Self Rental Exception to passive treatment

[bstarr001]

I have a self-rental situation where a partnership owns and rents all the fixed assets of an operating business to its related mirror owned operating business which is also a partnership.  The rental activity ends up on Form 8825 and the software automatically treats as a passive activity limiting the loss.  All the partners spend 500 or more hours running the business so since they materially participate the losses should not be limited.  Reg. Sec. 1.469-1T(e)(3).  To have the loss not be treated as passive the only way I can get it to work is report the loss on line 1 of the K-1, but the software put the self-rental loss on line 2, thus invoking the passive loss rule.  I guess I can override the software but I'm hesitant.  Has anyone else had this issue?

Thanks,

Golf Hack, CPA

[dkh]

Are they renting buildings or equipment ?    or both ?   

Buildings on 8825.  Equipment on page 1 F1065