Passive income loss/k-1 rental profit

[Scottfree]

I am a member of a two member LLC that rents a commercial building and I have a k-1 that shows a profit. I have a vacation rental that is a sole proprietorships that show a loss on paper from depreciation. It appears that k-1 profit for rentals is shown as active income as opposed to passive and I cannot offset the LLC rental profits with the sole proprietorship losses. Is there a way to use the losses to offset the profit?

Any ideas going forward to utilize the passive losses now as opposed to rolling over to the future?

[SeattleCPA]

It sounds to me as if both the partnership return and its k-1 and then also the Schedule C have been prepared incorrectly.

It seems highly unlikely for starters that a Schedule C activity you operate is passive. Usually you'll meet one of the material participation tests described in the regulations:

https://www.law.cornell.edu/cfr/text/26/1.469-5T

Further, real estate per se is passive and a correctly prepared 1065 and partnership k-1 would reflect that.

[Scottfree]

The rental LLC is not on schedule C but on schedule E part 2 which would appear to be passive but apparently a new change limits LLC to passive gains and active losses?

[ISawTheLight]

Who is renting the commercial building owned by the LLC?  If you own (and materially participate in) the business that is renting the commercial space owned by the LLC, the income from that rental property is not passive.  You can't create passive income by paying rent to yourself, even if the operating business and the rental business are different entities.

[Scottfree]

That must be it. Our business rents from the LLC along with two other tenants.

[SeattleCPA]

That must be it. Our business rents from the LLC along with two other tenants.

OK, yup, now it all makes sense.

First, the rental property you own isn't a sole proprietorship... (A sole proprietorship goes on Schedule C.) It's rental property on Schedule E. So passive makes sense.

Second, self-rental income isn't passive income it's nonpassive income... the law works that way so you can't do what you thought you might be able to do.