Where to report passive income to be offset by passive loses in turbotax

[segor]

I have small lending business and have passive income from it, if I report it under "Self employment" income - Mortgage lending(Business code 999000) it will be offset by passive loses(K1) from prior year on tax form, but it will add "Self employment taxes" on 1040. If I report it under 'Miscellaneous Income' it will not add "Self employment taxes" on 1040, but will not be offset by passive losses.

Where should I report this income to be offset by passive loses from prior year and will not add "Self employment taxes"?

[AmeliesUncle]

Why do you think your business is not subject to self-employment tax?

Your business is passive?  That is extremely unusual.  Do you not "Materially Participate" in the business?

[segor]

I did only 4 transaction last year. In most cases I just do wire transfer and few minutes communication. All major work done by title company.

I think I do "Materially Participate" the same way as for my investment account in Fidelity where I have 'interest' income, but it is not related to real estate.

Second question: Why turbotax offset this income with passive loses if it considered as an active income?

[BrittanyS]

You will report passive income and losses on the Schedule E.  Per, the IRS, "Use Schedule E (Form 1040) to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs)".  To report passive income follow these steps:

1. Sign into TurboTax
2. Search for Schedule E
3. Click the Jump To Link
4. Answer Interview questions.

Passive losses will only offset passive income.  You can enter the passive loss in TurboTax and if it exceeds the loss for the income in the current year, the loss will be carried forward to the next tax year.  

For more information, see the links below:

• About Schedule E
• How to file a Schedule E
• Calculating Passive Losses

[AmeliesUncle]

You need to determine if it is a business or a hobby.  If it is a business, it is subject to self-employment tax.  If it is hobby, you report income as "interest" [edited] but can't deduct expenses.

https://www.thetaxadviser.com/issues/2013/jul/tpp-july2013-story-02.html

In tax terminology, "Passive" and "Active" are not opposites.  If you Materially Participate in this business, it is not passive.

[AmeliesUncle]

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@BrittanyS wrote:

You will report passive income and losses on the Schedule E.  Per, the IRS, "Use Schedule E (Form 1040) to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs)".  

Just because something is passive does NOT automatically put it on Schedule E.  They have a lending business, not a rental property.  If it is a business, this goes on Schedule C.

[segor]

@AmeliesUncle 

Thank for advise, but

If I report income as "other income" in this case it will not be offset by passive loses, despite this income from real estate

[segor]

@BrittanyS 

1. Search for Schedule E
2. Click the Jump To Link
3. Answer Interview questions.

It will require to report a property address for rental, but it is Mortgage lending(Business code 999000) income, not a rental. Under "Self employment" income it ask me just for income amount, in this case it will offset income by passive loses but will add Self employment taxes.

[AmeliesUncle]

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@segor wrote:

@BrittanyS 

 Mortgage lending(Business code 999000) income

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You keep calling it a business.  If it is a business, it *IS* subject to self-employment tax.

[segor]

@AmeliesUncle   You keep calling it a business.  If it is a business, it *IS* subject to self-employment tax.

Great, but if I pay self-employment tax, is it active income? why this active income offset by passive losses?

[AmeliesUncle]

Paying self-employment tax has nothing to do if it is passive or non-passive.

You mentioned above that you DO "Materially Participate".  Did you indicate that in the software?  If so, that would make it non-passive.  If you mistakenly told the program you do NOT Materially Participate, you are telling the program it is passive.

You didn't say where the passive losses were coming from, but (a) if the passive activity was disposed the carryover losses would be allowable, and (b) in certain circumstances passive losses from real estate rentals are allowable.

[segor]

@AmeliesUncle 

I have choose in a software - "I didn't actively participate in the operation of this business.". Unfortunately I have not found "Materially Participate" option. 

[AmeliesUncle]

Are there any 'help' things on that page?

If I had to GUESS, the program is using the wrong term but that is the Material Participation question.  If you look at line "G" on Schedule C, you can see if it says Material Participate or not.

[segor]

@AmeliesUncle 

On line "G" on Schedule C it says NOT. Should Self employment tax be charged on this income in this case? I wonder why turbotax add self employment taxes on this income, I thought that in this case SE taxes should not be charged.