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.

Question;
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?

Answer;
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*.