Easy Massachusetts Tax Question

Technical topics regarding tax preparation.
#1
Wiles  
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CA resident is selling their rental property in MA.

Can they offset the MA capital gain income tax with their freed up suspended passive losses on that same rental? Or are those losses flushed down the toilet?
 

#2
Nilodop  
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Same as Federal.
A taxpayer who disposes of the taxpayer's entire interest in the activity in a fully taxable transaction to an unrelated party may at the time of disposition claim any unused suspended deductions in full.

https://www.mass.gov/technical-informat ... venue-code
 

#3
Wiles  
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Thank you for that link. I read through it and I feel like these excess passive losses can be used against the capital gain income, but my software just won't let it happen.

Allow me to rephrase the question with some sample numbers:
* MA rental property current year loss $10,000
* Same property has a PAL CF of $35,000
* Same property is sold for a $100,000 gain

The $45,000 passive loss is being released, but it goes nowhere. There is no other MA ordinary income that exists.

The full $100,000 capital gain (less the personal exemption) is being fully taxed by MA at 5%.

Can the $100,000 capital gain be reduced by the $45,000 freed up suspended loss?
 

#4
Nilodop  
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Wild guess on my part. If the passive loss in the Fed 1040 is being used against other ordinary income, then maybe MA is just following that treatment, and the other income is not MA income, so ...

More likely - software is wrong.

Or maybe it's some obscure check-mark you didn't make.

TIR 89-2 https://www.mass.gov/technical-informat ... venue-code seems to support your position. You need a pro forma 8582.
 

#5
Wiles  
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I prepared a dummy client in my software, Lacerte, that only has the info in #3, above. Just a released passive loss and a gain from the complete disposition of the same rental. No other ordinary income.

Of course, the Fed version of the tax return has the loss reducing the gain before calculating the taxes.

Still, the MA version of the tax return, taxes the entire gain (less the personal exemption). The released PAL goes nowhere. Not even an NOL carryforward.

Checked all my diagnostics and nothing. I hope it's just me and my software not communicating well and it's not a MA tax law thing.
 

#6
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Double check all of your lacerte screens associated with the rental and depreciation have MA as the correct state.
 

#7
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Not a MA preparer, so I don't know the answer. But FWIW I dumped this scenario in my software (UltraTax) and found that the entire passive loss was allowed on Line 9 which contributes to the total 5.0% income subject to regular income tax which end up being zero. The gain from the sale is then reported on Line 14c and is subject so tax on LTCG on line 28. So it looks like they are calculating different taxes on different types of income and the regular income loss does not offset against the LTCG for the LTCG tax calculation.

Hope a MA expert can weigh in here...
 

#8
Wiles  
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Thanks for checking Nightsnorkeler. I am getting a bad feeling about this.

I wonder if I can use the tax benefit rule and exclude the accumulated depreciation from the gain on the sale...
 

#9
MilesR  
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Wiles wrote:Thanks for checking Nightsnorkeler. I am getting a bad feeling about this.

I wonder if I can use the tax benefit rule and exclude the accumulated depreciation from the gain on the sale...


I think MA only allows certain deductions against capital gain.
It also seems super unfair to make you depreciate property and disallow the deduction, and then tax the whole gain and not allow any of that unused carryover.
Last edited by MilesR on 29-Jun-2022 1:09pm, edited 1 time in total.
 

#10
sjrcpa  
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New Jersey and PA do the same I think.

I'm not a Mass expert, but I think the software is correct.
Mass has different buckets of income. Ordinary 5% income, 12% income and long-term capital gain income.
I don't see a netting on Form 1-NR/PY.
 

#11
Wiles  
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I also changed my dummy tax return to a full year resident MA just to remove any possible non-resident nuances. Same results.

Where are the MA folks?
 

#12
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You are looking for the Massachusetts Form C-2 which should allow you to free up those ordinary losses against the Massachusetts Capital Gain income. The losses have to be directly associated with the gain which these would be.

In ProFx, they have you input the Capital Gain amount associated with the losses and this frees up the deductions which will reduce Schedule D

I have seen many Mass Preparers miss this as the C-2 is an obscure form.

I would suspect other software has the same type of question.
 

#13
Wiles  
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Thank you!!

It's unbelievable Lacerte does not either do this automatically or, at a minimum, provide a diagnostic. The software knows the Sch E and the disposition are connected. smh

Again... Thank you!
Last edited by Wiles on 30-Jun-2022 11:10am, edited 1 time in total.
 

#14
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ProFx default is to ignore it as well and I think most other software as well. Like I mentioned, I have seen this missed by Massachusetts CPAs a lot and I remember thinking when it was pointed out to me (many years ago now) that I could guarantee you I missed it on someone.
 

#15
sjrcpa  
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We learn something new every day. Thanks!
 


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