What are you depreciating?

There is no page 2 to a 1041 K-1.

Precisely where is the depreciation showing up? Line and letter.

Perhaps you have the depreciation set up to flow through separately to the beneficiary instead of being shown with the rental activity. This may or may not be correct. 

Depreciating the building and some improvements. 

Depreciation is showing on box 9 of K-1, I mentioned K-1 page two as there are multiple properties therefore it creates a second page with a statement.

Yes, it has been set up to flow through separately to the beneficiary.

What is the best way to go with this and thank you for your help.

Also, when depreciation is shown on Sch E, Lacerte gives a critical diagnostic saying the depreciation should be on the K-1.

In the depreciation screen, see what form/schedule you have the building linked to.

The depreciation is linked to the Sch E building, these are all correct.

The depreciation is prorated to the beneficiary which in this case it's reported on the K-1, box 9 and since this year the taxpayer has all unallowed passive losses therefore no losses are reported on K-1.

The question remains if the depreciation expense is reported on K-1 and if not why the program gives a critical diagnostic.

All I need to know if K-1 is all blank, would this be right to have the depreciation on the K-1? 

Check your Options in the 1041 program. 

Look for something like Depreciation in trust.

Thank you for time.