Passive 1231 gain and capital losses

[tax_investment_life]

Hi All,

This seems to good be true, so I am trying to disprove this or poke holes.

• Client has a passive 1231 gain form a LLC K-1 (Box 10), about 600k.

• The passive gain frees up about 600k of passive losses from the same LLC. Makes sense so far.

• the 600k 1231 gain goes to 4797 and then to Schedule D. Makes sense so far

• On the Schedule D the 600k 1231 gain is being offset by ~400k of capital losses carry overs.

Net Result is a Schedule E page 2 loss of 600k (passive loss allowed with passive income) and only 200k of 1231 gains, this creates a Net Operating Loss and no tax. Everything seems to line up, but it just feels like we are taking 2 kinds of losses (passive loss carryovers and capital loss carryovers) against the same income. Any thoughts?

[sjrcpa · Accepted solution]

Provided the 1231 gain is passive, everything sounds correct.

[tax_investment_life]

Thank you!  I was having trouble finding confirmation that both losses could be used in checking form instructions.