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Arizona 25% Capital Gain Deduction

WilliamP
Level 2

Client recently moved to AZ and has Section 1231 gains passing through from several real estate partnerships, which will end up on Sch D and taxed as capital gains.   For the  25% AZ capital gain exclusion, Lacerte only picks up the Sch D capital gains for assets acquired after 12/31/11, which is the disposition screen input.  Are Section 1231 gains passing out of a partnership eligible for the 25% AZ gain exclusion?    The AZ statutes and regulations do not address the issue.     If they do qualify, how do you accomplish the Lacerte input.   It appears that 1231 gains qualify because if they are entered the gain through the disposition screen and trigger the Form 4797, then the 25% gain exclusion is triggered.    Rather than input the Section 1231 gain on the K-1 input one could move the gain to the 4797 input using the disposition screen and title the gain as "K-1 Passthrough ABC LLC", which would trigger the 25% deduction.   Frustrating not being able to get an answer to a simple question.   Called and emailed AZ two weeks and no response and they are not answering phones.  

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8 Replies 8
BobKamman
Level 15

If these were Arizona partnerships the state K-1 would include a page breaking down gains from before and after the 2011 date.  Since they are out-of-state partnerships, I suppose the first question is where were the properties located and does it really make a difference if you are figuring out-of-state tax credit.  But maybe these are just generic REITs with a little gain here and a little gain there.  So are you sure they were all post-2011?  In any case, Arizona doesn't have many people answering the phones, but then they don't have many people auditing returns either.  They can't help you with Lacerte input questions, but neither can I.  It's the same problem faced by anyone with a mutual fund that has capital gain distributions.

WilliamP
Level 2

This has to be a frequent issue in AZ.   I actually verified the acquisition date for the two largest gains, which are approximately $400K.   All of the other partnerships were formed after 2011 so the property sold would have been acquired after that date.   If Arizona decides to question the acquisition dates, I can always request a copy of the Form 4797 from each partnership.   The real issue is with how Lacerte handles the input.   The K-1 input does not have a box for the post 2011 AZ gain.   The only amount that is carried to Line 22 on the AZ return is from the Screen 17.1 Dispositions.   Lacerte does have an override option for Line 22 on Screen 51.101, which is the AZ override screen.   However, if you try to use the override you end up with a critical diagnostic, which states you need to use the worksheet but the worksheet has no input for the passthrough gains.   The return needs to be filed electronically.   Filing paper will require a lot of attachments since the taxpayer files in a large number of states. 

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PhoebeRoberts
Level 9
Level 9

"Rather than input the Section 1231 gain on the K-1 input one could move the gain to the 4797 input using the disposition screen and title the gain as "K-1 Passthrough ABC LLC", which would trigger the 25% deduction."

... that looks like a pretty simple workaround to me? I've done much worse to get an accurate return that meets e-file specs. Don't forget to manually adjust your basis in the K-1 input screen.

WilliamP
Level 2

My initial thought was to move the gain to the disposition screen exactly as you proposed.    That may work because the 4797 gains are comingled on Sch D, Line 11.     Maybe some AZ tax professionals will chime in as to whether that seems to work for the IRS matching program.    This has been a Lacerte issue since 2012 and no resolution.    

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BobKamman
Level 15

If I bought property in 1998, then contributed it to a partnership formed in 2012, what is the acquisition date for Arizona capital-gains purposes?  At least it's highly unlikely that any Arizona auditor would be asking.  

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WilliamP
Level 2

Bob the acquisition date would be the original purchase date, if it was a tax free contribution.    There are special rules to account for the built in gain and loss on the date of contribution.   The other partners would not be able to take the 25% deduction on the date of sale, if the original acquisition date was prior to 2012.   That and gifts is probably the reason AZ requires actual verification of purchase date.

 

    

 

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BobKamman
Level 15

I was just asking because you wrote, "All of the other partnerships were formed after 2011 so the property sold would have been acquired after that date."

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WilliamP
Level 2

Sorry everyone.  I wasted my time and yours.    There is a line under the partnership K-1 input for capital gains for the AZ qualifying capital gains.    I must be blind.    An entry in the box will result in the 1231 gain being treated as qualifying capital gains.    The override box on Screen 20 is only for paper filed returns.