K1 challenges on syndication

[Roy Mitle]

I invested 50K in a syndicate. They used cost seggregation and put 50K as losses in year 1.  This showed up in box2 of K1. My CPA put that as loss in my tax return and carried it over.

Next year they sold the property for a gain of 32K. They put that 32K in box 10. I also see 5K as rental income loss in box 2 of the K1.

My CPA says that 32K is section 1231 gain and so goes into capital gains

However, I feel the box 10 gain should go against my loss of 50K +5K from box2. So I should not be paying any extra taxes. The syndicate agrees with my position. 

In a nutshell, can I offset my gain in box10 with loss from box2 and other passive activity losses (eg. I have a rental property that has passive carryover loss ~125K from years of depreciation)

[Michael Plaks]

@Roy Mitle

Your post may be omitting important details, so my answer is based on what you shared. For instance, I assume that the sale of the property was also the final year of the syndication and you received a "final" K1.

1. Yes, you're correct, the carryforward loss of $50k from the last year should offset your gain. It does not directly offset it, the mechanics are complex, but you should benefit from the $50k losses, resulting in no additional taxes from the sale. I'd speculate that your CPA failed to check the "complete disposition of activity" checkbox in his tax software, keeping these losses locked instead of releasing them.

2. Regardless of the K1 being final, any time you have 1231 gains on K1, they are "gains from passive activity" and they can be offset by losses from any other passive activity, i.e. your $125k stash.

3. Doing cost segregation in year 1 and selling the same property in year 2 makes me question the competence if your syndicator. Normally, it's a counterproductive move with such short cycle.