By definition, rental activity is passive unless a partner materially participates in the activity. This determination is made at the partner level, so you'll see the related question in TurboTax Business for Form 1065 under Business Info >> Partner/Member Information on the page "Tell us more about this member." Check the second box to indicate "A member that is not actively involved in running the business." If this box is checked, the partner's participation is considered to be passive.
These questions do not appear on a Form 1120-S S-Corp return.
If you are entering Schedule K-1 on an individual Form 1040 return, the question about material participation appears during the S-Corp K-1 interview after you choose the type of activity as Box 1 Business or Box 2 Rental real estate. The material participation question does not appear for a Partnership K-1. The determination is based on the type of partner (general or limited).
Note that rental activity on a business return is reported on Form 8825, not Schedule E.
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