Passive Loss from 4835

[WhiteOleander]

I am so glad I found you guys.

I have a client with a K-1 from a 1065. He is a general partner. It is a farm run on a 4835.

He has a loss of about $2000.00. My software is not allowing the loss to be currently deducted. He doesn't have any other passive income. I think there may be a problem with the K-1.

If a 4835 is prepared directly for a client, doesn't the loss carry to Sch E and allow the loss subject to the $25000 loss rules on rental real estate.

On this particular K-1, the loss is listed on Line 3, "Other rental gain/loss" instead of line 2 "Net rental real estate gain/loss"

Am I not understanding this correctly? Isn't the loss from a 4835 a currently deductible loss subject to the $25000 limit?

Hope I have made my question clear.

Thanks.

[Gene V]

actively participate

If the taxpayer actively participate in the operation of this activity and is at least a 10% owner, then you should get the deduction, up to $25,000.
You need to check the box on your k-1 input that said (not a passive activily or actively participated or something like that, then it should work).

[WhiteOleander]

Thanks for the reply. I am glad to know that I am correct that the client is entitled to the loss, subjuct to the limitations.

The reason I think the K-1 may be incorrect, is because, in the instructions for a K-1 from a partnership it states that any amout on line 3 is considered passive for All partners.

So, I will give the loss. I just wanted to make sure I was correct.

[jainen]

Disagree

Most rental income/loss is passive by definition for all taxpayers. There is a special exception for rental real estate with active participation. According to the partnership itself, as reported on its tax return, your loss is NOT from rental real estate and therefore is subject to passive loss rules.

[WhiteOleander]

Isn't a farm rental considered rental real estate? That's what I am trying to pin down.

[jainen]

Farm rental

Could be real estate, or equipment, crops, intangibles. Form 4835 means payment based on livestock or crop production rather than a set value for use of pasture or field. I don't know much about farms, so I would go with what the partnership return says.

[TMI Moderator]

Partnership Reporting is Not the Issue

The determination of whether the taxpayer is entitled to the special $25,000 loss allowance for rental real estate is made at the individual level. How the partnership reports it has nothing to do with it.

There is a conflict between treasury regulations and IRS instructions on this issue. Reg. 1.469-1T(e)(3)(vii) says, in part:

"...If the taxpayer owns an interest...conducting an activity other than a rental activity, and the taxpayer provides property for use in the activity...the provision of such proeprty is not a rental activity..."

That seems to indicate that income from Form 4835 is not from a rental activity, therefore is not eligible for the $25,000 special allowance for rental real estate activities.

However, the instructions for Form 4835 state, "Use Form 4835 to report farm rental income based on crops or livestock..."

So, we have your gray area. I'll bet your software doesn't carry the loss based on the regs. However, I'd be inclined to believe the instructions on this one. It's a legitimate position based on IRS instructions and it benefits your client. Your call, but I'd go for it.

[WhiteOleander]

Thanks. I also see the gray area.

I do think it is a defendable position because this farm produces cotton. It is very large. And alot of crop is produced.

So, I will keep looking. But, I do think he is entitled to the current loss deduction.

[jainen]

Keep looking

A good place to keep looking is Section 1.469 which defines rental real estate. Specifically, it says sharecropper arrangements are not rental activities, and thus not eligible for the $25000 allowance. You may find the instructions for Form 4835 to be confusing in this light. Obviously the partnership, and presumably its partners, do not consider the business to be rental real estate. That's what they put on the K-1, so you will have a devil of a time supporting a different position if it's examined. If you hope to base it on the 4835 instructions, that's not very strong authority. As I said, I don't know farms so maybe there is some case law. But at the least, going against the regulations would require a disclosure on Form 8275-R.

[WhiteOleander]

I think that the partnership has made an error. I plan to contact the preparer of the 1065 and check with them.

It is possible that this is just an oversight from their end.

[Scarecrow]

Its all clear to me now...?

Reg. Sec. 1.469-1T(e)(3)(vii), example 8 does seem to indicate a crop share arrangement is not a rental activity. It seems to imply a crop share arrangement is in itself a partnership, and thus would not qualify for rental real estate status.

Kind of makes you think the 4835 shouldn’t even exist, because the very fact that you are sharing profits with your tenant by getting a cut in the crops, you are by definition a partnership, according to that example in the regs, and as Armando insists, ALL partnerships must file a 1065…

But then Reg. Sec. 1.1402(a)-4, under the heading RENTALS FROM REAL ESTATE, says the following:

“(a) IN GENERAL. Rentals from real estate and from personal property leased with the real estate (including such rentals paid in crop shares) and the deductions attributable thereto, unless such rentals are received by an individual in the course of a trade or business as a real-estate dealer, are excluded.”

That reg in connection to not paying self-employment tax on the activity.

So let me get this straight: A crop share arrangement is NOT a rental activity because it is by definition under the regs to section 469 a partnership due to the fact that you are sharing crops (or profits), but then it isn’t a partnership because IRS says to fill out a 4835 and not a 1065, and as Armando insists, ALL partnerships file a 1065, PLUS the regs under section 1402 say it is not a self-employment activity but rather a rental real estate activity, so that would mean the regs under section 469 don’t apply because it can’t be a partnership that doesn’t qualify for the rental real estate status, yet the example in the regs for section 469 specifically say the crop share arrangement IS a partnership…………………………

So does anyone have some firecrackers that we can throw at these rules?

caw

[Unregistered]

WhiteOleander

I think we need to start over, does the partnership own the land and is receiving cash or crops for payment? and are they materially participating in the operation? or are they leaseing the land from someone else and working the land?

[WhiteOleander]

From my understanding, three siblings own the land. It is leased to produce cotton. Two siblings are limited partners. My client is a general partner. He takes charge of the "books" so to speak. He keeps track of the expenses and bank accounts, etc. None of the siblings actually do any of the farm work.

[Gene V]

Landlord

I way I see it, if he is receiving rent and is materially participating in the farm then the income or loss is report on Schedule F.
If he did not materially participate in operating the farm, then report the income or loss on Form 4835.
This information can be found in Pub. 225 Farmer’s Tax Guide