USA Form 8582 Passive Activity Grouping Question

[TaxGirl]

I have two rental properties that were reported on Schedule E prior to being contributed to an LLC. Spouse and taxpayer own the LLC. Prior to contribution to the LLC, each property was previously considered a separate activity on Form 8582. Upon contribution to the LLC, can and should K-1 losses from these properties be aligned with previously suspended losses by property?

My tax software and taxpayer/tech support insist the only way to present the K-1 losses is by investor, thus two new groups have been presented on Form 8582 for the taxpayer and spouse's share of the rental losses (separate from the 2 existing groups for the previously suspended Schedule E losses). They believe the Schedule E losses should have been released when the property was contributed to the LLC and subsequent losses should be presented by investor, but the contribution was a nontaxable transaction.

I want to maintain the separate tracking of these activities, so that when one property is sold previously suspended losses from that property/rental activity will be released to offset any gain. If the presentation is now by investor, both properties or investments in the LLC would have to be sold to trigger the release of the losses, right? Am I missing something?

 

[Drmdcpa]

Husband and wife own the LLC? The easiest thing to do would have been to accept the default allocation as a disregarded entity. This would have resulted in a continuity of tax treatment on your personal return.

If that was not done, I cannot imagine why, except that you are probably not getting the best tax advice. It appears you file your own returns? Therein lies part of the problem.

Passive losses should not have been released in transfer.

 

[TaxGirl]

Husband and wife own the LLC? The easiest thing to do would have been to accept the default allocation as a disregarded entity. This would have resulted in a continuity of tax treatment on your personal return.

If that was not done, I cannot imagine why, except that you are probably not getting the best tax advice. It appears you file your own returns? Therein lies part of the problem.

Passive losses should not have been released in transfer.

Thank you for the helpful advice. My understanding, however, is that disregarded entity default would only apply in a community property state which is not the case here. I am also aware of an election to be treated as a joint venture, but that does not apply in the case of an LLC. Would there have been another option?

 

[Drmdcpa]

You can still elect to be treated as a disregarded entity. It is the default for community property states and an affirmative election in common law states.

 

[TaxGirl]

Affirmative election via 8832? Can't an LLC with two members only choose between a partnership and a corporation?

 

[Drmdcpa]

Husband and wife can elect to be treated as one. This is the default in community property states. It has to be affirmatively elected in common law states.