Business & farm

korz · ‎March 19, 2023

@CarlYou appear to be absolutely correct (except above where it seems that you meant "passive"). As much as I may feel that my participation in this business was time consuming and I didn't just cash checks that came in the mail, according to the IRS, this is a passive income.

I looked up IRS Publication 334 and it was no help other than to point me to Publication 925.

According to Pub 925:

"Rental Activities

A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. See Real Estate Professional under Activities That Aren’t Passive Activities, later. An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. It doesn’t matter whether the use is under a lease, a service contract, or some other arrangement.

Exceptions.

Your activity isn’t a rental activity if any of the following apply.

The average period of customer use of the property is 7 days or less. You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. The activity's average period of customer use will equal the sum of the amounts for each class.
The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. Significant personal services include only services performed by individuals. To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. Significant personal services don’t include the following.
1. Services needed to permit the lawful use of the property;
2. Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental; and
3. Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs.
You provide extraordinary personal services in making the rental property available for customer use. Services are extraordinary personal services if they’re performed by individuals and the customers' use of the property is incidental to their receipt of the services.
The rental is incidental to a nonrental activity. The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. The rental of property is incidental to a trade or business activity if all of the following apply.
1. You own an interest in the trade or business activity during the year.
2. The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years.
3. Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience.
You customarily make the rental property available during defined business hours for nonexclusive use by various customers.
You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity.

If you meet any of the exceptions listed above, see the Instructions for Form 8582 for information about how to report any income or loss from the activity..

Special $25,000 allowance.

If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that’s disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing the passive activity loss. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.

If you’re married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance can’t be more than $12,500. If you lived with your spouse at any time during the year and are filing a separate return, you can’t use the special allowance to reduce your nonpassive income or tax on nonpassive income"

I looked up even the qualifications for the special allowance and it requires 100 hours of material participation. I did a little calculation and I've spent only about 50 hours in 2022 on the business.

Also, Publication 925 says:

Activities That Aren’t Passive Activities

"The following aren’t passive activities.

Trade or business activities in which you materially participated for the tax year.
A working interest in an oil or gas well that you hold directly or through an entity that doesn’t limit your liability (such as a general partner interest in a partnership). It doesn’t matter whether you materially participated in the activity for the tax year. However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. See Temporary Regulations section 1.469-1T(e)(4)(ii).
The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental.
An activity of trading personal property for the account of those who own interests in the activity. See Temporary Regulations section 1.469-1T(e)(6).
Rental real estate activities in which you materially participated as a real estate professional. See Real Estate Professional, later."

We could actually qualify for #3 above, if we rented for 9 months and used it for personal purposes for 1 month, but in 2022, we didn't. Therefore, alas, our condo rental income is most certainly passive.

That means that we can only carry forward our passive losses to later years in which we actually make a passive profit. For this reason, it's very important that I continue to use TurboTax to keep track of my passive income and losses, from year to year.

As for my original question, I'll have to see who answered it best/first. One option that may have applied was a Qualified Joint Venture, but it appears that because I formed the LLC and operated the business via that LLC in 2022, we are not eligible to be considered a Qualified Joint Venture.

It seems as though I will be entering our two Schedule K-1 losses on our 1040 Schedule E and carrying forward the passive losses to next year, where we hopefully will make a profit.

Thanks very much for your patience and insight, while I sorted all of this out.