Partnership return - rental real estate

[oceanlovin'ea]

Client brought me his k-1 from a partnership return. He is one of 2 partners. The partnership had one rental unit in it. He is listed as a LLC member-manager and an active individual. The partnership had a loss on line 2. Line 10 shows a net section 1231 loss. They sold the condo. When I put in the loss, the program asks if the loss was from a passive activity. By nature, rental real estate is a passive activity. But if the property was sold then the loss should be allowed, shouldn't it? So I answered "NO" and it allows the loss. If I answer yes, it doesn't allow the loss.

This is where I am confused. 1) By nature, rental real estate is passive. 2) the k-1 says he is an active member of LLC 3) the property was sold. So it would seem I should answer the question as no and then the loss is allowed.

Am I looking at this correctly?

Linda, EA

[oceanlovin'ea]

bumping up

Just wanted to bump this up to see if I can get a response to this question.

Linda, EA

[BHoffman]

Hi Linda - Is the K1 marked "Final"?

[DaveinTexas]

Why not active?

Just wanted to bump this up to see if I can get a response to this question.

Linda, EA

From IRS Pub 527 Active participation. You actively participated in a rental real estate activity if you owned at least 10% of the rental property and you made 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 expenditures, and other similar decisions.

With only two partners in this partnership, active participation may be simpler to attain than you think.

I will also add that if a management company is involved in on site management, it will be difficult to prove the active participation in a rental activity.

"For many taxpayers using any kind of outside management, the only material participation test available is the 500 hour test. In many situations, the other tests will not apply." That quote is from the IRS's Passive Activity Losses ATG.

Clear as mud.

[oceanlovin'ea]

K-1 is not marked final. Guess they are not closing the partnership but sold the only property in it now. They may be planning to purchase something else in the future.
They bought this condo just before real estate bombed in Florida. They lost $100,000 on the sale of it.

Well, both of the partners have full time jobs in banking industry. So I am sure that neither put in 500 hours. Since I only see the K-1, don't know if they use management company. I do know that they do not live in the town where the condo is. They are about 1 hour away.

Linda, EA

[Burke]

Is there something to check in your K-1 input worksheet to show total disposition or some such wording? When that was done on the partnership return, it would have freed up any suspended losses.