Changed rental property from sole proprietorship to husband-wife partnership on Jan 1, 2022. Manually filled out 1065 and K-1's. Where do I enter the K-1 lossses?

[korz]

My wife and I bought a condo in 2021 and got a very small amount of rent in 2021, which we did as a sole proprietorship on our 2021 taxes, via TurboTax Home and Business.  I think it was a Schedule E.

Starting Jan 1, 2022, we created a partnership LLC and I recently filled out a Form 1065 (along with the form 8825, form 4562, and two K-1's) and sent all the forms in to the IRS last Wednesday (March 15, 2022... the deadline).  We had a loss, which I split 50/50 on the K-1's.  Now TurboTax Home and Business (I have another sole proprietorship) thinks I still have the sole proprietorship rental business from last year and says I have $3,100 of carryover loss, which it seems to think is a passive loss... it's not, it's an at-risk loss... we were always involved in the management and decision making of the rental, even though we had an agent in Florida to do some of the management for us.

In 2022 there were 6 months when we couldn't find a tenant, so we ended up with a $15,200 loss.

Question 1: Where do I enter the K-1 losses on the Home and Business desktop software?

Question 2: How do I let the TurboTax software know that I changed the business from a sole-proprietorship to a partnership?

Question 3: Can I still utilize that $3,100 carryover loss from 2021 and if so, how do I do that, or do I simply lose that by changing from the Schedule E to two K-1's?

Thanks.

[KrisD15 · Accepted solution]

“My wife and I bought a condo in 2021 and got a very small amount of rent in 2021, which we did as a sole proprietorship on our 2021 taxes, via TurboTax Home and Business.  I think it was a Schedule E.”

If it was reported on Schedule E, it was NOT a business, it was not reported as  Sole-Proprietorship (Self-Employment) income.

Schedule E reports rental income. This is how rental income is normally reported. It is passive income.

A Sole Proprietor files as a business and uses Schedule C. It reports EARNED income.

Question 1: Where do I enter the K-1 losses on the Home and Business desktop software?

Personal 

Personal Income

Business Investments and Estate/Trust Income

Schedule K-1

“Question 2: How do I let the TurboTax software know that I changed the business from a sole-proprietorship to a partnership?”

You will need to report the income and expenses for 2022 (although you may not have any) and report that the rental was converted to personal use. 

This will close out the rental.

If you took any bonus depreciation and/or Section 179 Deduction on assets you added to the rental, such as appliances, the basis will need to be adjusted for that depreciation and/or deduction. 

Any depreciation on the building will adjust your basis. So if you purchased the condo for 275,000, and depreciated it 10,000 for the one year it was a rental, your adjusted basis is 265,000. 

The basis of the property for the partnership will be your adjusted basis.

 Depreciation starts over for the Partnership. (This is reported on Form 1065)

Question 3: Can I still utilize that $3,100 carryover loss from 2021 and if so, how do I do that, or do I simply lose that by changing from the Schedule E to two K-1's?

Yes, you can list the loss carry-over on the K-1’s. 

HERE are links that address that situation. 

Passive Activity Loss

Enter Passive Loss from Prior Years 

@korz

[Edited 03/20/2023 | 5:08 pm PST]

[korz]

Answer 1: Thanks!

Answer 2: Followup question: But we didn't change it to personal use... we simply went from renting it as a sole proprietorship to a partnership.  Also, we did not formally transfer ownership of the property from our names to the LLC.  I found out that this was next to impossible and we'd have to refinance the property.  Even if we assumed that we could transfer ownership (why would a bank want to write a loan for a property that lost money in years 1 and 2?), we'd lose our sweet 3.5% mortgage and would have to get a new 7% mortgage.  No... I'm afraid we're still going to always own this property personally, even if the income comes in as partnership income in 2022.  Does that change your answer?

Also, I've had it with all the additional partnership paperwork hassles.  I've decided to change it back to a sole-proprietorship in 2023.  If we say that this started Jan 1, 2023, does that change your answer?

Answer 3: I've read the passive income rules several times and this is not passive income.  We do everything except billing the tenants, managing the listings (Airbnb, VRBO, etc.), and paying the maids.  We visit the condo  several times per year and we upgraded furniture in 2022,  We personally repainted the whole condo in 2022.  We hired a company to clean and waterproof the sleeper sofa.  We pay all the bills monthly (mortgage, electricity, HOA fees, insurance, etc.).  We hired contractors to fix the broken shower valve.  We bought a new dishwasher and hired a contractor to install it in 2021 - and again bought another new dishwasher in 2023 and paid a contractor to install it (sheesh!).  That's not passive, is it?

However, when I opened the "Do any of these situations apply to this property?"  TT had "Do I have passive activity real estate losses carried over from a prior year" was checked and when I click Continue, it shows how I have -3,103 Sch E Regular Tax Carryovers and -3,103 Sch E AMT Carryovers and -3,103 Sch E QBI Carryovers.  When I unchecked that and checked the "I have at-risk losses carried over from 2021." the next page shows empty boxes for At-Risk Losses From Prior Years.

It seems that TT decided that this was a passive income and there's nothing I can do about that short of filing an amended return.

Am I right?

Thanks again.

[Carl]

Long term residential rental real estate is not a sole proprietorship by any stretch of the imagination. A sole proprioetorship produces non-passive income and gets reported on SCH C as a part of your personal 1040 tax return. Income from rental real estate is non-passive and therefore gets reported on SCH E as a part of your personal 1040 tax return. If you have not been reporting your rental income on SCH E in the past, then you have a major issue that is beyond the scope of this forum, and will require professional help to make things right. This is especially true if your state taxes personal income, as if you reported it incorrectly in the past, then you have a double-whammy.

If you did "in fact" report this on SCH E in the past, then work through the property and each individual asset to indicate you converted the property to personal use, one day before it was acquired by the partnership.

On the 1065 partnership return, the in service date will be exactly the same as it was on the SCH E, since there was no change of ownership that occurred due to a taxable event. (such as selling the property)

Additionally, since the in service date can not be before the partnership was established, that means your "date established" for the partnership must be the same as or before the "in service" date of the property. Since there is no ownership change, things will be fine. (The same people that owned the property, are the same people that own the partnership - so there is no taxable event here.)

[korz]

I don't understand why rental real estate cannot be a sole proprietorship.  If I was single, bought a condo, and used it only for short term rentals, I wouldn't imagine forming anything other than a sole proprietorship.  A lawyer I spoke to about this, informally, had no problem with my changing the rental business from a husband-wife partnership to a sole proprietorship.

Yes, the rental income in 2021, before we formed the partnership, was reported on a Schedule E.  I had heard that it was a good idea for a rental property business to be an LLC because you could protect your other assets if you were sued for liability.  So, when I created the LLC, I chose partnership because I thought it would be nice to have my wife and I co-own the business.  I already had a sole proprietorship where I sold air purifiers (www.midwestpureair.com, if you're in the market).  This was before I had heard that if the funds of the business are *ever* co-mingled with your personal funds (ours funds have, but only to the benefit of the partnership... that is, we contributed capital to the partnership when we didn't have enough money from rents to pay the mortgage and HOA fees), a smart lawyer would find this out during a liability suit and the LLC would not protect our assets.  So, at the moment, it's a partnership LLC, but I do want to change it to a sole proprietorship simply because the taxes are so much easier.  I could do the Schedule E with TT Home and Business rather than having to buy TT Business which is twice the price and I'm not even certain that TT Business allows me to do a personal tax return, which might mean that I have to buy both TT Home and Business for my W2 taxes, my wife's W2 taxes, and my Schedule C for my air purifier business, PLUS TT Business for the 1065, 8825, 4562, and K-1's, or struggle with them manually every year, which I don't want to do.

So, if I understand correctly, you are saying that the property used by the partnership would be converted to personal use for just several hours, only to be then taken over for rental use by the sole proprietorship?  What my lawyer friend informally said was that I would write a contract with my wife relinquishing my 50% ownership in the partnership, which would have the partnership default back to a sole proprietorship, if I understood correctly.  The mortgage is and has always been in both of our names and was never transferred to the partnership.  We simply used the property we jointly owned to run a business we jointly owned.  It is my understanding that a family member can be an unpaid employee of a family business, so that I can still do the taxes, hire plumbers, and seal the grout at no cost to the business where my wife is the sole proprietor.

But the partnership *was* formed several months after we bought the property.  We bought the property on September 1, 2021 and we began using the property to make money for the partnership on Jan 1, 2022.  Before that, we had one tenant that was left over for the month of September from the previous owner and that income I claimed on a Schedule E on my 2022 1040... and yes, I would have paid Illinois state income tax had we made a profit, but we didn't.

I think it best that I pay a lawyer to draw up the papers to change the partnership to a sole proprietorship and I think that I can say in the contract that I relinquish all income starting from Jan 1, 2023 to my wife, which would then allow us use the Schedule E on our 2023 taxes.  Meanwhile I will try telling TT Home and Business that the property was changed to personal use on Dec 31, 2021 to get TT to stop keep bugging me about a Schedule E.  Then I'll find where to enter income from the two K-1's I generated (one for my wife and one for me) in my 2022 taxes.

Do I have this right?

Thanks.

[Anonymous_]

At this point, in addition to consulting with legal counsel, you might also want to consider seeking guidance from a local tax professional. 

See https://taxexperts.naea.org/listing/service/business-tax-preparation

[Carl]

I don't understand why rental real estate cannot be a sole proprietorship.

For a sole propritorship, one must go out and actually "do something", usually on a recurring basis to actually "earn" the money they are paid. This produces non-passive income. That money is reported on SCH C. That income, in addition to "normal" income tax, is also subject to an additional 15.3% self-employment tax "on top of" the normal tax. The self employment tax is basically the employer's side of medicare and social security.

Rental property produces passive income. That means all you do it "sit there" doing nothing beyond walking to the mailbox every pay period to collect the rent check. Therefore, rental income is reported on SCH E. Passive income is *not* subject to the additional 15.3% self-employment tax. This means that rental income can not be used when figuring your maximum allowed retirement contribution, and it does not count towards your future social security payments.

A lawyer I spoke to about this, informally, had no problem with my changing the rental business from a husband-wife partnership to a sole proprietorship.

Most likely the lawyer you "informally" spoke to, assumed you knew the difference.

Yes, the rental income in 2021, before we formed the partnership, was reported on a Schedule E.

So that confirms you reported it correctly.

I had heard that it was a good idea for a rental property business to be an LLC because you could protect your other assets if you were sued for liability.

Not necessarily true to the extent you may have been led to believe. I know in FL such protection is limited, which is why it's called a "limited" liability company. Personal assets are at no more or no less protection than they are without the LLC; depending on the extent of responsibility the owner has which may have generated the legal action against them in the first place.

I already had a sole proprietorship where I sold air purifiers (www.midwestpureair.com, if you're in the market).

... and that was a business where you had to go out and "do something" on a recurring basis to actually "earn" that money. Which is why it was reported on SCH C.

that is, we contributed capital to the partnership when we didn't have enough money from rents to pay the mortgage and HOA fees),

Now, you're referring to your air purifier business as a partnership, whereas earlier you stated it was a sole proprietorship. It can't be both. Either it's a sole proprietorship which can only have one owner, or it's a partnership that must have at least two owners/partners.

I'm also noting that you "seem" to be "suddenly" concerned about legal action from a tenant. It sounds to me like some lawyer is taking advantage of your lack of knowledge on things, to their own benefit.

a smart lawyer would find this out during a liability suit and the LLC would not protect our assets.

Hey, if it's a case of negligence on the landlords part, even a not-so-smart lawyer has a good chance of attacking your personal assets; LLC or no LLC. In my county, I've seen such cases given to the "new hire" lawyer on the basis that it's usually an easy win and a great confidence booster for that new hire.

So, at the moment, it's a partnership LLC, but I do want to change it to a sole proprietorship simply because the taxes are so much easier.

If you've already established the partnership and transferred the property to that partnership, you can't just arbitrarily "change it" to another business structure type. You have to dissolve the partnership and then create a new single member LLC. But doing that is still a waste, as you still will not be reporting anything concerning the rental on SCH C.  You'll just continue to report it on SCH E "as if" nothing what-so-ever changed.

When you put a rental property into a single member LLC, absolutely nothing changes on the tax front. You "still" report the rental income/expenses on SCH E, "exactly" as you have been in the past.  If the only thing owned by the single member LLC is the rental property, then absolutely nothing concerning the rental property is reported on SCH C.

[korz]

I did pay an H&R Block guy to help me fill out the form 1065.  When I started having trouble following his directions, I watched a half dozen youtube videos on the form 1065 for real estate property.  I discovered that he told me completely wrong: he had me filling out page 1.  Wrong.  Real estate income comes in on a form 8825 and that is entered in schedule K of the 1065 on page 4.  So, tax professionals aren't automatically more knowledgeable about tax issues.

[Carl]

So, tax professionals aren't automatically more knowledgeable about tax issues.

Not all of them anyway. In some states, anyone can hang out a shingle and call themselves a "professional" in any number of professions; not just tax folks. With income taxes, you can have anyone calling themselves a "professional" even when they are just an Enrolled Agent with no "formal" education when compared to that of a CPA or Tax Attorney.

I discovered that he told me completely wrong: he had me filling out page 1. Wrong. Real estate income comes in on a form 8825 and that is entered in schedule K of the 1065 on page 4.

Then when you enter the K-1 on your personal 1040 tax return, all the rental data still ends on on SCH E. But it ends up on page 2 of the SCH E instead of page 1. So any way you look at it, your rental income/expenses "still" get reported on SCH E as a part of your personal 1040 tax return.

So, tax professionals aren't automatically more knowledgeable about tax issues.

Unfortunately, the few that are clueless tend to shed bad light on all the numerous good ones out there. (A few of those good ones are actually active participants in this forum, and have been for many years. It's how I learned some of this stuff without having to attend the "school of hard knocks.")

[Anonymous_]

---

@Carl wrote:

With income taxes, you can have anyone calling themselves a "professional" even when they are just an Enrolled Agent with no "formal" education when compared to that of a CPA or Tax Attorney.

---

Sorry, @Carl, but you are misinformed with respect to Enrolled Agents.

See https://www.irs.gov/tax-professionals/enrolled-agents/enrolled-agent-information

[korz]

I do appreciate your helping me understand this and apologize why it's taking so long for me to "get it."  I think I'm starting to understand our disconnect.  You keep saying:

"For a sole propritorship, one must go out and actually "do something", usually on a recurring basis to actually 'earn' the money they are paid."

But I did explain that I do "do something" in my last post.  This is a *short-term* vacation rental.  I have a management company in Florida that maintains the calendar, takes calls from potential renters, does the billing, and has contracted maids, but my wife and I approve rent discounts, hire plumbers to fix shower faucets, pay the mortgage/electricity/AmazonPrimeVideo/HOA bills every month, purchase appliances when they fail and hire contractors to install them, and we go there several times per year to improve the unit (new paint, new furniture, scrubbing the tile floor and sealing the floor grout annually, new TV, etc.).  We also seek out tenants.  I spend more hours per year on this condo than I do on my air purifier business.

I just looked up what the IRS says regarding rental property and they do say that you usually claim rental property income on schedule E (just as you said), but the IRS also says:

"Schedule C (Form 1040), Profit or Loss From Business

Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer.

Providing substantial services.

If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C. Use Form 1065, U.S. Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Substantial services don’t include the furnishing of heat and light, cleaning of public areas, trash collection, etc. For more information, see Pub. 334, Tax Guide for Small Business. Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. For a discussion of “substantial services,” see Real Estate Rents in chapter 5 of Pub. 334."

We do provide laundered linens and maid service between tenants, plus we provide Amazon Prime Video, WiFi, and some basic staples like coffee, sugar, etc.  I pay the management company for those services because I live 1000 miles away.

I'm going to read Pub 334.  I'm a little concerned about self-employment, but so far TurboTax has done all the calculating of tax for me and I'm confident they are creating a schedule SE if I need it.  I do have a W2 income and probably max out the Medicare and Social Security deductions via my salary.

Also, you confused me when you said (three posts ago):

"Income from rental real estate is non-passive and therefore gets reported on SCH E as a part of your personal 1040 tax return."

I think you meant to say "passive income."

Again, this is not a "just go to the mailbox and get a check from an annual tenant" business.

You wrote: "Now, you're referring to your air purifier business as a partnership, whereas earlier you stated it was a sole proprietorship. "

I was referring to paying bills of the rental property from our personal checking account (mixing personal and business finances).  I only brought up the sole proprietorship air purifier business because I spend fewer hours per year working on that business and there's no dispute that it's non-passive income.  I heard that same story about giving new lawyers LLC liability cases to build confidence.  I only heard that after I had already created the LLC.

Thanks for your effort in explaining this.  I want to get away from the partnership because I don't want to manually do the 1065, 8825, 4562, and K-1 forms and am too cheap to buy both TT Home and Business and also buy TT Business for the partnership income.

My understanding of why I want this to be considered a non-passive income is because my salary is a non-passive income and if I have a $15,000 loss in 2022 and this is a passive income, I can only carry forward the loss to a subsequent profit from this or another passive income, right?  If it's a non-passive income, then I can take the $15,000 loss in 2022 against my 2022 W2 income, correct?

[Carl]

One has to be really careful with short term rentals, as very few I've ever dealt with actually qualify as a SCH C business per IRS guidelines. If you've been reporting your rental income/expense on SCH E in the past, that would indicate to me that your setup does not qualify as a "trade or business" per IRS guidelines. At least, that was most likely true in the tax year it was set up as such. I'm not aware of anything that would change that now-a-days.

Providing substantial services.

If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C.

Key words are "primarily for your tenant's convenience"

The things you list:

I have a management company in Florida that maintains the calendar, takes calls from potential renters, does the billing, and has contracted maids, but my wife and I approve rent discounts, hire plumbers to fix shower faucets, pay the mortgage/electricity/AmazonPrimeVideo/HOA bills every month, purchase appliances when they fail and hire contractors to install them, and we go there several times per year to improve the unit (new paint, new furniture, scrubbing the tile floor and sealing the floor grout annually, new TV, etc.). We also seek out tenants.

None of that is done to be directly beneficial to the tenant. Cleaning between tenants is normal. You pay for utilities, HOA, etc. weather the unit is occupied or not. Appliances/plumbing/electrical problems get replaced/fixed when needed, regardless of occupancy. Scrubbing/sealing floors is normal cleaning/maintenance done weather there's a renter in it or not.

If you’re providing hotel-like perks such as regular cleaning or maid service (in excess of 10% of the rental cost), fresh linens or towels, in-room coffee, transportation, or sight-seeing, you’re providing substantial services and that put you closer to reporting on Schedule C.

I would highly advise you seek the services of a local tax professional in your area. One familiar with FL tax law is not really necessary beyond the extent of registering your partnership LLC in the state of FL. If the county/city/township where the rental is has any local laws or ordinances governing STR's, I'd expect you are already aware of it, as that comes into play too. (In my county within the city limits, STRs are required to be registered with the city and pay a yearly registration fee and pass yearly safety inspections, just like hotels do.)

[korz]

@CarlYou appear to be absolutely correct (except above where it seems that you meant "passive").  As much as I may feel that my participation in this business was time consuming and I didn't just cash checks that came in the mail, according to the IRS, this is a passive income.

I looked up IRS Publication 334 and it was no help other than to point me to Publication 925.

According to Pub 925:

"Rental Activities

A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. See Real Estate Professional under Activities That Aren’t Passive Activities, later. An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. It doesn’t matter whether the use is under a lease, a service contract, or some other arrangement.

Exceptions.

Your activity isn’t a rental activity if any of the following apply.

1. The average period of customer use of the property is 7 days or less. You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. The activity's average period of customer use will equal the sum of the amounts for each class.

2. The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. Significant personal services include only services performed by individuals. To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. Significant personal services don’t include the following.

   1. Services needed to permit the lawful use of the property;

   2. Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental; and

   3. Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs.

3. You provide extraordinary personal services in making the rental property available for customer use. Services are extraordinary personal services if they’re performed by individuals and the customers' use of the property is incidental to their receipt of the services.

4. The rental is incidental to a nonrental activity. The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. The rental of property is incidental to a trade or business activity if all of the following apply.

   1. You own an interest in the trade or business activity during the year.

   2. The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years.

   3. Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience.

5. You customarily make the rental property available during defined business hours for nonexclusive use by various customers.

6. You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity.

If you meet any of the exceptions listed above, see the Instructions for Form 8582 for information about how to report any income or loss from the activity..

Special $25,000 allowance.

If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that’s disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing the passive activity loss. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.

If you’re married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance can’t be more than $12,500. If you lived with your spouse at any time during the year and are filing a separate return, you can’t use the special allowance to reduce your nonpassive income or tax on nonpassive income"

I looked up even the qualifications for the special allowance and it requires 100 hours of material participation.  I did a little calculation and I've spent only about 50 hours in 2022 on the business. 

Also, Publication 925 says:

Activities That Aren’t Passive Activities

"The following aren’t passive activities.

1. Trade or business activities in which you materially participated for the tax year.

2. A working interest in an oil or gas well that you hold directly or through an entity that doesn’t limit your liability (such as a general partner interest in a partnership). It doesn’t matter whether you materially participated in the activity for the tax year. However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. See Temporary Regulations section 1.469-1T(e)(4)(ii).

3. The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental.

4. An activity of trading personal property for the account of those who own interests in the activity. See Temporary Regulations section 1.469-1T(e)(6).

5. Rental real estate activities in which you materially participated as a real estate professional. See Real Estate Professional, later."

We could actually qualify for #3 above, if we rented for 9 months and used it for personal purposes for 1 month, but in 2022, we didn't.   Therefore, alas, our condo rental income is most certainly passive.

That means that we can only carry forward our passive losses to later years in which we actually make a passive profit.  For this reason, it's very important that I continue to use TurboTax to keep track of my passive income and losses, from year to year.

As for my original question, I'll have to see who answered it best/first.  One option that may have applied was a Qualified Joint Venture, but it appears that because I formed the LLC and operated the business via that LLC in 2022, we are not eligible to be considered a Qualified Joint Venture.

It seems as though I will be entering our two Schedule K-1 losses on our 1040 Schedule E and carrying forward the passive losses to next year, where we hopefully will make a profit.

Thanks very much for your patience and insight, while I sorted all of this out.

[korz]

It seems that you can choose more than one Best Answer, so I chose @KrisD15 for my initial questions and one from @Carl for my followup question.  Thanks everyone.

[korz]

@CarlSorry... I'll bet you thought you were done answering my questions.  I hope that you don't mind one more question:

For 2022, I'm going to be entering our real estate rental income on Schedule E Part II from our partnership K-1's.

I really would like to stop doing the 1065 (and 8825 and 4562 and K-1s) for 2023.  It seems that I would tick the "Final return" box on the 2022 1065, right?  I found an error on the 1065 I sent in on March 15, so I have to send an amended 1065.  When I send that again, I can either tick the "Final return" box or leave it unchecked.

Then what?  I was going to change our partnership to a sole proprietorship so that we could just do all our taxes on TT Home & Business, Schedule E.  But you've convinced me that if change the partnership to a single owner, my wife, it doesn't make it a sole-proprietorship.  Once I write up a contract where I give my 50% share in the partnership to my wife, can we still have bank accounts and get 1099-NEC's from our management company (that collects the rents) all in the name of our LLC using the LLC EIN, but then just enter it in Part I, as if we were just individuals making rental income?

If not, how would we do it?

Thanks!