These tax experts here are wrong and Turbo Tax fails to handle this situation. They are failing to realize that there are several exceptions Reg 1.469-1T(e)(3)(ii) in particular if the income is from short term rentals. If these exceptions are met then the activity is treated as business and not rental income.
* The average stay is 7 days or less
* The tax payer or family stays at residence 14 days or less
* The tax payer material participates - doesn't matter if they are real estate professional
Rules for Material Participates depends on the Entity but for LLC
-- All partners (General and Limited) are treated as Limited in regards to Passive Activity rules in most states and therefore, they would be limited to the passive activity rules with 3 exceptions. These exceptions are:
(1) The tax payer works 500 hours or more in trade or business
(2) The tax payer materially participated in the activity in ay of 5 of prior 10 years
(3) The activity is a personal service and the tax payer materially participated in any 3 years prior.
I have the supporting documentation if needed but I found a great reference is the IRS Passive Activity Loss Audit Technique Guide (ATG) that you can download from their site. It gives the instructions and decision trees for questions that auditors use to determine how to treat something. This document provides not only the supporting law but also references to some court cases where these have been argued in court.
My issue is where do I treat this as non-passive. Do I modify the K-1's and move the amounts from Box 2 to Box 1 or do I have TurboTax take the value in Box 2 and treat as nonpassive. For now, Turbo Tax doesn't let me no matter what I do.
If anyone can help me figure out how to get TurboTax to handle this I would appreciate it. When talking to them via support they were very nice but they admitted that they didn't understand these IRS rules and regulations and I was told to reach out to a CPA to have them do it.
