1031 exchange cash out offset by passive losses

[Chris Gilbert]

We did a 1031 exchange in 2020 where we exchanged a smaller, older house we bought in 2010 for a much larger, newer house.  The exchange went well.  When we did the exchange, we took out $25k knowing we would be taxed on this portion of the gain.  At the same time, we have passive losses from our rental portfolio primary due to rehabbing we did on the house we sold and the house we purchased.  My question is:

Is the $25k gain taken out of the 1031 exchange offset by passive losses?

I don't see how this shouldn't be true, but TurboTax shows it as taxed at our capital gains rate.  At the same time, I'm not an expert in this area.  The information I have found on the Internet is all over the place, but some suggested TurboTax is not handling this correctly.  I didn't see a similar question on BiggerPockets, but maybe I just missed it.

I don't want to hijack my own thread, but I'll add that I do plan to consult a CPA or tax expert, I am looking for a tax expert, and I will likely work with a tax expert going forward.  I went ahead and estimated my taxes based on my assumption, paid more taxes, and filed an extension.  I will be looking for someone to assist me in filing my taxes before October.

[Michael Plaks]

Originally posted by @Tom Degroodt:

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