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The investment interest expense I entered is offsetting rental real estate income instead of properly against related capital gains. How do I fix that?

Forum|Forum|6 years ago
December 7, 2019
8 replies
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The interest expense was entered on 4952 along with income from the related capital gains and dividends. The expense properly flows to p1 of 1041. However, on the K-1 the expense is reflected as netted against net rental real estate income instead of against net short term capital gain.

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Best answer by sjrcpa

On a 1041 the interest deduction goes to page 1 of the 1041 and doesn't particularly offset any specific thing.

Do you have a DNI calculation question?

S

ShawnCAAuthor

Level 3

This is related to 1041, not 1040

itonewbie

Level 15

Works the same way. Where do you see these offsets happening?

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S

ShawnCAAuthor

Level 3

The issue is on the "Distributable Income for Schedule (s) K-1" In Part II There is income numbers in columns a,c,d,e,f -- if I check the box to allocate the interest expense pro-rata to all classes, each column with an income number gets an allocation; if I don't check the box to allocate the interest expense pro-rata to all classes, only columns (e) and (f) get the allocation.

I am trying to have the interest expense allocate only to column (d) capital gains, which is what the interest expense is related to .

sjrcpa

Level 15

Well now I see what you mean. Did you enter it in the corpus column? (If PTO has one, big sister Lacerte does)

The more I know the more I don’t know.

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ShawnCAAuthor

Level 3

I am not sure I know what this means, on the same form?
I contacted support, but they were stumped (after an hour and a half!), and told me to override, which means I would have to override the K-1 amounts as well. I would like to avoid that if possible.

itonewbie

Level 15

.

---------------------------------------------------------------------------------Still an AllStar

sjrcpaAnswer

Level 15

On a 1041 the interest deduction goes to page 1 of the 1041 and doesn't particularly offset any specific thing.

Do you have a DNI calculation question?

The more I know the more I don’t know.

itonewbie

Level 15

Could you clarify what you meant? How is investment interest offsetting rental real estate income? And how would you like it to offset capital gains?

If you're referring to F.4952, rental income subject to PAL is generally not considered net investment income. Capital gains are not either because you can't use an income that's taxed at a lower rate to allow an expense that would reduce an income at marginal rate, unless an election is made to forego the preferential treatment. In fact, PTO would optimize that for you and even give you a suggestive diagnostic.

All of these happen on F.4952 and Sch A, so there is no offset against the rental real estate income or capital gains per se.

---------------------------------------------------------------------------------Still an AllStar

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