If you sold, exchanged, or otherwise disposed of your entire interest in a partnership or other K-1 investment during the tax year, you may be able to deduct passive losses that were previously suspended by the passive activity loss rules.
When a complete disposition qualifies under IRS rules, those unused passive losses can generally be reclassified and deducted in the year of disposal. To report the reclassified loss in the software, you'll need to create a second K-1 entry.
How do I enter a reclassified passive loss?
- Create a second K-1 entry in your return.
- In the partnership name field, enter "Reclassified Loss" instead of the partnership's name. This makes it easier to identify the adjustment on your tax forms.
- Enter the reclassified loss amount in Box 1 as a negative number.
How will the loss appear on my return?
Why is a second K-1 entry needed?
Creating a separate K-1 entry helps distinguish the reclassified loss from your regular partnership activity. This allows the software to report the previously suspended passive loss correctly as an allowed deduction in the year you disposed of the investment.
Only passive losses that were suspended in prior years and become deductible because of a qualifying disposition should be entered as a reclassified loss. Be sure your records support the amount of suspended loss being claimed.