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Solved

Changed rental property from sole proprietorship to husband-wife partnership on Jan 1, 2022. Manually filled out 1065 and K-1's. Where do I enter the K-1 lossses?

Forum|Forum|3 years ago
March 18, 2023
1 reply
0 views

My wife and I bought a condo in 2021 and got a very small amount of rent in 2021, which we did as a sole proprietorship on our 2021 taxes, via TurboTax Home and Business. I think it was a Schedule E.

Starting Jan 1, 2022, we created a partnership LLC and I recently filled out a Form 1065 (along with the form 8825, form 4562, and two K-1's) and sent all the forms in to the IRS last Wednesday (March 15, 2022... the deadline). We had a loss, which I split 50/50 on the K-1's. Now TurboTax Home and Business (I have another sole proprietorship) thinks I still have the sole proprietorship rental business from last year and says I have $3,100 of carryover loss, which it seems to think is a passive loss... it's not, it's an at-risk loss... we were always involved in the management and decision making of the rental, even though we had an agent in Florida to do some of the management for us.

In 2022 there were 6 months when we couldn't find a tenant, so we ended up with a $15,200 loss.

Question 1: Where do I enter the K-1 losses on the Home and Business desktop software?

Question 2: How do I let the TurboTax software know that I changed the business from a sole-proprietorship to a partnership?

Question 3: Can I still utilize that $3,100 carryover loss from 2021 and if so, how do I do that, or do I simply lose that by changing from the Schedule E to two K-1's?

Thanks.

TurboTax Home & Biz Windows

Best answer by KrisD15

“My wife and I bought a condo in 2021 and got a very small amount of rent in 2021, which we did as a sole proprietorship on our 2021 taxes, via TurboTax Home and Business. I think it was a Schedule E.”

If it was reported on Schedule E, it was NOT a business, it was not reported as Sole-Proprietorship (Self-Employment) income.

Schedule E reports rental income. This is how rental income is normally reported. It is passive income.

A Sole Proprietor files as a business and uses Schedule C. It reports EARNED income.

Question 1: Where do I enter the K-1 losses on the Home and Business desktop software?

Personal

Personal Income

Business Investments and Estate/Trust Income

Schedule K-1

“Question 2: How do I let the TurboTax software know that I changed the business from a sole-proprietorship to a partnership?”

You will need to report the income and expenses for 2022 (although you may not have any) and report that the rental was converted to personal use.

This will close out the rental.

If you took any bonus depreciation and/or Section 179 Deduction on assets you added to the rental, such as appliances, the basis will need to be adjusted for that depreciation and/or deduction.

Any depreciation on the building will adjust your basis. So if you purchased the condo for 275,000, and depreciated it 10,000 for the one year it was a rental, your adjusted basis is 265,000.

The basis of the property for the partnership will be your adjusted basis.

Depreciation starts over for the Partnership. (This is reported on Form 1065)

Question 3: Can I still utilize that $3,100 carryover loss from 2021 and if so, how do I do that, or do I simply lose that by changing from the Schedule E to two K-1's?

Yes, you can list the loss carry-over on the K-1’s.

HERE are links that address that situation.

Passive Activity Loss

Enter Passive Loss from Prior Years

@korz

[Edited 03/20/2023 | 5:08 pm PST]

KrisD15Answer

If it was reported on Schedule E, it was NOT a business, it was not reported as Sole-Proprietorship (Self-Employment) income.

Schedule E reports rental income. This is how rental income is normally reported. It is passive income.

A Sole Proprietor files as a business and uses Schedule C. It reports EARNED income.

Question 1: Where do I enter the K-1 losses on the Home and Business desktop software?

Personal

Personal Income

Business Investments and Estate/Trust Income

Schedule K-1

“Question 2: How do I let the TurboTax software know that I changed the business from a sole-proprietorship to a partnership?”

You will need to report the income and expenses for 2022 (although you may not have any) and report that the rental was converted to personal use.

This will close out the rental.

If you took any bonus depreciation and/or Section 179 Deduction on assets you added to the rental, such as appliances, the basis will need to be adjusted for that depreciation and/or deduction.

Any depreciation on the building will adjust your basis. So if you purchased the condo for 275,000, and depreciated it 10,000 for the one year it was a rental, your adjusted basis is 265,000.

The basis of the property for the partnership will be your adjusted basis.

Depreciation starts over for the Partnership. (This is reported on Form 1065)

Question 3: Can I still utilize that $3,100 carryover loss from 2021 and if so, how do I do that, or do I simply lose that by changing from the Schedule E to two K-1's?

Yes, you can list the loss carry-over on the K-1’s.

HERE are links that address that situation.

Passive Activity Loss

Enter Passive Loss from Prior Years

@korz

[Edited 03/20/2023 | 5:08 pm PST]

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korzAuthor

Answer 1: Thanks!

Answer 2: Followup question: But we didn't change it to personal use... we simply went from renting it as a sole proprietorship to a partnership. Also, we did not formally transfer ownership of the property from our names to the LLC. I found out that this was next to impossible and we'd have to refinance the property. Even if we assumed that we could transfer ownership (why would a bank want to write a loan for a property that lost money in years 1 and 2?), we'd lose our sweet 3.5% mortgage and would have to get a new 7% mortgage. No... I'm afraid we're still going to always own this property personally, even if the income comes in as partnership income in 2022. Does that change your answer?

Also, I've had it with all the additional partnership paperwork hassles. I've decided to change it back to a sole-proprietorship in 2023. If we say that this started Jan 1, 2023, does that change your answer?

Answer 3: I've read the passive income rules several times and this is not passive income. We do everything except billing the tenants, managing the listings (Airbnb, VRBO, etc.), and paying the maids. We visit the condo several times per year and we upgraded furniture in 2022, We personally repainted the whole condo in 2022. We hired a company to clean and waterproof the sleeper sofa. We pay all the bills monthly (mortgage, electricity, HOA fees, insurance, etc.). We hired contractors to fix the broken shower valve. We bought a new dishwasher and hired a contractor to install it in 2021 - and again bought another new dishwasher in 2023 and paid a contractor to install it (sheesh!). That's not passive, is it?

However, when I opened the "Do any of these situations apply to this property?" TT had "Do I have passive activity real estate losses carried over from a prior year" was checked and when I click Continue, it shows how I have -3,103 Sch E Regular Tax Carryovers and -3,103 Sch E AMT Carryovers and -3,103 Sch E QBI Carryovers. When I unchecked that and checked the "I have at-risk losses carried over from 2021." the next page shows empty boxes for At-Risk Losses From Prior Years.

It seems that TT decided that this was a passive income and there's nothing I can do about that short of filing an amended return.

Am I right?

Thanks again.

Carl11_2

Employee

Long term residential rental real estate is not a sole proprietorship by any stretch of the imagination. A sole proprioetorship produces non-passive income and gets reported on SCH C as a part of your personal 1040 tax return. Income from rental real estate is non-passive and therefore gets reported on SCH E as a part of your personal 1040 tax return. If you have not been reporting your rental income on SCH E in the past, then you have a major issue that is beyond the scope of this forum, and will require professional help to make things right. This is especially true if your state taxes personal income, as if you reported it incorrectly in the past, then you have a double-whammy.

If you did "in fact" report this on SCH E in the past, then work through the property and each individual asset to indicate you converted the property to personal use, one day before it was acquired by the partnership.

On the 1065 partnership return, the in service date will be exactly the same as it was on the SCH E, since there was no change of ownership that occurred due to a taxable event. (such as selling the property)

Additionally, since the in service date can not be before the partnership was established, that means your "date established" for the partnership must be the same as or before the "in service" date of the property. Since there is no ownership change, things will be fine. (The same people that owned the property, are the same people that own the partnership - so there is no taxable event here.)