Switched charter boats and business from passive to non-passive

[wrnoof]

In 2021, we sold our charter sailboat that was managed as a passive activity. We report no loss from this sale and charter activity as it is passive. We then purchased a new sailboat and placed it in charter. This one is actiively managed, and we show a slight loss for 2021 as it was put into charter late in December. Both boats were/are owned by our LLC partnership. How do I report these in our TT Business partnership return such that I can take the net operating loss on the second non-passive boat and show no loss on the first passive boat?

[ThomasM125]

To some extent, you determine if the activity is passive or not when you prepare your personal tax return. So, if you were actively involved in the business in 2021 and the business activity is considered non-passive, then when you report the K-1 on your personal tax return, you would indicate that you are actively involved with the business.

Also, the type of income you report would be a determining factor. Short-term rentals could be reported as business income, thus showing up on line 1 of your K-1 schedule, as opposed to rental income in box 2. Rental income is passive by default, but ordinary income is typically active income if you are materially involved with the business.

So, assuming your rental activities qualify for ordinary income treatment, you report the income and expenses on page one of your form 1065 partnership return as opposed to the rental schedule 8825 for rental activity. Then, when you prepare your personal tax return, indicate that you were actively involved with the business.

[wrnoof]

I have not found a way to separate the passive and non-passive on my partnership return. Do I create a separate K-1 or 1065 for each boat?

[ThomasM125]

You would only have one partnership return. I assume you are renting both boats out. In order for either activity be considered active, it would mean it was not a rental activity.

For that, you would have to provide substantial services to convert the activity from a rental to an ordinary business. This would be a situation where you provided daily cleaning or meal preparation, or a captain to pilot the boat. Like a Bed and Breakfast for instance, you are renting a room but providing enough services to convert it from a rental to an active business. So, if you do that for one of the boats, you would report that as ordinary income and the income or loss would appear on line 1 of your schedule K-1.

For the other vessel, I assume you are just allowing someone to rent it and they are on there own until they return it to you. That would be considered a rental activity and would be reported on form 8825 and the income will show up on line 2 on your schedule K-1.

Thus, you would have active income (line 1) and passive income (line 2) reported on the same K-1 and partnership return.

[wrnoof]

You have been very helpful. One boat was sold in 2021. That was clearly a passive activity and we never claimed a loss on it on our returns although with depreciation there was a loss. The new boat is actively managed and we are being careful to keep the average charter at or below 7 days. And, I think our payment of a turnaround fee to clean and service the boat and change the sheets and towels after each charter could qualify as providing significant personal services which raises the allowable average rental term to 30 days.

I think the reason I was confused is the TT Business interview, not the forms, path only speaks of rentals in terms of real estate and not personal property. Thanks for pointing me to the right forms.

[AmeliesUncle]

You should not be entering, or ever have entered, the boat rental on Form 8825.  As you pointed out, that is for real estate, not personal property like boats.

It should be reported as general business income on the Partnership return, both for the first boat and for the second boat.  And forgot about those rules about 7 days, 30 days or services ... again, those are for real estate.

As was pointed out above, to indicate whether or not you are "passive" with the LLC/Partnership happens when you enter the K-1 into your personal tax return.  That is not determined on the Partnership return.

[wrnoof]

Page 3 of Publication 925 says the 7 and 30 day rules apply to rental activity, and rental activity is for any tangible property, real or personal. I read this as meaning these rules are not limited to real estate.

[AmeliesUncle]

 I apologize, you are correct, you are correct.  However, it still should not on be entered on 8825, which is specifically for real estate (and the rental income should show up on Box 3 of the K-1, not Box 2).

Based on what I've seen, TurboTax does NOT handle these type of passive situations well (at least on the personal return), and it may require overriding.  You may consider a tax professional.

[AmeliesUncle]

Now that the rental is non-passive (short term rental that you materially participate in), I suspect that you the easiest way to do it is to enter it as general/ordinary income on the Partnership return (which will show up in Box 1 of the K-1), not as a "rental", which will treat things as Passive.

[wrnoof]

I agree on the professional idea.

[wrnoof]

I have not doubt the two of you are right about reporting the passive rental on line 3 of the K-1. However, I can't figure out how to get information onto that line without using the override feature. The passive rental boat had $4,800 of charter revenue and ~$12k of depreciation, not to mention it sold for less than the depreciated value. I can't figure out how to get TT to keep these values separate from the actively managed boat for which we provide significant personal services. I do think a professional tax expert is going to be hired.