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MASSACHUSETTS–How does TT handle suspended passive activity losses released in the CY due to disposition of the passive activity when those losses exceed Form 1 income?

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June 1, 2019
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In the current year, I have suspended passive activity losses (PALs) that should be released due to the disposition of a residential rental property. TurboTax is reporting the entire amount of previously suspended PALs on Form 1, line 7. Additionally, TurboTax is properly ignoring the Sections 1245 & 1250 recapture related to the gain on the sale of the residential rental property for MA income tax purposes. My issue is that the PALs are in excess of the Form 1 income that I am reporting. Additionally, the sale of the residential rental property has triggered a long-term capital gain. Therefore, I have a deficit reported on Form 1, line 10 and a long-term capital gain subjected to the 5.15% tax rate. It is my understanding that any excess PAL reported on Form 1 may be used to offset income reported on Schedule B and Schedule D following certain ordering rules. Does TurboTax automate these adjustments or will I need to deal with this manually? Also, does anyone disagree with my interpretation of MA income tax law with respect to offsetting Schedule B and D income with excess losses/deductions from Form 1?

TurboTax Deluxe Windows

Best answer by Joe-Dirt

Please ignore my question above. I feel as though I figured out the proper solution in TT. In case anyone has this issue in the future, it appears that the best approach (or possibly the only approach in TT) is to manually make entries on the MA Schedule C-2. I mistakenly thought that TT was identifying the manual adjustments that I made on this Schedule originally as overrides. This is not the case and, thus, allows for the proper reporting and should avoid the e-file nightmare associated with overrides.

J

Joe-DirtAuthorAnswer

Please ignore my question above. I feel as though I figured out the proper solution in TT. In case anyone has this issue in the future, it appears that the best approach (or possibly the only approach in TT) is to manually make entries on the MA Schedule C-2. I mistakenly thought that TT was identifying the manual adjustments that I made on this Schedule originally as overrides. This is not the case and, thus, allows for the proper reporting and should avoid the e-file nightmare associated with overrides.

S

StoddardV

I have a similar situation. I sold a rental condo in FL which I bought in 2014. For some years, my operating loss was limited $25,000 in each year. This has accumulated to a total "suspended loss" of about 50,000 over the years I owned it

TT reports this and accounts for it fine on Federal Return.

But on Massachusetts return, this suspended loss seems to be disallowed (I tried and failed to find info on this with a lot of searching so it may be this is the Mass. law). The net effect is that this $50,000 is considered Sched D income, which in MA is taxed at 5.1%. thus increasing my liability by $2550.

Can anyone with knowledge of MA rules shed some light on this?

M

mglauner

@StoddardV From mass.gov:

"Carryover passive losses which you may take upon disposing of your entire interest in the passive activity to an unrelated party in a fully taxable transaction may be used to offset:

Form 1 income
Form 1-NR/PY income
Schedule B income
Schedule D income"

If your losses did not carry over from your Federal return properly, you may need to make a manual entry to report them on Massachusetts Schedule C-2.

S

StoddardV

Thanks for your reply. You said...

"If your losses did not carry over from your Federal return properly, you may need to make a manual entry to report them on Massachusetts Schedule C-2. "

The "suspended loss" from prior years of my rental property did not carry over from FED to MA. But I cannot tell if this is because

A) Massachusetts will not allow the "suspended loss" from my FED return, or,

B) Massachusetts does allow it, but some reason TT did not correctly carry over to the Mass Return.

Do you have any idea if it may be A) or B) ? from my reading of

https://www.mass.gov/technical-information-release/tir-89-2-massachusetts-income-tax-treatment-of-passive-activity

It sounds to me like it is B). If so, this suggests TT got it wrong (which I am dubious about)

Thanks for any feedback