Deducting interest on a loan used to purchase membership in a passive activity LLC

[gzimmerman1946]

This Turbo Tax article

https://turbotax.intuit.com/tax-tips/investments-and-taxes/what-are-deductible-investment-interest-e...

says you can use such interest to offset income received from that activity but does not say how to do it.  I was able to do an Override to force a value into column (f) Section C of the K-1 worksheet, but it seems that I should not be modifying K-1 values.  Also, there does not appear to be a way to "Add Supporting Details" to that entry so I can even say what it is.  Does anyone know of a better way to write off this interest?

[tagteam]

Did you read the article?

Interest incurred for an investment in a "passive activity" generally doesn't qualify for the investment interest deduction. A passive activity is a business or trade in which you hold an ownership interest but in which you don't actually participate.

Taking the deduction

To actually claim the deduction for investment interest expenses, you must itemize your deductions. Investment interest goes on Schedule A, under "Interest You Paid." You may also have to file Form 4952, which provides details about your deduction.......

[Critter-3]

Taking the deduction

To actually claim the deduction for investment interest expenses, you must itemize your deductions. Investment interest goes on Schedule A, under "Interest You Paid." You may also have to file Form 4952, which provides details about your deduction.

Sadly the section of the Sch A you are looking for was removed from 2018 thru 2025 so you cannot deduct investment expenses. 

[gzimmerman1946]

Yes, but the next paragraph in that article says:

For example, say you borrowed $20,000 to buy a 10 percent stake in a friend's car wash. That stake is certainly an investment, but unless you were there washing cars (or doing some other work), it's a passive activity, because you're not materially involved running the business. Thus, you couldn't deduct the interest on the $20,000 loan as investment interest. However, you could use the interest to offset income you received from the passive activity.

I understand that this can not be a Schedule A deduction, but this article seems to say it can come off on Schedule E.

[Critter-3]

Ok ... so are you a partner in this business?   Did you get issued a K-1 from a 1065? 

[Mike9241]

am i missing something?

from CPA journal

http://archives.cpajournal.com/2000/0400/Departments/d45500a.htm#:~:text=Passive%20interest%20expens... 

Passive interest expense is deductible on Schedule E after applying the passive loss limitation rules of IRC section 469. Form 8582, Passive Activity Loss Limitations, and its supporting worksheets are generally used to determine the deductibility of passive activity losses.

turbotax link

Passive activity
Interest incurred for an investment in a "passive activity" generally doesn't qualify for the investment interest deduction. A passive activity is a business or trade in which you hold an ownership interest but in which you don't actually participate.

For example, say you borrowed $20,000 to buy a 10 percent stake in a friend's car wash. That stake is certainly an investment, but unless you were there washing cars (or doing some other work), it's a passive activity, because you're not materially involved running the business. Thus, you couldn't deduct the interest on the $20,000 loan as investment interest. However, you could use the interest to offset income you received from the passive activity.

Also, under the tax code, rental activity generally counts as passive activity, so if you borrowed money to buy a house to rent out, the interest isn't deductible as investment interest. But in this case, you could use the interest as an expense item for operation of the rental property on Schedule E.

[tagteam · Accepted solution]

https://www.irs.gov/instructions/i1040se#en_US_2022_publink24332td0e1965

[gzimmerman1946]

Thanks.  Making a separate line item on Schedule E Part II allows me to do this without an Override & allows me to describe what it is.

[vishapat]

How were you able to do this through TurboTax? Through the forms manually adding a line? Or through step-by-step wizard?

[Mike9241]

tell us more about your situation since the interest could be related to an investment in a partnership, S-corp, or rental property schedule E or even schedule C such as a B&B or rental of tangible personal property like cars so where to enter the interest differs.  also clarify if this is a passive or non-passive because this also affects where and how to enter the amount. 

[vishapat]

This interest is specific to personal debt I obtained to buy into a passive partnership LLC, where I receive a Schedule K as well as I do not materially participate. In the step-by-step instructions for S-Corporations there is a checkbox for personal debt interest, but when I go through the steps for the LLC input, the checkbox never appears. Based on my interpretation, I believe I can offset that passive interest paid against the passive income earned.

[gzimmerman1946]

As per https://www.irs.gov/instructions/i1040se#en_US_2022_publink24332td0e1965:

For interest allocated to passive activity use, enter the interest on Form 8582 as a deduction from the passive activity of the partnership or S corporation. Show any deductible amount on a separate line on your Schedule E, Part II. Enter "passive interest" and the name of the entity in column (a) and the amount in column (g).

My plan is to tell TurboTax there is a new entity named "passive interest <old entity name>" for which I only enter the interest expense.  So use the wizard, but trick it into doing the right thing.