K1 not posting to Schedule E correctly, ie not allowing non-passive loss

[joannabanana6]

Apologies ahead of time for the long post, but I am so frustrated!

I have used TT Premier and TT Business for years and never had this issue before, so I'm wondering/hoping this is just a glitch in the software (that can be fixed).

We have an LLC for our rental properties. I've entered everything exactly the same every year for the K1's (except for the amounts of course). We are general partners and materially participate and qualify as real estate professionals. Here's the problem:

Every time that we've had a loss, the amount from our K1's posts to Schedule E, under "Loss K1" in the "Nonpassive Income & Loss" section and then to Schedule 1, Line 5.

THIS year, it is posting the amount of the loss as zero under "Loss allowed K1" under "Passive Income & loss", and I cannot figure out why!!!!!

The ONLY difference I can think of is that this year--unlike prior years--when entering the K1's in our personal return, it does not ask the question "Is this a trade or business" (although I do see that question on the printed form itself). So I'm wondering if this is the reason why this is happening??

I dearly hope someone can help me--thanks! 🙂

[ThomasM125]

That will happen if you indicate that you do not materially participate in the activity. You will see that questions on the screen that says Do You Actively Participate? to which you have to answer "yes" if that is true. You will see that question when you edit your Schedule K-1 entry. You may have answered the question wrong by mistake.

[joannabanana6]

Thank you for taking the time to reply! 😊 However, I DID put that we actively participate, so it can't be that... 🤔

[RobertB4444]

This is weird because I can't get the system to duplicate the problem that you're having.  I'm going to recommend that you completely delete the K-1 information from the prior year and re-enter the K-1 into the system as if it were a new K-1. 

[Kas1244]

This is clearly a bug in TurboTax which no TurboTax employee will acknowledge.

If you have a loss on Box 2 (real estate losses), TurboTax 2025 automatically assumes it's passive. However, in many cases, Box 2 losses CAN be non-passive - for example, with short-term rentals (where you materially participate). The other big one is REPS status. There's no way to get around this.

I think you can override this behavior by pretending that the loss was on Box 1 - because after all, at least on the federal return the Schedule K-1 is not electronically sent as part of the personal return. But really, it's a bug in TurboTax - incorrectly typing in the K1 is obviously not a proper solution.

[PatriciaV · Accepted solution]

You can fix this using Forms Mode if you're using TurboTax Desktop.

1. Open your return and click the Forms icon in the TurboTax header. 
2. In the list of Forms in My Return on the left, scroll down and look for Info Wks near the top. 
3. Click the form name to open it in the large window. 
4. Scroll down to Part VI - Real Estate Professionals and check the "Yes" box.
5. Now find K-1 Partner for the related activity.
6. Confirm that the first box under Line 2 is checked: "Materially Participated."
7. Find Schedule E, pg 2, and confirm that the loss is shown under Part II Line 28 (i) Nonpassive Income and Loss.
8. Click Step-by-Step in the header to return to the main screens.

@joannabanana6 

@Kas1244 

[joannabanana6]

Thank you so so much!!!!  This took care of it, thank God! Appreciate the help - THANKS again! 😀

[Kas1244]

How do you fix this if you are NOT a real estate professional, but rather you're claiming active loss because you run an STR (<7 days average rental period and material participation; but still not providing hotel like services so it wouldn't go on a Schedule C).

I guess you could trick the software by just saying you're a Real Estate Professional (similarly, you could trick the software into saying the loss appeared on Box 1), but both seem unsafe. For example, even though the federal Schedule E would end up looking the same, this might make a difference on some state forms.

It would be far better for TurboTax to just fix the bug.