Rent Phase Out - Why or Why Not?

[Corduroy Frog]

For high-income taxpayers, rental losses phase out and are totally suspended after $150,000.

But suppose a partnership invests in rent (Form 8825) and has a loss.  Or maybe an S corp that passes through the loss to the owner/shareholder.  The loss is allowed on the personal return.

Why the difference?  They are both rent - and both investments (if a profit they are subject to the NIIT).  The pass-through character is the same from the entity as to the owner. 

What is the difference?  Thanks in advance...

[Slippery Pencil]

Pass through rental losses are subject to the same passive loss rules.

As an aside, the $150k income limit adjusted for inflation is $430k.  $150k is no longer high-income, it's middle class.

[jasdlm]

I don't know what software you're using, but it might be that there are boxes at the top of the K1 entry screen that need to be checked to create an accurate flow.  (Like the passive income box)

[Corduroy Frog]

Sorry folks.  The $150,000 has not been adjusted for inflation as the personal losses continue to go to 8582.

And no restriction on rental losses for the pass-through.  The rental activity is "active participation."

I'm missing something relevant in the comparison, and reaching dead-end streets with the responses, for some reason.

Or else Drake is wrong.

Thanks.

 

[jklcpa]

45 minutes ago, Corduroy Frog said:

Sorry folks.  The $150,000 has not been adjusted for inflation as the personal losses continue to go to 8582.

And no restriction on rental losses for the pass-through.  The rental activity is "active participation."

I'm missing something relevant in the comparison, and reaching dead-end streets with the responses, for some reason.

Or else Drake is wrong.

Thanks.

 

8582 must be produced to determine the correct amount of net loss to use at the bottom for the limitation, if that actually applies.

What boxes are checked on the input for the activity? 

What is the modified AGI being used?  Have you checked to make sure that MAGI is below $150K, and that you aren't basing your statements on AGI?

I doubt Drake is wrong and is probably doing what you are telling it to do based on your input. 

[Slippery Pencil]

1 hour ago, Corduroy Frog said:

Sorry folks.  The $150,000 has not been adjusted for inflation as the personal losses continue to go to 8582.

We know it hasn't been adjusted for inflation.  You stated, "For high-income taxpayers, rental losses phase out and are totally suspended after $150,000."  $150k is not high income, it's middle class.  My comment, which wasn't relevant to your question, thus why I said, "as an aside", was just to point out that it's not just high income taxpayers who have their losses suspended.  The unstated implication of my comment is that when a politician tells you a law will only affect the rich (or some other class of people you're not a part of) don't believe them.  They will use that law to come after you in a few years. 

1 hour ago, Corduroy Frog said:

And no restriction on rental losses for the pass-through.  The rental activity is "active participation."
I'm missing something relevant in the comparison, and reaching dead-end streets with the responses, for some reason.
Or else Drake is wrong.

There are restrictions on rental losses for pass throughs.  It doesn't matter where the rental loss comes from, the $150k and other restrictions apply.  The restrictions are on the individual level.  The full loss will show on the 8825s & K1s.

The likelihood that Drake is handling this wrong is close to zero.  It's been this way since 1987 and there haven't been complaints about Drake handling this wrong the past 37 years.  It's April 8th.  If Drake had a bug this year, we'd have heard about it by now.  The likelihood that you're not entering something correctly in the software is close to 100%.

[Corduroy Frog]

24 minutes ago, jklcpa said:

 

Thank you Judy for your response.  I'll deal with your questions in Bold Italics

8582 must be produced to determine the correct amount of net loss to use at the bottom for the limitation, if that actually applies.  8582 appears on Taxpayer A, whose loss has been suspended, and this is what I expected to happen.  Taxpayer B, whose losses were allowed on a 1065 K-1, has not 8582 at all.

What boxes are checked on the input for the activity? The only boxes checked for Taxpayer A, are "Active Rental Real Estate" and "Single Family Residence."  Taxpayer B, has no page 1 for Schedule E, and lists the loss on page 2 of Schedule E under "Nonpassive Loss allowed" Line 28A coming from the pass-through K-1  (form 1065, 8825)  The K-1 shows the loss on Line 2 - Rental Income or (Loss).

What is the modified AGI being used?  Have you checked to make sure that MAGI is below $150K, and that you aren't basing your statements on AGI?  Modified AGI  for taxpayer A is $156,307.    There is no calculation of Modified AGI for taxpayer B, but their AGI is $236,778.  TTB lists 10 elements which comprise "Modifications" for Modified AGI and none of them occur with Taxpayer B.

I doubt Drake is wrong and is probably doing what you are telling it to do based on your input. 

Don't know what else to say.  Thanks.

[jklcpa]

Well, your taxpayer A would have 8582 because of the passive nature, but the MAGI already exceeds $150K so no loss should be allowed during the year unless there is a disposition or related gain that it generated.

Taxpayer B, you said nonpassive loss with high AGI. Is this a real estate professional that could be materially participating? Is the amount also shown on Sch E, pg 2, line 43?  Did Drake produce an MAGI worksheet or an 8582 worksheet. That 8582 worksheet looks almost identical to the form itself and should give you an idea what is happening on the return.

[Corduroy Frog]

Judy, thank you for hanging in there with me. You demonstrate a keen intuition for possibilities, and are bulldog tough in thinking things through.

I am thinking there may be a problem with Drake - that is doubtful, but I have found them to be in error a very few times over the years.  We agree that Taxpayer A was handled correctly - unable to take the loss in the current year.

Taxpayer B is not a real estate professional - a private high school principal.  His $236K income is very high in his geographical area.  There is no entry at all on page 2 line 43, as he is not a real estate professional.  Instead there is a loss appearing on line 41.  This is Sch E, page 2 - there is no Page One.  Also there is no 8582 form and no 8582 worksheet, which typically allocates the suspended losses - such as for Taxpayer A.

I would call Drake, but the call center personnel are knowledgeable about their software - not responsible for the intricacies in the law.  They would have to refer it to their "development team" who forges the tax law into their software.

I am convinced that Taxpayer B should not be entitled to the rental loss - whether it's my fault or Drake's.

Thanks again - Ron

[jklcpa]

What is listed as the "type" of partner? Does it say "individual" or does it say "individual passive" or "passive"?

Drake will put the loss in the nonpassive column and carry, allow it, and carry that loss to 1040 Sch 1 if you check "Nonpassive (default) box D" on the K-1 input screen.

If you believe this is wrong and that the loss should be subject to the PAL rules, then you need to check box B for "other passive" on the K-1 input screen.

I still don't think Drake has a programming error. It is doing what you are telling it.

[Corduroy Frog]

The "type" of partner is "Individual" answered on the K-1 , question I1.  Box D refers to a publicly traded partnership, and is not checked.

Box B for "other passive" is not checked, because this is active participation.  However, you may have found something.  "Active participation" may be an antithesis if the loss is coming from a K-1 partnership.  Seems to be quite a stretch of the imagination, but maybe....

If this were really "passive" there is no doubt  Drake would disallow it.  I believe Drake should disallow it because of the high income, not because it is passive.

[Slippery Pencil]

Rentals are considered passive.  Passive losses are not allowed.  An exception is provided for rental losses with active participation for those with income below $150k.  Drake should disallow (and is disallowing) passive losses.  Drake should not disallow non-passive losses.

Check the passive box and watch the software do what you want.

[Corduroy Frog]

Pencil, I agree with everything you've said, but Drake is allowing a rental loss with a huge income.

Judy thanks for your involvement.

I'm going to move on, because this thing is taking effort away from other clients at this late date.

[jklcpa]

8 hours ago, Corduroy Frog said:

Pencil, I agree with everything you've said, but Drake is allowing a rental loss with a huge income.

Judy thanks for your involvement.

I'm going to move on, because this thing is taking effort away from other clients at this late date.

 

The box I am referring to has nothing to do with PTPs.  You either have nothing checked in this section shown or have the default checked which is "D". Again, Drake is allowing the loss as nonpassive because no box is checked or is defaulting to "D" and is putting it in the nonpassive column on pg 2 of Sch E.

IF you want the the loss to be subject to the PAL rules, you must check either box "A" or "B" that I have highlighted. Checking either of these will produce the form 8582, and 8582 worksheet, and possibly a PAL worksheet.

If your client has active participation, check box "A" and the loss should carry to line 1b of the 8582 and will be disallowed for the current year, carried fwd to future, and current Sch E should have a -0- on it.

Checking box "B" for passive activity will also produce the 8582 with the loss flowing to line 2b. Again, loss should be disallowed and carried fwd with the current Sch E having a -0-.
 

 

Edited April 9 by jklcpa
Fixed image, added stuff

[Corduroy Frog]

Judy - you finally found it!!  I don't have any of those boxes marked, and I should have marked the "Active" box.  My mistake (as predicted) and not Drake.

Thanks for the time you spent on this and being tough enough to see it through.