Taxing Income Without Offsetting Losses

[mtalo]

Hello,

I am working on my 2023 federal tax return with Turbo Tax Premier.  In 2023 I became a limited partner, passive investor with an LLC that owns multiple rental properties and convenience stores on the properties.  I received 1 Schedule K from the partnership.  TT wants me to list out each property as a separate schedule K.  I have done that, there are 7 in total.  Of the 7 schedule Ks, 5 are properties that have losses, 2 are convenience stores that have income.  TT is automatically aggregating the Schedule Ks and calculating the QBI deduction on the income from the stores without offsetting the loss of the rentals (Form 8995).  I did not receive money in 2023 from this partnership, nor do I have carry-over losses from 2022 as this is my first year to invest in this partnership.  Is it correct that TT is pulling the passive income to line 8 on Form 1040 and applying QBI deduction on line 13 without offsetting the partnership losses from 2023?

Thank you for your time.

[Mike9241]

As a limited partner you do not participate in the partnership activities. further the Convenience stores income probably appears on line 1 of the k-1.  while passive it would seem the rules of code section 199A (the QBI section) would treat the business income as qualifying for the QBI deduction.

however rental activities are treated differently

The final QBI regulations offer three avenues for a rental real estate activity to be considered a trade or business eligible to generate QBI: (1) the rental activity qualifies as a Sec. 162 trade or business (generally this would be real estate professionals); (2) it rents to specific related parties; or (3) it satisfies the requirements of a proposed safe harbor (requires hours of participation which you as a LP is not permitted to do) .

thus for a limited partner neither 1 nor 3 would apply

however you say some of the rental properties rent to the convenience stores.

SPECIAL RULE FOR RENTING PROPERTY TO A RELATED PERSON

Fortunately, the final QBI regulations provide clearer guidance for certain related-party rentals. Under specific circumstances, a rental activity that rents to a related person is deemed a trade or business for QBI purposes. The activity must rent or license property to an individual or passthrough entity that is commonly controlled, which means the same person or group of persons owns at least 50% of the rental activity and the related trade or business. The related party cannot be a C corporation under this rule.

I THINK the rentals that rent to the stores would qualify because they are apparently pass-through entities commonly controlled

does the K-1 indicate that the rental activities qualify for QBI. if so, you must complete the QBI section of each of the rental k-1s that has QBI info.