I have been asked this question in the past by business owners who are investing in real estate, and I figured it might be useful to many of you, so here it goes.
A taxpayer and spouse are 75/25% shareholders in S-Corp, and the spouse is a passive shareholder. Spouse K-1 from the S-Corp has $200,000 in profit. In addition, the spouse has unrelated passive real estate losses in the amount of $150,000. Can they use her passive loss to offset passive income? The goal here is to avoid the real estate $25,000 loss limitation.
If the answer is no for S-Corp, will it work with LLC?
If the taxpayer is active in an activity, the spouse is deemed to be active in that same activity because of the taxpayer’s participation. In other words, the spouse is non-passive due to taxpayers’ non-passive attribution. This applies to both S-Corps and LLC.
Regulation § 1.469-5T(f)(3) treats the participation of a spouse in an activity as participation by you for purposes of IRC Section 469 and its regulations *without regard to whether the spouse files a joint return*.