Schedule E land rent

[sstreit]

I'm working on a return with Schedule E land rent - taxpayer does not actively or materially participate.  There is rent income, real estate taxes and some insurance.  That's it.  It results in income (not a loss).  Proseries is defaulting to "nonpassive" for this income which will then not offset a passive loss from a K-1 on Sch E p. 2.  Last year, exact same situation and it was passive.  When I scroll all the way to the bottom of the Schedule E worksheet it clearly shows that it has nonpassive status and overriding that to "passive" does not change anything.  Any idea why it is doing this and how to fix it?

[dkh]

The taxpayer doesn't actively participate? ..... he doesn't collect rent, pay the property tax bill, pay the insurance,  make the rental agreement?  

[sstreit]

Rental activities are considered passive by definition unless you are a real estate professional, which my client is not.  If I select code 5 at the top of the worksheet for land and have a loss, Proseries calculates that as a passive loss but if there is profit, it changes to nonpassive.  Doesn't make any sense at all.  If I change the code to 4 which is commercial property, it stays passive with a profit or a loss.  So, I changed the code to 4.  Must be some sort of glitch with code 5.  Can't think of any other explanation.

[TaxGuyBill · Accepted solution]

It is not a glitch, it is the law.

For land (and self-rentals), losses are passive and profits are nonpassive.

[sstreit]

Wow, ok, I was not aware that was the case.  Thank you for the clarification.  I have confirmed that in IRS Publication 925.  

[TaxingUpNorth]

OK, I'm stuck.  Two clients one in 2019 and one in 2020.  Both with Schedule E income, farmland rental.  I'm choosing 5 - LAND on schedule E for type, it's kicking out Earned Income Credit for both of them due to their income level. 

Both have gotten letters on this from the IRS stating they are not entitled to EIC due to their investment income being over $3650.  (this schedule E income is their only investment income). 

I know the issue is that the income is considered nonpassive, so it should be allowed, and proseries is calculating it correctly. 

Can someone throw me a bone here, WHERE in pub 925 does it state that?  I can't find it.  I think I've been though that dang publication 5 times.  Thanks in advance!  

[TaxingUpNorth]

Is it just publication 925, page 5, middle column, where it says Activities that aren't passive - 1.  Material Participation?

[TaxGuyBill]

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@TaxingUpNorth wrote:

I know the issue is that the income is considered nonpassive, so it should be allowed, and proseries is calculating it correctly. 

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Actually, that is not the issue.  You are right that passive income is disqualifying income for EIC.  But so are "rents" (not from a trade or business).  ProSeries either ignores that or is interpreting "rents" only applies to rental of non-real estate, so it allows EIC.  Apparently the IRS disagrees with Intuit.

[TaxingUpNorth]

OK...  So it's the RENTS... part.  oK.  got it.  Thank you!

[TaxingUpNorth]

They really need to address this at Proseries.  It's funny, I've never gotten a letter regarding this prior to this year.  What would you recommend overriding to avoid this?  or should I be choosing a different type of rental type?  

[TaxGuyBill]

I don't think there is anything you can do to avoid it in connection with the rental.  If you go to the "Earned Income Credit Worksheet", you can manually enter the rental income (profit) on Line G of the Smart Worksheet between Lines 7 and 8.

As you can see from Line D of that worksheet, Intuit interprets "rents" as from non-real estate, and does not consider non-passive real estate to be "rents".

However, be aware that the "investment income" limit is dramatically increased for 2021 ($10,000?).

[IntuitGabi]

Thank you for this discussion & @George4Tacks for reporting it. We'll look into this.