Updated October 16, 2026. Quick answer: Box 3 of Schedule K-1 (Form 1065) is a partner’s share of other net rental income or loss, which means rental activity other than rental real estate. The instructions call the amount passive for all partners. A loss goes through the Form 8582 instructions to column (g) of Schedule E, line 28, and income goes to column (h).
What box 3 reports
On the form, line 3 of Part III is labelled “Other net rental income (loss)”. The instructions give the character first: “The amount in box 3 is a passive activity amount for all partners.” “If the partnership had more than one rental activity, it’ll attach a statement identifying the income or loss from each activity.”
The statement uses four activity types: “trade or business activity, rental real estate activity, rental activity other than rental real estate, and other activity”. Box 3 is the home of the third type. The companion box for rental real estate is covered on the box 2 page, and the full box list is on the Schedule K-1 (Form 1065) boxes overview.
Where box 3 goes on your return
For an individual partner the destination is Schedule E (Form 1040), line 28, with Form 8582 in the loss case.
| Box 3 result | Where the instructions send it |
|---|---|
| Box 3 is a loss | “If box 3 is a loss, follow the Instructions for Form 8582 to figure how much of the loss can be reported in column (g) of Schedule E (Form 1040), line 28.” |
| Box 3 is income | “If income is reported in box 3, report the income in column (h) of Schedule E (Form 1040), line 28.” |
| Item D (PTP) is checked | “if the box in item D is checked, report the income following the rules for PTPs under Publicly traded partnerships, earlier.” |
The loss version of the PTP instruction reads: “report the loss following the rules for PTPs under Publicly traded partnerships, earlier.”
The reference point for the PTP checkbox is “If the box in item D is checked, you’re a partner in a PTP and must follow the rules discussed earlier under Publicly traded partnerships.”
Why box 3 is passive
The passive category includes rentals by definition. “Generally, passive activities include the following.” Two items appear: “Trade or business activities in which you didn’t materially participate.” and “Activities that meet the definition of rental activities under Temporary Regulations section 1.469-1T(e)(3) and Regulations section 1.469-1(e)(3).”
The rental is passive whether or not the partner works at it. “If you determine that you didn’t materially participate in a trade or business activity of the partnership or if you have income (loss), deductions, or credits from a rental activity of the partnership (other than a rental real estate activity in which you materially participated as a real estate professional), the amounts from that activity are passive.”
The instructions then split by result. “If you have an overall gain (the excess of income over deductions and losses, including any prior-year unallowed loss) from a passive activity, report the income, deductions, and losses from the activity as indicated in these instructions.” “If you have an overall loss (the excess of deductions and losses, including any prior-year unallowed loss, over income) or credits from a passive activity” the instructions require Form 8582 or its credit counterpart. See the Form 8582 page.
Special rules for certain other activities
A few activities are carved out of the passive result. “If you have net income (loss), deductions, or credits from any of the following activities, treat such amounts as nonpassive and report them as indicated in these instructions.”
| Activity | Treated as nonpassive, as printed |
|---|---|
| Oil and gas | “Working interests in oil and gas wells if you’re a general partner.” |
| Dwelling unit | “The rental of a dwelling unit any partner used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days that the residence was rented at fair rental value.” |
| Trading personal property | “Trading personal property for the account of owners of interests in the activity.” |
The partnership flags these. “the partnership will identify the activity and all amounts relating to it on Schedule K-1 or on an attached statement.” One of them, the dwelling unit rule, is the same personal use test that matters for a home converted to rental; see converting your home to a rental.
There is also a recharacterization rule: “If you have net income subject to recharacterization under Temporary Regulations section 1.469-2T(f) and Regulations sections 1.469-2(f)(5) and (6), report such amounts according to the Instructions for Form 8582 (or Form 8810).”
Self-charged interest
When the partner has lent money to the partnership, the K-1 package may carry an adjustment. “The partnership will report any self-charged interest income or expense that resulted from loans between you and the partnership”. “If there was more than one activity, the partnership will provide a statement allocating the interest income or expense with respect to each activity.”
There is an opt-out at the partnership level: “The self-charged interest rules don’t apply to your partnership interest if the partnership made an election under Regulations section 1.469-7(g) to avoid the application of these rules.”
The limits that apply before box 3 reaches the return
The instructions list four limits and put them in a fixed order: “These limitations and the order in which you must apply them are as follows: the basis limitations, the at-risk limitations, the passive activity limitations, and the excess business loss limitations.” The amounts printed in Part III are before any of them. “The amounts shown in boxes 1 through 21 reflect your share of income, loss, deductions, credits, and other items from partnership business or rental activities without reference to limitations on losses or adjustments that may be required of you”.
| Limit | As printed in the instructions |
|---|---|
| Basis | “Generally, a partner may only claim their share of a partnership loss (including a capital loss) to the extent it doesn’t exceed their adjusted basis in the partnership at the end of the partnership’s tax year.” |
| At-risk | “The at-risk rules generally limit the amount of loss and other deductions that you can claim to the amount you could actually lose in the activity.” |
| Passive activity | “If you’re an individual, an estate, or a trust, and you have a passive activity loss or credit, use Form 8582, Passive Activity Loss Limitations, to figure your allowable passive losses” |
| Excess business loss | “Your distributive share of losses attributable to all of the partnership’s trades or businesses may be limited under section 461(l).” |
Basis is the partner’s own job to track. “Any losses and deductions not allowed can be carried forward.” “It’s the partner’s responsibility to track and maintain the information necessary to figure their adjusted basis in the partnership (also known as outside basis).” The partnership’s capital account on the K-1 is not a substitute: “Although the partnership provides an analysis of the partner’s capital account in item L of Schedule K-1, that information is based on the partnership’s books and records and can’t be used to figure the partner’s adjusted basis.”
For the at-risk step, the Form 6198 requirement applies only when there is a loss or deduction and amounts in the activity for which the partner is not at risk: “you’ll have to complete Form 6198, At-Risk Limitations, to figure your allowable loss for the activity.” Form 6198 is covered on the Form 6198 page.
A statement can matter as much as the box. “Note: Box 22 of Schedule K-1, Part III, will be checked when a statement is attached.” The at-risk statement is described this way: “The partnership should identify on a statement attached to Schedule K-1 any losses that aren’t subject to the at-risk limitations.” And for the passive step: “Note: Box 23 of Schedule K-1, Part III, will be checked when a statement is attached.”
For an individual, an estate or a trust with a passive activity loss or credit, the instructions say to use “Form 8582, Passive Activity Loss Limitations, to figure your allowable passive losses” and Form 8582-CR, Passive Activity Credit Limitations, to figure allowable passive credits. “Other limitations may apply to specific deductions (for example, the section 179 expense deduction).”
Timing follows the partnership’s year, not yours. “If you file your tax return on a calendar-year basis, but your partnership files a return for a fiscal year, report the amounts on your tax return for the year in which the partnership’s fiscal year ends.” “For example, if the partnership’s tax year ends in February 2026, report the amounts on your 2026 tax return.”
Which revision applies
The edition read for this page is the 2025 Partner’s Instructions for Schedule K-1 (Form 1065) and the 2025 Schedule K-1 (Form 1065) itself, which are the revisions irs.gov served when they were read on 2026-10-16. Check the revision printed on the Schedule K-1 you received and the matching instructions, because a later edition can change the box layout, the column letters and the reporting lines.
Common mistakes
- Looking for a real estate professional exception in box 3. The instructions say the amount in box 3 is a passive activity amount for all partners, while box 2 carries the exception.
- Deducting a box 3 loss in full on Schedule E. The instructions send a loss through the Form 8582 instructions to figure how much can be reported in column (g) of line 28.
- Skipping the special rules list. The instructions say amounts from an oil and gas working interest held as a general partner, a dwelling unit with personal use, or trading personal property are treated as nonpassive, and the partnership identifies them on the K-1 or an attached statement.
Related: Form 8582 passive activity loss limits, Schedule E (Form 1040), converting your home to a rental, and Schedule K-1 (Form 1065) boxes explained.
Sources
- 2025 Partner’s Instructions for Schedule K-1 (Form 1065): https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf
- Schedule K-1 (Form 1065) (2025), Partner’s Share of Income, Deductions, Credits, etc.: https://www.irs.gov/pub/irs-pdf/f1065sk1.pdf
Read from the IRS documents linked above on October 16, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.