The K-1 that LLC #1 received shows amounts in box 1 ordinary loss, in box 2 rental, in box 5 interest, and box 13L other portfolio deductions, so these pass-through items will be shown as such on LLC #1's tax return. Box 13L shows a list of what looks like "operating" expenses, such as landscaping, professional fees, taxes, utilities. The K-1 that LLC #1 received doesn't show detail about what's included in box 1 ordinary. Since this is a tiered partnership, the ordinary could be from another partnership K-1 that passed through to LLC #2. I'm not sure how the LLC #1 that I'm concerned with can be considered a trade or business when its sole purpose is to contribute capital into LLC #2 so that LLC #2 can cover some of the cost to build the apartments. LLC #1 has no other relation to LLC #2, other than discussing the apartment construction with LLC #2, and LLC #1 only has 3 expenses of its own for taxes and filing fees. Thus, I'm inclined to report their 3 expenses as other portfolio deductions.

On another note, should their share of qualified nonrecourse debt shown on the K-1 be reported on line  18 or 20 of Sch L on the 1065? Qualified nonrecourse debt gives them at-risk basis, even though the partners are not personally liable for this debt. Because this debt gives them basis, is this debt considered recourse, which would go on line 20, or does this debt go as nonrecourse on line 18, regardless?