I have a K-1 (Form 1065) of a partnership "AMINO CAPITAL III, LP", which is a venture capital firm. My client is one of the investors. On the K-1, there is "Net long-term capital gain (loss)" item of $300.

The K-1 input screen has "Net long-term capital gain (loss)" and "Passive long-term capital gain (loss)" as shown below:

If I put the amount in "Net long-term capital gain (loss)", it is treated as a capital gain alone.

If I put the amount in "Passive long-term capital gain (loss)" as shown in the image, in addition to capital gain, the same amount of Schedule E rental loss will be allowed. i.e. it has three effects:

(1) Capital gain

(2) Schedule E loss allowed on form 1040

(3) Schedule E loss reduction

Questions are:

(a) what is the difference between "Net long-term capital gain (loss)" and "Passive long-term capital gain (loss)"?

(b) Should I put the amount in "Passive long-term capital gain (loss)" or "Net long-term capital gain (loss)"?

(c) Why does "Passive long-term capital gain (loss)" have this complicated three folds treatment?