Confussed by Info on K-1

[appelman]

You're right.

Of course they should provide this information. But if they didn't, what can you do but chase after it? As I said earlier in the discussion, it seems to be fairly common practice. But that doesn't mean it is strictly legal.

[Bonnie]

Well I have talked to the person who prepared the 1065 twice about this matter and I do question whether it has been prepared correctly. Problem is I don't understand how to prepare the 1065 enough to make this decision about it. If I did I would be preparing it instead of her. The information I gave in the original post is how she explained it to me after the 2nd conversation. Myself I question that it was preapred correctly but don't have enough knowledge to point out how. 3 individuals own about 12 residential rental properties. Have had the partnership since 2008. The three of them actively manage all the properties. Duties are divided up fairly equal. One is in charge of the actually renting (advertising when they become available to rent, showing doing paperwork for contract etc.). When they buy new properties all 3 are involved with looking at property, making decision to buy etc. One handles the books as far as rent collected and expenses, etc. Third party is a builder who is actively involed with any repairs or remodeling prior to renting. A couple years they have sold a property which resulted in some income. Other than that the entire income is from the rental of these properties. My customer I am working with now is the builder who does repairs. He also got his Real Estate license two years ago to sell Real Estate so he could handle to sale of any properties the business sold and for the past year or more he is working for a Real Estate Broker selling houses because the building market went bad and the houses he was building weren't selling and he is getting out of that. I'm thinkin he could be classified as a Real Estate Professional possibly. Still would like to make sure about the info on the K-1. One of the other Partners is also my customer too.

[Bonnie]

And as Appleman stated the amount in box 14 of -3132 that matches box 1 makes me feel this is the true indication of the business loss. I still kinda feel the 2761 in box 2 is more informational. But again I don't really understand enough about the preparation of the 1065 to make this call.

[appelman]

A couple of further points.

First of all, it looks as though we can dispose of the limited partner issue. It doesn't sound as though there are any limited partners, and I presume the K-1 doesn't identify the partner as a limited partner. That leaves Gary's concern that the Box 1 loss might be better allocated among the rentals as rental expense. This is arguable, but, as I keep saying, it is often done this way, right or wrong. Then, judging from Bonnie's description of what her client does, there's a possibility that he might meet the criteria for being classified as a real estate professional. And finally, aren't we talking about nothing? If the box 1 loss is passive, it will be almost all eaten up by the rental income, and the balance would probably fall under your client's special allowance for passive rental loss. The only impact might be the effect of the Box 14 entry on your client's other SE income, if any.

[Bonnie]

Well actually the K-1 does say it's a limited partner (I question this also). And it does affect a lot because what I didn't say originally because I didn't want to confuse the issue is that this taxpayer would qualify for EIC except for the income of 2761 from line 2 of the K-1 when added to interest income of 602 on the K-1 equals 3363 which is over the limit of 3150 to get the EIC. Very unique situation. I don't want to do anything wrong, but also don't want to eliminate his EIC if there is some way to net the 2761 of income with the loss of 3132, which in my minds eye seems to be the way it should flow since it's all one business of rental property

[Burke]

It sounds like that is the way it should be, and I agree with Gary that the Line 1 loss should have been applied apportionately across the rental properties. When I had these multiple rental-types, I allocated all the expenses which could not be assigned to any one property on another column of Sche E all by itself. This would have had the effect of offsetting the $2,761 income and generating a net passive loss. But that's not the way the preparer did it, and since this K-1 has been reported to the IRS as is (I assume), that is what your client's return is going to match against, and that thereby eliminates his EIC. You cannot perform this function by netting these on his tax return without a corrected K-1. I also believe, as you do, that he is not (as well as the others) a limited partner by definition. You might look at the partnership agreement for clarification, but under the circumstances you describe, he materially participates here.

[appelman]

The plot thickens!

That does up the ante a bit. But it is hard to believe that the "limited partner" designation isn't a mistake. If it were true, life would become very simple: everything other than guaranteed payments would be either passive or portfolio. For a general partner who is pretty clearly a material participant, it would be hard to call business loss passive. (Gary?) And the division between business income and rental income has to be made at the partnership level, so I don't think you can get away with simply reallocating it to what you think should be right. I assume your client doesn't have other suspended passive losses?

Just for your entertainment: I have a client who is a 99% partner in a real estate partnership. The other 1% is held by an S-Corp of which he is the sole shareholder. The K-1 came in with him designated as a limited partner!

[S T]

I am having an issue with why there is a Box 1 and a Box 2 if the Main Business Purpose is Real estate Rental - I would do as others suggested and if I were preparing the Form 1065/8825 all be allocated or assigned to Net Rental - not separate Box 1 Ordinary Income ---Unless there is other Income that the Partnership/LLC is engaged in besides Rental Activity. (not clear on this issue of other Income-Box 1)

As to the Limited Partner, in looking at my Software Input - I can maybe see where the confusion and the wrong Box marked.

My Software has 3 choices (for 2011) I believe these were different in prior years on choices.
GP or LLC Mg Member (subject to SE Tax)
Limited Partner or other LLC Member (Not subject to SE Tax)
Limited Partner or other LLC Member (subject to SE Tax)

So for a form 1065 - preparation we have to be very "careful" to generate the right information.

Example - I had a devil of a time on a LLC Real Estate client - that is their only activity - but the only Box that worked was the Limited Partner/or Other LLC Member not subject to SE Tax - and then Indicate #I as Passive Box. This was truly an LLC - election to file as a Partnership- All Rental Activity Only which should not be subject to SE and Passed through to the Individuals as such and all I completed was Form 8825 as such with the Form 1065.

Maybe some of this information might help you.

Sandy

[appelman]

A further thought

Bonnie, if you really want to fight the K-1, I would suggest the following: First of all, clear up this nonsense of a limited partner. Then, since it appears that your client really does have some skin in the game, get him to obtain the income/expenditure detail that generated the Line 1 loss. As one of three partners, he is certainly entitled to this information. Then, if on scrutiny of this detail, you are convinced that it should really be a rental loss, go ahead and prepare his return your way, and include a Form 8275 stating exactly what you are doing and why you are doing it.

[Uncle Sam]

Confusssssssssssssssssed

What about completing Form 8082 (I believe that's the form) for reporting partnership
information that's inconsistent with K-1 from the partnership.

[appelman]

Learn something every day!

Didn't know about that one. It sounds perfect for the purpose!