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Discussion:K-1 with rental losses 33.3% owner - how to determine active participation?

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Discussion Forum Index --> Basic Tax Questions --> K-1 with rental losses 33.3% owner - how to determine active participation?


Discussion Forum Index --> Tax Questions --> K-1 with rental losses 33.3% owner - how to determine active participation?

Illini (talk|edits) said:

20 April 2013
It's not clear to me how to treat a 33.3% member in an LLC which owns one rental property of real estate for their rental loss this year. They are not real estate professionals, so what is the hurdle or hurdles required to allow the passive loss on the 1040? The loss flowed over to the 8582. They are below the income levels for $25,000 passive rental loss allowed. I'm just looking for the proper questions to ask my client -- do they need to know the level of involvement of the other two members as well?

Death&Taxes (talk|edits) said:

21 April 2013
see the 8582 instructions for active participation:

"Active participation is a less stringent requirement than material participation (see Material Participation, later). You may be treated as actively participating if, for example, you participated in making management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that may count as active participation include:

• Approving new tenants,

• Deciding on rental terms,

• Approving capital or repair expenditures, and

• Other similar decisions."

Taxea (talk|edits) said:

22 April 2013
There is no need to include participation of other owners. If the TP merely gets a K1 with no involvement in the activity of renting then input the K1 following the instructions for the form.

Illini (talk|edits) said:

22 April 2013
So there's no time log required for hours spent on the activity? It sounds very liberal and easy to qualify as active participation. I'm gun shy because I had a client years ago with an investment in a rental property with several other investors, but I do seem to recall most of the management was by the organizers/developers/promoters. This was a locally owned S-Corp I think --not a publicly traded partnership. But this current client and their partners are all participating at various levels (ie, elbow grease, lining up contractors, getting tennants, etc.) Good to know -- I don't want any passive loss challenges from the IRS that I can't win. The last go-around was a nightmare!

CathysTaxes (talk|edits) said:

22 April 2013
Active participation is different than material participation. All you need to prove is that the landlord actively participated in the management/handling of the property.

Taxea (talk|edits) said:

22 April 2013
From Pub 925

Active participation. Active participation is not the same as material participation (defined later). Active participation is a less stringent standard than material participation. For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions.

Death&Taxes (talk|edits) said:

22 April 2013
Gee, I've read that somewhere before!

Seriously, it helps to have been there for the first 7-8 years of passive loss rules. Back then, active participation was all we had, and there was value to it for even if income were too high, in a succeeding year if income slipped under the magic 100K, those unused losses were available, unlike totally passive losses.

Illini (talk|edits) said:

23 April 2013
I think it gets confused in my head by the "choices" my software gives me to check off. The box descriptions do not always coincide exactly with the IRS descriptions or the way we learn the law. Lacerte has a "not a passive activity" box, an "actively participated in real estate" box, and a "real estate professional" box. I checked the "actively participated in real estate box", but it disallows the loss due to filing MFS. It did net part of the loss against a privately held real estate rental current year profit -- so it looks correct to me now, because MFS does not get the $25,000 rental loss "privilege". I think this was the first MFS I've ever filed who had rental losses, so the 8582 was throwing me. I think if they file jointly, they will be well over $150,000 AGI so it does not really matter -- she would be better off tax wise as single I bet!

Spell Czech (talk|edits) said:

23 April 2013
Oh that software! It's so .. so .. easy to use and tricky and detailed and right and thorough and right and not transparent and right and arcane and confusing and logical and punishing. And the descriptions it uses don't match what we learned in 1040 school.

And then there's the marriage penalty...

Illini (talk|edits) said:

24 April 2013
I wish the choices or boxes had questions to ask your client to determine if that box is "check" worthy or not. Another example of Lacerte disconnect is on dependents -- they don't have a selection for "Qualifying relative" v. "Qualifying child". They use some other confusing nomenclature.

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