Yes, you are correct. It is entered on Form 8582.

Please see the answer from Rick19744 in the next section.

Thank you for your response. Is the answer the same if (1) the LLC owns real estate that it rents on a nightly basis (average rental <7 days; e.g., Airbnb), and (2) a management company handles the rentals?

I don't agree with @ColeenD3 

Based on your facts, you acquired an interest in a trade or business in an LLC.  Since neither of you materially participate in the business this will be a passive activity for you.

The tax impact on interest expense is determined under the tracing rules.  You used your $$ to invest in the above mentioned activity.  The activity from this LLC will be passive for you, and as such, the interest expense attributable to the borrowing will also be passive.

This should be reported on the 8582 as interest expense attributable to a passive activity and subject to the passive activity limitations.  I do not know if TT has the ability to link this interest expense with the specific passive activity.  If not, set up a separate K-1 input screen for this passive activity and ONLY input the interest expense figure.

Investment interest expense is interest allocable to proceeds that generate investment type income such as interest, dividends, stock gains / losses, etc.

Investment interest expense would be applicable if this were a C corporation only.

Thank you, Rick.   I looked again, but still don't see a way to link the interest expense to the activity. Your solution seems to work, however, so I created a K-1 for "Interest Expense LLC".  That results in separate forms for that "partnership" (which isn't a partnership, obviously), but at least Form 8582 seems to be correct in spirit.

Intuit should update its offerings to appropriately address this issue.   

Don't get hung up on the nomenclature.  The LLC is taxed as a partnership so should be fine.

Possibly @ColeenD3 has better insight into a different handling, however, at the end of the day you reach the same tax result.