Thanks Champ. I have everything I need. But I want to pass along to you that I believe the TurboTax Premier Step-by-Step interview has some weaknesses that TurboTax may want to resolve.
First, the step-by-step for Schedule K-1 entries has a series of questions about material participation that are designed to get the correct tax treatment. These questions can be initiated by selecting the "EasyStep" feature with the step-by-step process. However, I do not believe the questions are entirely clear or complete, causing potential incorrect tax treatment.
Second, after the Schedule K-1 is completed, the step-by-step process does not allow you to go back and review the EasyStep questions and answers. In effect, you are locked in to your original responses, unless you go to the Forms section and figure out how to make changes to some of the questions. But, in the Forms mode, TurboTax does not have the definitions (for material participate, actively participate, etc.) that are available in the step-by-step process.
Third, the algorithm I used to determine the proper tax treatment is shown in the 7 steps below. I believe TurboTax does not fully address the determination of tax treatment for rental income.
Anyway, I figured out everything I needed in order to properly complete the K-1s in TurboTax, and get the correct tax treatment, but I wanted to pass this feedback to you, in case TurboTax wants to improve the step-by-step process.
| | Summary of IRS Rules Covering Tax Treatment of LLC Rental Income - Based on Publication 925 |
| 1 | There are 2 kinds of "passive activities": (i) Trade/Business activities in which you don't materially participate, and (ii) Rental activities, even if you materially participate in them (unless you're a real estate professional). |
| 2 | Special $25,000 Allowance Exception - If you actively participate in a passive rental activity, the amount of the passive activity loss that is disallowed is decreased, and therefore you can deduct up to $25,000 of loss activity from your nonpassive income. |
| 3 | Active Participation - Active participation is a less stringent standard than material participation. For example, you may be treated as actively participating if you make management decisions in a significant and bona fide way. |
| 4 | Only individuals can actively participate in a rental real estate activities. |
| 5 | Limited partners aren't treated as actively participating in a partnership's rental real estate activities. |
| 6 | If you are a Real Estate Professional, rental real estate activities in which you materially participated aren't passive activities. |
| 7 | Real Estate Professional Defined - Must meet two requirements: (i) more than 50% of your services performed in all trades/businesses were performed in real estate property trades/businesses in which you materially participated. |
