Make Turbo Tax treat Rental Income on K-1 Line 2 as Non-passive on 1040 instead of passive

[Bearly]

My wife and I have a Short Term rental in a LLC.  I've already verified that the rental income can be treated as non-passive and meets ALL of the rules and conditions to do so.  I'm 100% confident in this and have the complete documentation to back it up.  The income is reported as rental income on our K-1's.

However, I need Turbo Tax to treat it as non-passive.  Instead, when filling out the questionnaire for our 1040, it doesn't allow me to treat it that way.  Tax Cut has a option that allows you to specify it.  My CPA advisors have the same ability but want to charge me $1200 to do my taxes.

I have spoken to customer support at QuickBooks weeks ago and they were very nice and agreed with me but at the end of the call they didn't know how to do it and told me that I needed to hire a CPA to file my taxes  because Quick Books didn't appear to have a way.  I'm not ready to give up on Turbo Tax yet so I'm begging for help.

Is there a way in Turbo Tax to indicate that the income from the K-1 Line 2 (Rental Income) be treated as non-passive instead of the traditional treatment of passive?  How can I override this default setting?

Please help. 

Thank you

[AmeliesUncle]

If that is your only rental and you don't have any passive activates on your tax return, a work-around would be to indicate that you are a Real Estate Professional.

[Bearly]

Thank you for your reply.  I was away for work and just got free to try what you suggest.  Unfortunately, when doing the interview process with Turbo Tax Online it doesn't ask me about being a real estate professional.  I'm wondering if I have to indicate that somewhere else.  To help everyone better understand I documented the steps in the interview process to help explain what I'm seeing.  This is for the Online version of Turbo Tax if that makes a difference.  I apologize in advance for the long post

Wife and I are filing together and we both have our own K-1's.  We only have 1 property in the LLC and this is our only property and LLC.

Steps  in interview

1. Added K-1 for Rental Activity
2. Selected that the K-1 was for me and not my wife
3. Indicated I was General Partner
4. Indicated I was a Domestic Partner
5. Indicated my ownership was 50% (wife has her own K-1,  same as mine)
6. Entered my liability share
7. Entered the Capital Account Information
8. Indicated that K-1 was for Rental Activity -Box 2
9. Indicated that I actively participated
10. Indicated no special handling of Rental Activities
11. Input the Rental Real Estate Loss in Box 2
12. Input that Boxes 19 and 20 had Amounts
13. Input the amount from Box 19 (Other property) which was very small
14. Input the amount from Box 20 (Business interest expense) which was very small
15. Input the amount from Box 20 (Section 199A) which happens to equal Line 2 amount and very large
16. Described the partnership - all my investment is at risk, I pay for expenses in which I'm not reimbursed
17. Entered my unreimbursed expenses (car mileage basically)
18. Indicated no personal asset information used for business
19. Indicated no Section 179 carryover
20. Indicated no transportation, travel or meals expenses paid
21. Indicated no gifts, education or publications expenses paid
22. Indicated miscellaneous supplemental expenses for a portion of cell phone bill for me
23. Indicated no personal expenses reimbursed
24. Indicated all Section 199A income comes from partnership for K-1
25. Added in all the Section 199A income, which was basically the Line 2 rental income/loss
26. Indicated No uncommon adjustments
27. Indicated my income will not exceed $329,800 so additional info needed

- That's it - nothing more

I didn't see the query asking about being a real estate professional.

I wonder what I'm missing.  Is the problem with the Online version?  Again, any help would be appreciated.

Thanks in advance.

Blake

[AmeliesUncle]

I suspect that if you go into the rental section of the program (like you would report a rental that is individually owned, rather than owned by a Partnership), one of the introductory questions should ask you about it.

[0_Legolas_0]

Hi Blake, et al

   It's been a year, and I am hoping you figured out how to get TT to resolve your issue :).  I see many similar queries and no resolutions.   I am facing the exact same issue but I cannot figure out how to get TT to do what it is supposed to do :(

[AmeliesUncle]

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@0_Legolas_0 wrote:

Hi Blake, et al

   It's been a year, and I am hoping you figured out how to get TT to resolve your issue :).  I see many similar queries and no resolutions.   I am facing the exact same issue but I cannot figure out how to get TT to do what it is supposed to do :(

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If it is a short-term rental AND you Materially Participate, enter it in Box 1 of the K-1 worksheet in the program (and say you Materially Participated).  That will report it correctly on the tax return.

[Mike9241]

The IRS addressed the second misconception in Chief Counsel Advice 202151005, particularly concerning short-term rentals. The IRS clarified that short-term rental activities where the average stay is seven days or less are not automatically passive rental activities under §469. Instead, they are considered passive only if the taxpayer fails to materially participate. Therefore, most short-term rental activities, like Airbnb and VRBO rentals, are nonpassive.  

There is often confusion among tax professionals about when short-term rental income is subject to self-employment tax and reported on Schedule C instead of Schedule E. The general rule is that rental income is exempt from self-employment tax. However, if services are provided alongside the rental, the income may be subject to self-employment tax, regardless of the average length of stay. 

basically the partnership is going to have to report it as business/income loss. if it reports on line 2 and you report on line1, you can expect an inquiry form the iRS. Turbotax treats line 2 as passive for losses and npon passive for income

[0_Legolas_0]

Thanks @AmeliesUncle , and @Mike9241   it is not a short-term rental (AirBnB, etc) but a traditional single family rental.   I noticed that when I enter it in Sched-E section it took it as active participation.  That said, I didn't check to see if it took just the depreciation or the total real losses :(

[RidgeBird1988]

You are allowed to treat AirBnb etc income as non-passive with certain limitations. However Intuit software doesn’t allow it so you have to try another competitor such as H&R Block Premium which does. Beware the accountants that tell you otherwise. I included the Tax Law reference for each item below and I’ve had 2 different Accounting firms confirm it. 

1. Avg rental is 7 days or less IRC-469-1T(e)(3)(ii)

2.  Owner uses property less than greater of 14 days or 10% of rented days Title-26, section 280A(d)(1)

3.  Owner has to Materially participate and must show 100 hours of effort and more than anyone else . IRC-469-5T

4.  Spousal time is included in the time threshold. IRC-469(h)(5)

5.  You do not have to meet 500 hour threshold even if LLC if partners are General Partners as stated in LLC agreement and the partner served as General Partners for full year. IRC-469-5T(a)(e)(ii)

I have more backup material but I’m typing this on a phone because Intuit’s login to community is not working on computer.  So apologies for the typos and brevity. 

The key is you have to Materially participate and provide regular, substantial and continuous effort and more than your cleaners and other contractors. That doesn’t mean you have to provide service like a hotel but you have to put in the hours and do the repairs yourself etc. 

good luck. 

[AmeliesUncle]

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@0_Legolas_0 wrote:

Thanks @AmeliesUncle , and @Mike9241   it is not a short-term rental (AirBnB, etc) but a traditional single family rental.   I noticed that when I enter it in Sched-E section it took it as active participation.  That said, I didn't check to see if it took just the depreciation or the total real losses :(

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Your question is completely different than the original question.

If you "Actively Participate" and your income is below certain thresholds, you are allowed to take the loss from passive real estate (up to $25,000).  If you don't Actively Participate and/or your income is too high, you are not allowed to take the passive loss and it will carry forward.