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Partner's K-1 Rental Business Income showing as Passive on Sch E

Carol-L
Level 2

General Partner's K-1 for Rental Real Estate Income with material and active participation $38800.  The rental activity is a trade or business (motel). Schedule E shows $38800 as Passive Income.  Shouldn't it be Non-Passive?

K-1 Part III Line 14 no amount listed for self-employment earnings.  Line 19, A, Cash distributions $14400. Line 20, Z, Sec 199A $7756.

Self-Employment earnings are not flowing to Schedule SE. I've entered $38800, through the worksheet, into SE Line 2..

Is this the proper way to handle this?

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5 Replies 5
sjrcpa
Level 15

Not much sounds right.

If it is a motel business it would be Line 1 income and subject to SE tax and maybe not passive.

Line 2 is for rental real estate. By definition, rental real estate is passive. It is not subject to SE tax. The only exception to it being passive is if your client is a Real Estate Professional.


ex-AllStar
Carol-L
Level 2

Rental Activities Not Automatically Treated as Passive Include, Average period of customer use is 7 days or less (motels), Average period of customer use is 30 days or less with significant personal services provided, and 5 other categories. From Reg.1.469-1 T

IRS Instructions for Schedule SE, Other Income and Losses Included in Net Earnings From Self-Employment #3. Payments for the use of rooms or other space when you also provide substantial services.....examples are hotel rooms, etc.

So it is a business activity.  I have checked the Rental Real Estate Activity is a trade is business check box.  I don't find any way to 

I have suggested for future years the person who prepares the 1065 and issues the K-1 should consider designating the Income as Business Income and/or make an entrance on the K-1 Part III, line 14 Self-Employment earnings.

The client should be paying into their Social Security account on this income.

 

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Carol-L
Level 2

sjrcpa, your thoughts were the same as mine.

Sorry, I see I dropped a thought in mid-sentence.  I don't see any way to designate the income as non-passive on the Schedule E. 

 

 

sjrcpa
Level 15

"I have suggested for future years the person who prepares the 1065 and issues the K-1 should consider designating the Income as Business Income and/or make an entrance on the K-1 Part III, line 14 Self-Employment earnings"

Who'd you make that suggestion to? The client or the Preparer?

 


ex-AllStar
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Carol-L
Level 2

In this case, I will tell the client to discuss it with the preparer.