Partial sale of PTP sold at a loss is it passive?

I have a client that invested money in a PTP for first time in 2020. He sold about 75% of his interest at end of the year. Has a large loss of several hundred K. The current year K-1 has a small loss of 20K. Their is a 751 component that is very small and I'm not worried about that. I know it is short term capital loss but is it passive and therefore not allowed until he disposes of the remaining 25% in the future or if the entity has income? He has other large capital gains from non PTP investments so he could utilize the entire capital loss if it is not passive.

The loss can only be used against income from that PTP until he fully disposes of the PTP.

PTP's are in silos. Losses are allowed only "within that silo", meaning you will have to wait until the silo is empty (the rest of the PTP is sold) to actually take those losses.

Trying to explain to clients how PTP's are taxed is usually difficult. Any since the broker never mentions any of this, so they are blind-sided. (I am sure that the broker doesn't understand it either.) I have cautioned several of my clients that they may not want to do those sorts of investments anymore.

Joan TB and sjrcpa:

Thank you each for the reply. What is confusing to me is that my software limited the 250K short term capital loss so it agrees with you. But I have seen my software be wrong in the past. But just for giggles if input the 250K short term capital loss as if it was on the PTP K-1 it flows to schedule D. And that somewhat makes sense as it is portfolio income. But it is confusing to me that it is a different answer and in one case it is deducted and the other not.

You want to be sure it is coded correctly in your software for correct results.

But it is confusing to me that it is a different answer and in one case it is deducted and the other not.

Apples and Oranges. A capital loss passed through on a K-1 is not the same as a capital loss on the sale of a partnership interest.

I reiterate what others have said. The gain or loss from the partial sale of a PTP (which is passive) is also passive. Gain would allow you to use suspended PALs from that PTP, whereas the loss may be disallowed if the PTP does not have income during the year. You need to code this properly in the software. If you input the loss within the K-1 itself, then unless you affirmatively tell the system that it's passive (our software has a checkbox that says "capital gains passive"), the software will likely assume it is portfolio in nature and deduct it - even if it's coming from a PTP. That's why you need to make sure the loss characterized as passive within your input to ensure the applicable PAL rules are being followed.

Thanks for the reply everyone. Much appreciated.

Trying to explain to clients how PTP's are taxed is usually difficult. Any since the broker never mentions any of this, so they are blind-sided. (I am sure that the broker doesn't understand it either.) I have cautioned several of my clients that they may not want to do those sorts of investments anymore.

Amen, amen. Spent countless hrs with client explaining why his PTP sale worksheet is not he same as his 1099-B

The PTP rules referenced above relate to passive actives I believe (trades or businesses in which the partner does not materially participate).

Was this taxpayer’s PTP engaged in a trade or business, or was it strictly a portfolio / investment partnership (such as a commodity investment fund)?

Taxmaster, any tips for explaining this to a client so that he/she will understand?

The reason your software passed through the capital loss is because the capital loss was not noted as being from a passive activity. Most software that I’ve seen includes a box you can check on the k-1 input screen, and if you selected that capital losses were from a passive activity, you would find that the software would reduce the deductible amount to zero.

You need to know what trade or business, if any, the PTP is in before deciding that no loss is permitted

My client sold some shares of the PTP and still holds on to the rest. He received a 1099-B & Capital Loss Schedule.

My understanding that the passive loss will be suspended until the entire share of PTP is disposed. Now does he need to report the sale with capital loss or should he wait till all the shares are disposed. I am a bit confused.

And he was also given a Schedule to figure out the 4797 gain. The cumulative adjustment of basis is zero according to the schedule. Do I need to update the information from my tracking of the basis?

Thanks.

The 2020 sale of some of the units needs to be reported on the 2020 tax return.

My client sold some shares of the PTP and still holds on to the rest. He received a 1099-B & Capital Loss Schedule.

My understanding that the passive loss will be suspended until the entire share of PTP is disposed. Now does he need to report the sale with capital loss or should he wait till all the shares are disposed. I am a bit confused.

And he was also given a Schedule to figure out the 4797 gain. The cumulative adjustment of basis is zero according to the schedule. Do I need to update the information from my tracking of the basis?

Thanks.

I assume the current year K1 income is a loss. If units are sold and it is a loss the proceeds need to be reported but the capital loss is suspended. On my software if you report the gain/loss info in the passthrough section the software correctly limited the loss. At first I thought my software was wrong but actually it is correct. You can't take the capital loss unless that PTP has enough income in the current year. Otherwise the capital loss is deferred until all the units or sold in a later year.