I have a new LLC treated as a partnership. Their only activity is rental real estate. I know by general definition that rental real estate is a passive activity, but for the special loss rules we consider an individual's participation active for the rental real estate rules. Question: What type of partners are they: Individual Active or Individual Passive? Both partners do enough to qualify as an active participant on the personal tax return. I don't do many partnerships and it shows. Please help.
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Individual Active
...from your post if you have described these partners.
Actually this refers to three "tiers" of allowable losses.
First is the loss which becomes disallowed if there is non-recourse financing. The loss is allowed only to the extent of the partner's risk. This can happen when the partnership has liabilities for which the partner is not liable. Most commonly, "limited" partners as opposed to "operating" partners.
Then is the loss which occurs on a rental when the lessee is not "actively" involved. Someone will probably answer this post who is familiar with the requirements to be "active" by IRS definition, but it is not crystal clear even then. One guideline is 500 hours of involvement annually, but that doesn't mean you have to average 10 hours per week to be considered "active."
The loss which is most attainable is the loss which occurs when you ARE "active." Even then, the loss will phase out when AGI exceeds $75000.
If the partnership's only activity is "rent" then it's entire operation should pass through to the partners' returns as "rent with active participation." There should be no "ordinary income" pass-through. -
Still confused
You bring up several good points. The partners guaranteed the mortgage, so there is recouse debt for both. They are both active more than 100 hours in the activity, which is as much as anybody else. They do have a rental agent who rents their vacaction house, but they manage the property in a real sense. They arrange or complete 98% of the repairs and maintenance, etc. I see on pg 7-12 on The Tax Book, that only individuals can actively participate in rental real estate activities and that a limited partner is not treated as an active participant. Here my partnership ignorance shows up - it seems to me that they would be general partners, not limited, because they are both personally liable for the partnership debt (i.e. the mortgage). However, they would not be subject to SE tax because the activity runs through from Form 8825 to Schedule K as rental income.
Snaggletooth - thank you so much for your help.Comment
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