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Mark Taylor
Mark Taylor, Certified Public Accountant
Category: Capital Gains and Losses
Satisfied Customers: 2054
Experience:  Certified Public Accountant
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1. Client sold a (passive) investment partnership interest

Customer Question

1. Client sold a (passive) investment partnership interest for a $1MM+ gain (No issues re: “hot”/ord. assets, suspended losses, basis/at-risk).
2. Client also has rental real estate with over $1MM of cumulative passive losses on Form 8582.
QUES: Can the (Long-term) capital gain from the sale of the partnership interest be offset by his cumulative passive losses on rental real estate?
Obviously a Long-term sale of IBM stock cannot, but the sale of an interest in a passive investment partnership? I maybe overthinking the obvious answer here given scale.
Thank you!
Submitted: 9 months ago.
Category: Capital Gains and Losses
Expert:  Mark Taylor replied 9 months ago.

Hi, my name is Mark. I will be happy to help you with your questions. Unfortunately the long-term loss from the capital gain generated from the sale would be able to offset the Passive Activity Loss. Is this a 2015 return? Is it possible to sell one of the investment with passive losses to be able to apply these to the gain?

Customer: replied 9 months ago.
Thanks Mark! Not sure I understand your response: The sale of the partnership interest was a GAIN, not a loss. The cumulative losses are on rental real estate, none of which were sold in 2015. You also noted "Unfortunately....would be able to offset the Passive Activity Loss", which is a good thing? Just want to be sure I understand your answer. The two elements, once more:
1. Client sold a (passive) investment partnership interest for a $1MM+ (LT capital) gain (No issues re: “hot”/ord. assets, suspended losses, basis/at-risk).
2. Client also has (unsold) rental real estate with over $1MM of cumulative passive losses on Form 8582.
THUS: Can the capital gain from the sale of the partnership interest be offset by his passive losses by rental real estate losses?
Obviously a Long-term sale of IBM stock cannot, but the sale of an interest in a passive investment partnership? I maybe overthinking the obvious answer here given scale.
Expert:  Mark Taylor replied 9 months ago.

Brian,

As I understood your question the client has suspended passive losses. The capital gain from the sale of the partnership interest cannot by offset by the suspended losses. You would need to have passive income or sell the passive activity to be able to utilize these losses.

Customer: replied 9 months ago.
Thanks Mark!!
In general, capital gains--such as a gain on IBM stock--cannot be offset by accumulated passive losses on rental real estate. But is a capital gain on the sale of a partnership interest treated differently given that it is from a passive activity?Reg. § 1.469-2T(c)(2)(i)(A)(2): Gain on disposition generally is passive income if the activity was a passive activity in the year of disposition.The fact that an activity is passive does not determine the character of the gain (or loss) in terms of whether it is capital or ordinary in nature. Gain on disposition, usually capital in nature, will be reflected on Form 4797 and Schedule D.So unless these trigger a revelation for you, I'll accept that this a capital gain which CANNOT be offset by cumulative passive losses from rental real estate.
Expert:  Mark Taylor replied 9 months ago.

That is the way I interpret it as well. Since the gain will be reported as capital (reflected on schedule D or Form 4797), it cannot be used to offset the suspended passive losses.

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