Are you sure the $40k was not included in the MAGI?  There's no provision for the K-1 income not to be included whether it is passive or not.  You may like to double-check.

My hunch is that the loss was allowed because you did not check the box in the K-1 input that this is a "Not a passive activity", which causes the $40k to show up on Line 3a to offset your passive loss from rental.