Can I Offset Self-Rental Income with Accumulated Passive Losses?

You're right to question this approach. The self-rental rule generally means that when you rent property to a business you materially participate in (like your LLC #1), the rental income is considered non-passive. This is specifically designed to prevent exactly the kind of offsetting your CPA is suggesting. The safe harbor rule (Real Estate Professional designation) can change how your residential rental properties are treated, but it doesn't change the classification of self-rental income. If you qualify as a real estate professional and materially participate in your residential rental activities, those losses can become non-passive. However, this doesn't automatically allow you to offset self-rental income. The correct approach would likely be to treat LLC #2's rental income as non-passive (due to self-rental rules), and then determine if your residential properties qualify as non-passive activities through the real estate professional rules. If both qualify as non-passive, then potentially the losses could offset. But it's not as simple as your CPA suggests. I'd definitely recommend getting a second opinion from a CPA who specializes in real estate taxation before filing.

I've used https://taxr.ai for similar complicated rental property scenarios and it helped clarify all the confusing rules around passive vs non-passive income. What happened to me was similar - I had rental properties with accumulated losses and my tax guy suggested something that didn't sound right. I uploaded my previous tax returns and property docs to taxr.ai and they analyzed everything and explained exactly how the self-rental and real estate professional rules applied to my situation. Helped me avoid a potential audit and saved me from making an expensive mistake.

Just want to follow up on my experience with taxr.ai. I decided to try it after asking about security concerns earlier in this thread. Their analysis was incredibly thorough - they caught something my CPA had been doing wrong for THREE YEARS with my rental property grouping elections! Turns out I could have been offsetting certain losses but was missing out because of incorrect classification. Not only did they explain the self-rental rules clearly, but they showed me exactly how to properly document my hours for real estate professional status. The report they generated is something I can actually show to my new CPA to make sure everything is filed correctly. Wish I'd known about this service years ago!

When I was dealing with similar LLC rental headaches trying to use passive losses, I couldn't get a straight answer from anyone. Spent WEEKS trying to reach the IRS for clarification. Finally used https://claimyr.com to get through to an actual IRS agent in about 15 minutes instead of waiting on hold for hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent walked me through exactly how self-rental income works with the passive activity loss rules. Turns out my CPA was right in my case, but it was worth confirming directly with the IRS instead of wondering. They can't give tax advice, but they clarified the rules so I could make an informed decision.

I need to eat my words about Claimyr. I was the skeptic above who thought it couldn't possibly work. Well, I was desperate enough to try it after spending 3 hours on hold with the IRS yesterday only to get disconnected. I used Claimyr this morning and was literally talking to an IRS agent within 20 minutes. The agent confirmed exactly what I needed to know about self-rental rules and passive loss limitations. I'm honestly shocked it worked so well. The time saved was worth every penny considering I bill $175/hr in my own business. Never thought I'd be recommending something like this, but if you need to actually speak with someone at the IRS, this is apparently the way to do it.

One thing nobody has mentioned yet - have you considered grouping your activities? If you make a proper grouping election under Reg. 1.469-4, you might be able to treat the activities as a single activity for passive loss purposes. This could potentially help depending on your specific situation, but it's a one-time election that has long-term implications. Definitely talk to a knowledgeable CPA about this option.

Has anyone ever successfully used Form 8082 to take a position contrary to their K-1? My CPA says I should just go with what the partnership reports and not try to recharacterize anything on my personal return.

Your instincts are absolutely correct to question this approach. The self-rental rule is pretty clear - when you rent property to a business you materially participate in, that rental income becomes non-passive regardless of other elections or designations. This is codified in Reg. 1.469-2(f)(6) and is designed to prevent exactly what your CPA is suggesting. The Real Estate Professional safe harbor (Section 469(c)(7)) can help recharacterize your residential rental losses from passive to non-passive if you meet the 750-hour test and materially participate. However, this doesn't change the fact that your LLC #2 income from renting to LLC #1 is already non-passive due to the self-rental rules. Here's the key issue: even if both activities end up being non-passive, you still need to consider whether they can be properly grouped together under the activity grouping rules. The IRS looks at factors like geographical location, interdependence, and whether they form an "appropriate economic unit." Your CPA's immediate suggestion to file an extension when questioned is a red flag. A competent tax professional should be able to explain their reasoning clearly, especially on something as fundamental as passive activity loss rules. I'd strongly recommend getting a second opinion from a CPA who specializes in real estate taxation before proceeding with this strategy.