Reporting loss from a Final K-1 on a passive investment---Help!!!

Forum|Forum|1 year ago
March 23, 2025
2 replies
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I received a "Final" K-1 for a passive investment I made that turned out to be a total loss. I invested $20,000 in this project (my basis) but the Final K-1 shows an Ordinary Income loss of $125,000. I'm not sure how that is possible on a $20,000 investment. In order to claim the loss on my tax return (i.e. so that it is not limited to passive gains), I Quick-Zoomed to enter disposition of partnership info which took me to the Additional Info sheet for the K-1. In Part II, I entered the sales price of 0 on Line 5 and my basis of $20,000 on Line 7. The result is a Long Term Loss of $20,000. That seems right. But the 1040/Schedule E reflects a loss of $125,000, which seems wrong considering the amount of my investment. Am I doing something wrong? Or do you think the K-1 is incorrect???

PatriciaV

Employee

Schedule K- 1 is reporting your share of the partnership ordinary loss for the year. If you don't have sufficient basis in the partnership to claim the entire amount of allocated loss, the excess will be carried forward to future years as a passive loss carryover. The carryover will be applied to passive income in future years.

The loss from the dissolution of the investment is a capital loss, some or all of which may be deductible this year (depending on other capital gains also reported on your return). Again, if you don't have capital gains to offset the loss from this investment, any excess will be carried forward as a capital loss carryover. You can claim up to $3,000 of capital losses each year until the carryover is used up.

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davidsilverman2-Author

Patricia, that would make complete and total sense if the $125,000 loss were reported as a capital gain/loss. But it is not....it is shown as an ordinary income loss on the K-1, which doesn't make sense considering my $20,000 investment in the venture. But because it is reported as ordinary income loss, TurboTax is allowing a deduction this year for the full amount...$125,000. That doesn't seem right, especially since I reported my basis as $20,000 in Part II of the K-1 Additional Information form. Shouldn't TurboTax be limiting my deduction to that?

Rick19744

Employee

A couple of comments:

Not sure how long you have had this investment, but have you maintained a tax basis schedule?
If you have not indicated if this K-1 is associated with an S corporation or a partnership.
I am going to assume this is a partnership.
Do you have any suspended passive activity losses from this activity?
What does your K-1 box L show as beginning of the year capital account?
In Part III is there any income reported in any of the boxes?

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

Mike9241

We can't answer your question. You are only allowed to deduct losses to the extent you are at risk or have tax basis, whichever is lower. To start with, your at-risk/basis amount is only $20K. What that other addition of $105K as shown in schedule L is, we don't know. Thus, we don't know if it adds to your at-risk/basis. It may merely be a plug to zero out your capital account and not give you basis or increase your at risk amount. if correct. this would limit your loss deduction to $20K

davidsilverman2-Author

TurboTax is allowing me to deduct the entire $125K ordinary income loss shown in the K-1. In order NOT to do that, I would have to overwrite something, and I'm not sure what that would be or how to do that. Can you provide guidance on that?