FORM 4797 - PAL Adjustment

[Lee B]

I'm working on a fairly complicated 1040. Client owns some vacation rental property, which was generating

 

passive losses, which were deducted. Last spring 2012, they sold a half interest in the property, which

 

generated a Long Term Capital Loss of $ -23,764 which shows up on line 2 of Part I of Form 4797. Below that

 

also on Line 2 is an entry "PAL Adjustment" $15,397, which reduces the Capital Loss to $ -8,367.

 

I don't see anything specific about this in the 4797 instructions, so I need some feedback from anyone

 

that can explain what this is and why the capital loss is being reduced.

 

Thanks,

 

Lee Barckert

[Lee B]

Ok, I've looked at the Form 4797 Instructions, The Tax Book, J K Lasser Pro Edition and The Master Tax Guide.

I've also done a Google search. I've read about PAL Adjustments in two IRS Auidt Guides, but they were about

two different Passive Loss situations. So my question is, Is my ATX software correct in making this adjustment or ???

[jklcpa]

It sounds like the overall losses from the passive activity are being limited, and that would be calc'd on the 8582 and its worksheets. That would be most likely where the PAL adjustment is coming from.

[Lee B]

Thanks for pointing me in the right direction. I took the time to backtrack it to worksheet 7 on page 2 of Form 8582.

It was a bit annoying because the ATX program links took me to a dead end.

[RitaB]

This is an old thread, but I have the same situation. I can't find a Worksheet 7 on p. 2, and I've looked at 2012 Form 8582 as well. Lee or Judy or anyone, can you help a girl out?

Never mind, found the answer in a 2012 thread: Passive Activity Loss Adj on 4797.

My good buddy Bulldog Tom has saved the day. Just needed to check a box. Thank you.

[jasdlm]

This is an old thread, but I have the same situation. I can't find a Worksheet 7 on p. 2, and I've looked at 2012 Form 8582 as well. Lee or Judy or anyone, can you help a girl out?

Never mind, found the answer in a 2012 thread: Passive Activity Loss Adj on 4797.

My good buddy Bulldog Tom has saved the day. Just needed to check a box. Thank you.

Can you point me to this thread (obviously, I'm having the same problem), or Tom, will you give me the magic check box, please?

[jklcpa]

Can you point me to this thread (obviously, I'm having the same problem), or Tom, will you give me the magic check box, please?

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In that topic, Tom said "Have you gone into the Sch E and clicked on the box for "Complete Disposition of a Passive Activity"? I think that is your problem. It is a two step process to dispose of a rental activity in ATX. You have to do the sale in the Asset Entry form and then click the box on the Sch. E."

[jasdlm]

I love this Board. Thanks so much!

[JIMMYP]

Hi All...

I have a client who sold a rental house at a big loss.   From reading above, I got rid of my PAL adjustment, but now see that the loss is going straight to the 1040 as "Other gains and losses" on Line 14.   I was thinking at least part of the (176,244) loss would wind up as NOL, since he paid no tax before the loss, and didn't need this loss on his 1040!  Or at least, it would be a capital loss carryover!    Comments?  thanks

[JIMMYP]

In other words.....Selling rental real estate at a gain is a Capital gain.  If rental RE is sold at a loss, is it a Capital Loss, or an Ordinary loss?

[jklcpa]

2 hours ago, JIMMYP said:

In other words.....Selling rental real estate at a gain is a Capital gain.  If rental RE is sold at a loss, is it a Capital Loss, or an Ordinary loss?

 

You might want to review the instructions for Form 4797, specifically the chart on page 1 of those instructions "where to make first entries."  That will give you your starting point and guide you to the flow of the transaction through the return.  https://www.irs.gov/pub/irs-pdf/i4797.pdf