Updated October 16, 2026. Quick answer: Box 3 of Schedule K-1 (Form 1120-S) is a shareholder’s other net rental income or loss from the S corporation, meaning rental activity that is not rental real estate. The 2025 instructions call it a passive activity amount for all shareholders. A loss goes through Form 8582 toward column (g) and income goes to column (h) of Schedule E (Form 1040), line 28.
What box 3 reports
On the form, line 3 of Part III is labelled “Other net rental income (loss)”. The instructions give a short rule: “The amount in box 3 is a passive activity amount for all shareholders.” That sentence sets the passive treatment, and it applies to every shareholder. This page covers the shareholder’s side of a K-1 you received; it does not cover how the corporation files its own return. Every other box is set out on the Schedule K-1 (Form 1120-S) boxes overview.
“If the corporation had more than one rental activity, it will attach a statement identifying the income or loss from each activity.” “After applying the limitations on losses and deductions, report the income or loss as follows.”
Where box 3 goes on Form 1040
The instructions give two rules, one for a loss and one for income.
| Situation | Where the instructions send it |
|---|---|
| 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 | “report the income in column (h) of Schedule E (Form 1040), line 28.” |
The landing spot is Schedule E (Form 1040), line 28. The passive loss worksheet is Form 8582. The box 3 entry closes with a pointer back to the general limits: “See Limitations on Losses, Deductions, and Credits, earlier.”
Why box 3 is passive
The general definition explains the label. “Generally, passive activities include”: “Trade or business activities in which you didn’t materially participate, and” “Activities that meet the definition of rental activities” under the regulations the instructions cite. “Section 469 provides rules that limit the deduction of certain losses and credits.” “These rules apply to shareholders who”: “Are individuals, estates, or trusts; and” “Have a passive activity loss or credit for the tax year.”
Rentals the instructions treat differently
Two situations are carved out of the passive category. “The rental of a dwelling unit any shareholder 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.” “Activities of trading personal property for the account of owners of interests in the activities.”
For both, the later instruction reads: “If you have net income (loss), deductions, or credits from either of the following activities, treat such amounts as nonpassive and report them as indicated in these instructions.” If the corporation has an activity with special rules, “the corporation will identify the activity and all amounts relating to it on Schedule K-1 or on an attached statement.”
Form 8582 and the overall gain or loss test
The form that figures the allowed loss is named in the instructions: “If you have a passive activity loss or credit, use Form 8582, Passive Activity Loss Limitations, to figure your allowable passive losses, and Form 8582-CR, Passive Activity Credit Limitations, to figure your allowable passive credits.”
Whether the amounts are netted depends on the overall 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, report the income, deductions, losses, and credits from all passive activities using the Instructions for Form 8582”.
Interest between you and the corporation can matter here as well: “The corporation will report any “self-charged” interest income or expense that resulted from loans between you and the corporation”.
The limits that apply to a box 3 loss
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 17 reflect your share of income, loss, deductions, credits, and other items from corporate business or rental activities without reference to limitations on losses, credits, or other items that may have to be adjusted”.
The basis step comes first. “Generally, the deduction for your share of aggregate losses and deductions reported on Schedule K-1 is limited to the basis of your stock and loans from you to the corporation.” “Any losses and deductions not allowed this year because of the basis limit can be carried forward indefinitely and deducted in a later year subject to the basis limit for that year.” “You are responsible for keeping the information needed to figure the basis of your stock in the corporation.” The instructions name the worksheet form: “You should generally use Form 7203” “to figure your aggregate stock and debt basis.”
The at-risk step follows basis. “Generally, if you have (a) a loss or other deduction from any activity carried on as a trade or business or for the production of income by the corporation, and (b) amounts in the activity for which you aren’t at risk, you will 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.
Since the at-risk rules work activity by activity, “Since at-risk limitations apply for each activity, you should get a separate statement of income, expenses, and other items for each activity from the corporation.” “Box 18 of Schedule K-1 will be checked when a statement is attached.”
The passive step comes after both: “When applicable, the passive activity limitations on losses are applied after the limitations on losses for a shareholder’s basis in stock and debt and the shareholder’s at-risk amount.”
Losses that were blocked in an earlier year come back into the calculation. “If you have losses, deductions, or credits from a prior year that weren’t deductible or usable because of certain limitations, such as the basis limitations or the at-risk limitations, take them into account in determining your income, loss, or credits for this year.”
Which revision applies
The edition read for this page is the 2025 Shareholder’s Instructions for Schedule K-1 (Form 1120-S) and the 2025 Schedule K-1 (Form 1120-S) 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
- Treating box 3 like box 2. Box 2 has an exception for a real estate professional who materially participated, but the box 3 instruction says the amount is a passive activity amount for all shareholders.
- Deducting a box 3 loss straight against other income. The instructions say to 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.
- Reporting the box 3 amount before the earlier limits. The instructions say to report after applying the limitations on losses and deductions, which begin with basis and at-risk.
Related: Form 8582 passive activity loss limits, Schedule E (Form 1040), Form 6198 at-risk limits, holding a rental property, and Schedule K-1 (Form 1065) boxes explained.
Sources
- 2025 Shareholder’s Instructions for Schedule K-1 (Form 1120-S): https://www.irs.gov/pub/irs-pdf/i1120ssk.pdf
- Schedule K-1 (Form 1120-S) (2025), Shareholder’s Share of Income, Deductions, Credits, etc.: https://www.irs.gov/pub/irs-pdf/f1120ssk.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.