Using passive losses to offset capital gains

[Karen Young]

A syndication investment sold in December. The Sch K-1 was not marked "Final" because the sponsor held some money back. My CPA says the capital gain can not be offset by the passive losses because "the passive Activity must be disposed of in its entirety". Is he correct?

Mahalo nui loa!

[Ashish Acharya]

We cannot conclude without actually looking at the K-1 to conclude if this can be recorded a substantially all disposition. 

A taxpayer can generally claim suspended losses only upon the complete disposition of the activity in a fully taxable transaction. However, a partial disposition can be treated as a complete disposition if substantially all of the activity is disposed of and the taxpayer can establish with reasonable certainty the carryover deductions and credits, and the current-year income, deductions, and credits allocable to that part of the activity [Reg. 1.469-4(g)]. According to the IRS Passive Activity Audit Guide, taxpayers need to keep a separate set of books and records for the disposed part of the activity to meet this requirement. 

If you had grouped this activity with your other activities, there are other implication. We just do not have enough information to help you here.