and there could well be a carryover but it may not be shown on the 1040NR for 2017 as Schedule D is not generally used.  You should at least request a copy of your client's 2016 (if not also 2015) to ascertain the correct amount of carryover and tax treatment.  (For expat clients, we always request the most recent 3 years' tax returns for our records.)

Just like Bill, I also have questions about your notion about Ponzi scheme.

[Franck]

itonewbie, thank you for your answer.  Sorry it took ma a while to get back to you guys.  We're talking about non resident alien and US-ECI.  After reading your post, i contacted the previous preparer who FINALLY sent the 2017 Federal Carryover worksheet from his ProSeries software.  The amount appears on the Nonrecaptured net Section 1231 losses where it's tracked from 2016. So the answer to my question would be "No, I can't do that."  Only section 1231 gain would apply.

[TaxGuyBill]

You've mentioned LT Capital Loss, Form 4797, Involuntary Conversion, and Ponzi Scheme.  What EXACTLY happened?

IF this loss was properly reported on Form 4797, that loss should have been FULLY allowed in 2016, and there is nothing directly carried over.  It would have offset any other income on the 2016 tax return.  If there was no income on the 2016 tax return, then that loss would have created a Net Operating Loss.  If the election to 'waive carryback' was not made, the NOL would be first carried to 2014, then to 2015, 2017 and then 2018.

[Franck]

Thanks Bill for your answer.  The  Ponzi Scheme I referred to was an investment group that promised outlandish returns etc.  The FBI and the SEC shut it down. After messy court trials, investors barely got anything back from their initial investments.