The 1041 K1 amount on line 7 would be reported as income on the beneficiaries tax return. If there was a loss amount on the K1, if would be subject to the passive loss rules for rental real estate. If there is a profit on line 7 of the K1, it would flow through to the beneficiary and offset any beneficiary passive losses. During the K1 input into TurboTax, if there was no passive income to offset from this or previous years, all the income would flow through the Sch E to the 1040 and be taxed.