passive loss rules

[attykss1]

My K1 has a loss in Box 1 but a gain in Box 2.  I have filled out a worksheet for each activity.  Can I reduce the amount of the loss in Box 1 by the gain in Box 2 before calculating how much of the loss I can deduct this year.

[ThomasM125]

On a form 1065 schedule K-1, box 1 reports ordinary income or loss and box 2 reports income or loss on a rental activity. The two have separate tax treatments, so you cannot necessarily net them together. However, TurboTax will determine the proper tax treatment of them automatically in the program, but you must enter them separately like you have done.

[attykss1]

Thomas:  my questioned pertained to my 1040 return.  How does TurboTax determine the tax treatment for ordinary business losses and rental real estate income automatically?  I don't see that being done in TurboTax Premier

[ThomasM125]

The business loss would flow to schedule E, page two and the rental income to schedule E, page 1. The totals from schedule E would then flow to form 1040, schedule 1, line 5.

You can see form 1040 and the numbered schedules while working in the online TurboTax by following these steps in the program:

1. Tools (left side of the menu bar)
2. Tax Tools 
3. View Tax Summary
4. Preview my 1040 (left menu bar)

[attykss1]

Thomas:  thank you for answering my questions.  When I asked about them, I neglected to say that both activities on my K1 are partnership (LLC) activities, and the amounts I inputted from the K1 onto the worksheets appear on Schedule E, Page 2.  Box 2 is net rental real estate income.  Box 1 is ordinary business from a self storage business owned by the partnership.  I do not understand how these different kinds of partnership income have different tax treatments.  They are both passive income or losses.

[ThomasM125]

You are correct, they both flow to page two of schedule E. Normally, rental income is reported on page one of schedule E, but I see there is an exception to that in the case of rental income reported on a k-1 schedule.

Since you have a business loss, it may be deducted from rental income, so they may both appear on schedule E in the same column, in which case they would end up be netted against each other. It may be different if you had a rental loss, which has restrictions due to it being considered a passive loss by default. Even though rental losses are passive, you are allowed to deduct them against ordinary income, depending on the adjusted gross income and filing status on the tax return.

Also, business income reported on a K-1 can be either passive or non-passive, whereas a rental loss is by definition passive.

[attykss1]

Thomas:  I am a limited member in the LLC and have no participation in any of its activities.  I therefore think that all of the income and loss reported in K1 is passive.  I rechecked Schedule E, page 2.  In section 28, each of the worksheets I filled in are listed with the LLC name on separate lines.  Below that, the ordinary business is listed in the first column.  The net rental real estate income appears in the second column.  They are not combined.  So I still have my original question.  Can I subtract the real estate income from the ordinary business loss for purposes of determining how much loss I can claim this year.

[ThomasM125]

The rental income is passive and the business loss is passive in your case, so you can deduct one against the other.