Suspended Losses

Technical topics regarding tax preparation.
#1
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Upon sale of an entire interest in a passive activity, suspended losses are fully activated. However if the sale is an installment sale, suspended losses are only deductible in the same ratio that gain realized bears to gross profit. I cannot find that this rule applies if the sale is of a non passive interest and the suspended losses are due to basis limitation. Assume that the taxpayer has outside stock basis in excess of suspended losses at time of sale. Would the suspended losses be prorated in the same manner as the passive suspended losses or would they be fully deductible? Thank you.
 

#2
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Why would the shareholder have suspended losses if he/she had enough basis to take the losses?
 

#3
Nilodop  
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If the suspended losses are due to basis limitations, but he has outside stock basis in excess of the losses, why were they suspended? Posted before seeing prev. post.
 

#4
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The suspended losses were from 2019 and 2020. The business had profit in 2021 plus shareholder made capital contributions in 2021.
 

#5
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dave1040 wrote:The suspended losses were from 2019 and 2020. The business had profit in 2021 plus shareholder made capital contributions in 2021.


So the question still remains: Why would the shareholder still have suspended losses at the time of sale if he/she had enough basis to take the losses?
 

#6
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The suspended losses would be taken fully in Schedule E in the year of sale. The losses taken then reduce the stock basis which then the cap gain is spread over the installment period.
 

#7
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Thanks Taxmaster for taking the time to understand what I was asking. That was what I was I was hoping to hear.
 

#8
Nilodop  
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Taxmaster is not the only one who understood what you were asking. So did Verytaxing and I. You see, once the remaining suspended loss was used/absorbed by the 2021 income and capital investment, it no longer existed. They were treated under 1366(d)(2) as if they had occurred in 2021 and thus were able to be used, as Taxmaster said, on Schedule E. That's not the same as what OP refers to as suspended losses at time of sale. They were used before the sale.
 

#9
COGS  
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I have a final K-1 for a client that never had basis but was allocated several hundred thousand in losses. No debt. I have no idea why the person putting putting in the cash did not get the losses as I don't do the partnership return. So since my final K-1 has hundreds of thousands in negative capital, am I correct in putting that as long term capital gain on Schedule D and then in the area for the suspended basis losses in the K-1 input area add in that amount as an increase to basis and then he gets to use the loss as an ordinary loss? I always thought the goal of "substantial economic effect" was so that there is flexibility in allocating losses so things like this do not happen. Or maybe I am committing malpractice when I don't allocate losses to people in excess of their basis.
 

#10
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It sounds like the 1065 was prepared incorrectly. I see it all the time, but that doesn't make it right.

As a final K-1, there should have been income allocated to your client to bring the capital account to zero, but if you don't know what you're doing for the first part (allocated losses), you probably don't know that you're supposed to do the other (allocate income in final year). There are, of course, circumstances where that doesn't apply. Just depends...

I'm not sure I would feel comfortable playing tax rate arbitrage in the manner you're describing with this set of facts. However, I think there is an argument to say it's okay to do so.
~Captcook
 

#11
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Could be correct… 704c makes for some weird allocations

Taxpayer’s gain on disposition is based on tax basis, not capital account.

Was taxpayer ever allocated a share of liabilities that would provide basis for a loss deduction?
 

#12
COGS  
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Thanks for the input. I think I will ask the client to ask about the negative capital account.
 


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