Instructions for Form 8582 Passive Activity Loss Limitations

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1 2007 Instructions for Form 8582 Passive Activity Loss Limitations Department of the Treasury Internal Revenue Service Section references are to the Internal rental passive activities. Overall loss is limited, and you do not need to Revenue Code unless otherwise noted. defined under Definitions on page 2. complete Form Enter losses reported on Schedule E (Form 1040), General Instructions In figuring your overall gain or loss Part I, line 22, on Schedule E, Part l from all passive activities for the year, line 23. For losses from a partnership do not include the following income or Purpose of Form or an S corporation, enter the amount losses. Form 8582 is used by noncorporate of the allowable loss from Schedule K-1 1. Net income that is not passive taxpayers to figure the amount of any in Schedule E (Form 1040), Part II, activity income. See Passive Activity passive activity loss (PAL) for the column (f). Enter losses reported on Income beginning on page 5. current tax year. line 32 of Form 4835, Farm Rental 2. Net losses that are not passive Income and Expenses, on Form 4835, A PAL occurs when total losses activity net losses. See Activities That line 33c. (including prior year unallowed losses) Are Not Passive Activities on page 2. from all your passive activities exceed 3. Net income or net loss from your the total income from all your passive interest in any publicly traded Coordination With Other activities. partnership (PTP). See Publicly Traded Limitations Generally, passive activities include: Trade or business activities in which you did not materially participate for the tax year. Rental activities, regardless of your participation. PALs cannot be used to offset income from nonpassive activities. Exception 2 Partnerships (PTPs) beginning on page Any overall loss from an entire disposition of a passive activity. See Dispositions beginning on page 6 for more information. Generally, PALs are subject to other limitations (for example, basis and at-risk limitations) before they are subject to the passive loss limitations. Once a loss becomes allowable under these other limitations, you must determine whether the loss is limited under the passive loss rules. See Form 6198, At-Risk Limitations, for details on the at-risk rules. Also, capital losses that are allowable under the passive loss rules may be limited under the capital loss limitations of section Percentage depletion deductions that are allowable under the passive loss rules may be limited under section 613A(d). However, a special allowance for rental real estate activities may allow some You actively participated in rental real losses even if the losses exceed estate activities (see Special Allowance passive income. for Rental Real Estate Activities on beginning page 3), and you meet all of PALs not allowed in the current year the following conditions. are carried forward until they are Rental real estate activities with allowed either against passive activity active participation were your only income, against the special allowance, passive activities. if applicable, or when you sell or You have no prior year unallowed exchange your entire interest in the losses from these activities. activity in a fully taxable transaction to Your total loss from the rental real an unrelated party. estate activities was not more than For more information, see Pub. 925, Before Completing Form $25,000 ($12,500 if married filing Passive Activity and At-Risk Rules, separately and you lived apart from 8582 which contains a filled-in example of your spouse all year). Form 8582 with step-by-step To find out if your activity is treated as a If you are married filing separately, passive activity, read the following instructions for reporting losses from you lived apart from your spouse all passive activities. sections of these instructions. year. Note. Corporations subject to the Trade or Business Activities if your You have no current or prior year passive activity rules must use Form unallowed credits from a passive activity is a trade or business activity 8810, Corporate Passive Activity Loss activity. (page 3). and Credit Limitations. Your modified adjusted gross income Rental Activities if your activity is the was not more than $100,000 (not more renting of tangible property (beginning Who Must File than $50,000 if married filing separately on page 2). and you lived apart from your spouse Material Participation (on page 4). Form 8582 is filed by individuals, estates, and trusts who have losses all year). Grouping of Activities (page 5). (including prior year unallowed losses) You do not hold any interest in a To find out how to treat income and from passive activities. You do not have rental real estate activity as a limited deductions from your activity, read to file Form 8582 if you meet Exception partner or as a beneficiary of an estate Passive Activity Income and 1 or 2 below. or a trust. Deductions, Former Passive Activities, For the definition of modified and Dispositions (pages 5 through 7). Exception 1 adjusted gross income, see the You do not have an overall loss when instructions for line 7 on page 8. To find out how to enter income and you combine all your net income and losses on Form 8582, read the net losses (including any prior year If all the above conditions are met, instructions for Worksheets 1, 2, and 3 unallowed losses) from business or your rental real estate losses are not (beginning on page 7). Cat. No A

2 A real property trade or business is Losses From the Activities on page 3 if Definitions any real property development, you meet any of the exceptions. Except as otherwise indicated, the redevelopment, construction, following terms in these instructions are reconstruction, acquisition, conversion, An activity is a rental activity if defined as shown below. rental, operation, management, leasing, tangible property (real or personal) is or brokerage trade or business. used by customers or held for use by Net income. This is the excess of customers and the gross income (or current year income over current year Services you performed as an expected gross income) from the deductions from the activity. This employee are not treated as performed activity represents amounts paid (or to includes any current year gains or in a real property trade or business be paid) mainly for the use of the losses from the disposition of assets or unless you owned more than 5% of the property. It does not matter whether the an interest in the activity. stock (or more than 5% of the capital or use is under a lease, a service contract, Net loss. This is the excess of current profits interest) in the employer. or some other arrangement. year deductions over current year Note. If a rental real estate activity is income from the activity. This includes not a passive activity for the current Exceptions any current year gains or losses from year, any prior year unallowed loss is An activity is not a rental activity if: the disposition of assets or an interest treated as a loss from a former passive in the activity. activity. See Former Passive Activities 1. The average period of customer on page 6. use is: Overall gain. This is the excess of the 3. A working interest in an oil or gas a. 7 days or less, or net income from the activity over the prior year unallowed losses from the well. Your working interest must be held b. 30 days or less and significant activity. directly or through an entity that does personal services were provided in not limit your liability (such as a general making the rental property available for Overall loss. This is (a) the excess of partner interest in a partnership). In this customer use. the prior year unallowed losses from case, it does not matter whether you Figure the average period of the activity over the net income from materially participated in the activity for customer use for a class of property by the activity or (b) the prior year the tax year. dividing the total number of days in all unallowed losses from the activity plus If, however, your liability was limited rental periods by the number of rentals the net loss from the activity. for part of the year (for example, you during the tax year. If the activity Prior year unallowed losses. These converted your general partner interest involves renting more than one class of are the losses from an activity that were to a limited partner interest during the property, multiply the average period of disallowed under the PAL limitations in year), some of your income and losses customer use of each class by the ratio a prior year and carried forward to the from the working interest may be of the gross rental income from that tax year under section 469(b). See treated as passive activity gross income class to the activity s total gross rental Regulations section (f)(4) and and passive activity deductions. See income. The activity s average period of Pub Temporary Regulations section customer use equals the sum of these T(e)(4)(ii). class-by-class average periods Activities That Are Not 4. The rental of a dwelling unit you weighted by gross income. See used as a residence if section Regulations section (e)(3)(iii). Passive Activities 280A(c)(5) applies. This section applies Significant personal services include The following are not passive activities. if you rented out a dwelling unit that you only services performed by individuals. 1. Trade or business activities in also used as a home during the year for To determine if personal services are which you materially participated for the a number of days that exceeds the significant, all relevant facts and tax year. greater of 14 days or 10% of the circumstances are taken into 2. Any rental real estate activity in number of days during the year that the consideration, including the frequency which you materially participated if you home was rented at a fair rental. of the services, the type and amount of were a real estate professional for the 5. An activity of trading personal labor required to perform the services, tax year. You were a real estate property for the account of owners of and the value of the services relative to professional only if: interests in the activity. For purposes of the amount charged for use of the this rule, personal property means property. a. More than half of the personal property that is actively traded, such as services you performed in trades or 2. Extraordinary personal services stocks, bonds, and other securities. businesses during the tax year were were provided in making the rental See Temporary Regulations section performed in real property trades or property available for customer use T(e)(6) for more details. businesses in which you materially This applies only if the services are participated, and performed by individuals and the Generally, income and losses from b. You performed more than 750 customers use of the property is these activities are not entered on Form hours of services during the tax year in incidental to their receipt of the However, losses from these real property trades or businesses in services. activities may be subject to limitations which you materially participated. 3. Rental of the property is other than the passive loss rules. For purposes of item (2), each incidental to a nonrental activity. interest in rental real estate is a The rental of property is incidental to separate activity, unless you elect to Rental Activities an activity of holding property for treat all interests in rental real estate as A rental activity is a passive activity investment if the main purpose of one activity. For details on making this even if you materially participated in the holding the property is to realize a gain election, see page E-1 of the activity (unless it is a rental real estate from its appreciation and the gross instructions for Schedule E (Form activity in which you materially rental income is less than 2% of the 1040). participated and you were a real estate smaller of the unadjusted basis or the If you are married filing jointly, one professional). fair market value (FMV) of the property. spouse must separately meet both However, if you meet any of the five Unadjusted basis is the cost of the (2)(a) and (2)(b), without taking into exceptions beginning below, the rental property without regard to depreciation account services performed by the of the property is not treated as a rental deductions or any other basis other spouse. activity. See Reporting Income and adjustment described in section

3 The rental of property is incidental to through a PTP or if any of the rules The special allowance is not a trade or business activity if: described under Recharacterization of available if you were married, are filing a. You own an interest in the trade Passive Income on page 6 apply. See a separate return for the year, and lived or business activity during the tax year, the PTP rules beginning on page 11. with your spouse at any time during the b. The rental property was mainly If none of the special rules apply, year. used in the trade or business activity enter the income and losses from the Only an individual, a qualifying during the tax year or during at least 2 passive rental activity on Worksheet 1, estate, or a qualified revocable trust of the 5 preceding tax years, and 2, or 3. that made an election to treat the trust c. The gross rental income from the Worksheet 1 is for passive rental as part of the decedent s estate may property is less than 2% of the smaller real estate activities in which you actively participate in a rental real of the unadjusted basis or the FMV of actively participated. See Special estate activity. Unless future regulations the property. Allowance for Rental Real Estate provide an exception, limited partners Lodging provided for the employer s Activities beginning on this page. are not treated as actively participating convenience to an employee or the in a partnership s rental real estate employee s spouse or dependents is Worksheet 2 is for commercial activity. incidental to the activity or activities in revitalization deductions (CRDs) from A qualifying estate is the estate of a which the employee performs services. rental real estate activities. CRDs from decedent for tax years ending less than 4. You customarily make the rental rental real estate activities are not 2 years after the date of the decedent s property available during defined entered on Worksheet 1 or 3. See death if the decedent would have business hours for nonexclusive use by Commercial revitalization deduction satisfied the active participation various customers. (CRD) on page 4. requirements for the rental real estate 5. You provide property for use in a Worksheet 3 is for passive rental activity for the tax year the decedent nonrental activity of a partnership, real estate activities in which you did died. S corporation, or a joint venture in your not actively participate, activities of capacity as an owner of an interest in A qualified revocable trust may elect renting personal property, and other the partnership, S corporation, or joint to be treated as part of a decedent s passive trade or business activities. venture. estate for purposes of the special See the instructions for Worksheets allowance for active participation in Example. If a partner contributes 1, 2, and 3 beginning on page 7. rental real estate activities. The election the use of property to a partnership, must be made by both the executor (if none of the partner s distributive share Trade or Business any) of the decedent s estate and the of partnership income is income from a trustee of the revocable trust. For rental activity unless the partnership is Activities details, see Regulations section engaged in a rental activity. A trade or business activity is an activity (other than a rental activity or Also, a partner s gross income from You are not considered to actively an activity treated as incidental to an a guaranteed payment under section participate in a rental real estate activity activity of holding property for 707(c) is not income from a rental if at any time during the tax year your investment) that: activity. The determination of whether interest (including your spouse s the property used in the activity is 1. Involves the conduct of a trade or interest) in the activity was less than provided in the partner s capacity as an business (within the meaning of section 10% (by value) of all interests in the owner of an interest in the partnership 162), activity. is made on the basis of all the facts and 2. Is conducted in anticipation of Active participation is a less stringent circumstances. starting a trade or business, or requirement than material participation 3. Involves research or experimental (see Material Participation on page 4). Reporting Income and expenditures deductible under section You may be treated as actively Losses From the Activities 174 (or that would be if you chose to participating if, for example, you deduct rather than capitalize them). If an activity meets any of the five participated in making management exceptions listed above, it is not a decisions or arranged for others to Trade or business activities are rental activity. You must then provide services (such as repairs) in a generally reported on Schedule C, determine: significant and bona fide sense. C-EZ, or F, or in Part II or III of Management decisions that may count 1. Whether your rental of the Schedule E. See Publicly Traded as active participation include: property is a trade or business activity Partnerships (PTPs) beginning on page Approving new tenants, (see Trade or Business Activities on 11. For trade or business activities that Deciding on rental terms, this page) and, if so, are significant participation passive Approving capital or repair 2. Whether you materially activities (defined on page 4), see Pub. expenditures, and participated in the activity for the tax 925 for how to report their income or Other similar decisions. year (see Material Participation on losses. page 4). The maximum special allowance is: Special Allowance for $25,000 for single individuals and If the activity is a trade or business married individuals filing a joint return activity in which you did not materially Rental Real Estate for the tax year. participate, enter the income and losses $12,500 for married individuals who from the activity on Worksheet 3. Activities file separate returns for the tax year If the activity is a trade or business Active participation. If you actively and lived apart from their spouses at all activity in which you did materially participated in a passive rental real times during the tax year. participate, report any income or loss estate activity, you may be able to $25,000 for a qualifying estate from the activity on the forms or deduct up to $25,000 of loss from the reduced by the special allowance for schedules normally used. activity from your nonpassive income. which the surviving spouse qualified. If the rental activity did not meet any This special allowance is an exception Modified adjusted gross income of the five exceptions, it is generally a to the general rule disallowing losses in limitation. If your modified adjusted passive activity. However, special rules excess of income from passive gross income (see the instructions for apply if you conduct the rental activity activities. line 7 on page 8) is $100,000 or less -3-

4 ($50,000 or less if married filing appointment books, calendars, or Test for a spouse. Participation by separately), your loss is deductible up narrative summaries. your spouse during the tax year in an to the amount of the maximum special Tests for individuals. You materially activity you own may be counted as allowance referred to in the preceding participated for the tax year in an your participation in the activity even if paragraph. activity if you satisfy at least one of the your spouse did not own an interest in If your modified adjusted gross following tests. the activity and whether or not you and income is more than $100,000 ($50,000 your spouse file a joint return for the tax 1. You participated in the activity for if married filing separately) but less than year. more than 500 hours. $150,000 ($75,000 if married filing 2. Your participation in the activity Tests for investors. Work done as an separately), your special allowance is for the tax year was substantially all of investor in an activity is not treated as limited to 50% of the difference the participation in the activity of all participation unless you were directly between $150,000 ($75,000 if married individuals (including individuals who involved in the day-to-day management filing separately) and your modified did not own any interest in the activity) or operations of the activity. For adjusted gross income. for the year. purposes of this test, work done as an 3. You participated in the activity for investor includes: Generally, if your modified adjusted gross income is $150,000 or more more than 100 hours during the tax 1. Studying and reviewing financial ($75,000 or more if married filing year, and you participated at least as statements or reports on operations of separately), there is no special much as any other individual (including the activity. allowance. individuals who did not own any interest 2. Preparing or compiling in the activity) for the year. summaries or analyses of the finances If you qualify under the active 4. The activity is a significant or operations of the activity for your participation rules, use Worksheet 1 participation activity for the tax year, own use. (see page 7). and you participated in all significant 3. Monitoring the finances or Commercial revitalization deduction participation activities during the year operations of the activity in a (CRD). The special $25,000 allowance for more than 500 hours. nonmanagerial capacity. for the CRD from rental real estate A significant participation activity is activities is not subject to the active any trade or business activity in which Special rules for limited partners. If participation rules or modified adjusted you participated for more than 100 you were a limited partner in an activity, gross income limits discussed above. hours during the year and in which you you generally did not materially The $25,000 allowance must first be did not materially participate under any participate in the activity. You did applied to losses from rental real estate of the material participation tests (other materially participate in the activity, activities with active participation, than this fourth test). however, if you met material figured without regard to the CRD (see 5. You materially participated in the participation test 1, 5, or 6 (see Tests Part II). Any remaining portion of the activity for any 5 (whether or not for individuals on this page) for the tax $25,000 allowance is available for the consecutive) of the 10 immediately year. CRD from rental real estate activities preceding tax years. However, for purposes of the (see Part III). See the instructions for 6. The activity is a personal service material participation tests, you are not Worksheet 2 on page 8. For general activity in which you materially treated as a limited partner if you also information about the CRD, see Pub. participated for any 3 (whether or not were a general partner in the 954, Tax Incentives for Distressed consecutive) preceding tax years. partnership at all times during the Communities, and section 1400I. An activity is a personal service partnership s tax year ending with or activity if it involves the performance of within your tax year (or, if shorter, Material Participation personal services in the fields of health, during the portion of the partnership s law, engineering, architecture, tax year in which you directly or For the material participation tests listed accounting, actuarial science, indirectly owned your limited partner below, participation generally includes performing arts, consulting, or in any interest). any work done in connection with an activity if you owned an interest in the other trade or business in which capital A limited partner s share of an activity at the time you did the work. is not a material income-producing electing large partnership s taxable The capacity in which you did the work factor. income or loss from all trade or does not matter. However, work is not 7. Based on all the facts and business and rental activities is treated participation if: circumstances, you participated in the as income or loss from the conduct of a It is not work that an owner would activity on a regular, continuous, and single passive trade or business customarily do in the same type of substantial basis during the tax year. activity. activity, and You did not materially participate in Special rules for certain retired or One of your main reasons for doing the activity under this seventh test, disabled farmers and surviving the work was to avoid the disallowance however, if you participated in the spouses of farmers. Certain retired of losses or credits from the activity activity for 100 hours or less during the or disabled farmers and surviving under the passive activity rules. tax year. spouses of farmers are treated as Proof of participation. You may Your participation in managing the materially participating in a farming prove your participation in an activity by activity does not count in determining activity if the real property used in the any reasonable means. You do not whether you materially participated activity would meet the estate tax rules have to maintain contemporaneous under this test if: for special valuation of farm property daily time reports, logs, or similar a. Any person (except you) received passed from a qualifying decedent. See documents if you can establish your compensation for performing services Temporary Regulations section participation by other reasonable in the management of the activity, or T(h)(2). means. For this purpose, reasonable b. Any individual spent more hours Estates and trusts. The PAL means include, but are not limited to, during the tax year performing services limitations apply in figuring the identifying services performed over a in the management of the activity than distributable net income and taxable period of time and the approximate you did (regardless of whether the income of an estate or trust. The rules number of hours spent performing the individual was compensated for the for determining material participation for services during that period, based on management services). this purpose have not yet been issued. -4-

5 2. An activity involving the rental of The partnership or S corporation Grouping of Activities real property with an activity involving does not have a record of any Generally, one or more trade or the rental of personal property (except CAUTION prior year unallowed losses from business activities or rental activities personal property provided in the passive activities of the partnership may be treated as a single activity if the connection with the real property or vice or S corporation. If you had prior year activities make up an appropriate versa). unallowed losses from these activities, economic unit for the measurement of 3. Any activity with another activity they can be found in column (c) of your gain or loss under the passive activity in a different type of business and in 2006 Worksheet 5. rules. which you hold an interest as a limited Whether activities make up an partner or as a limited entrepreneur (as Self-Charged Interest appropriate economic unit depends on defined in section 464(e)(2)) if that Certain self-charged interest income or all the relevant facts and other activity engages in holding, deductions may be treated as passive circumstances. The factors given the producing, or distributing motion picture activity gross income or passive activity greatest weight in determining whether films or videotapes; farming; leasing deductions if the loan proceeds are activities make up an appropriate section 1245 property; or exploring for used in a passive activity. Generally, economic unit are: or exploiting oil and gas resources or self-charged interest income and 1. Similarities and differences in geothermal deposits. deductions result from loans between types of trades or businesses, you and a partnership or S corporation 2. The extent of common control, Activities conducted through in which you had a direct or indirect 3. The extent of common partnerships, S corporations, and C ownership interest. This includes both ownership, corporations subject to section 469. loans you made to the partnership or 4. Geographical location, and Once a partnership or corporation S corporation and loans the partnership 5. Interdependencies between or determines its activities under these or S corporation made to you. It also among the activities. rules, a partner or shareholder may use includes loans from one partnership or these rules to group those activities S corporation to another partnership or Example. You have a significant with: S corporation if each owner in the ownership interest in a bakery and a Each other, borrowing entity has the same movie theater in Baltimore and in a Activities conducted directly by the proportional ownership interest in the bakery and a movie theater in partner or shareholder, or lending entity. The self-charged interest Philadelphia. Depending on all the rules do not apply to your interest in a Activities conducted through other relevant facts and circumstances, there partnership or S corporation if the entity partnerships and corporations. may be more than one reasonable made an election under Regulations method for grouping your activities. For A partner or shareholder may not section (g) to avoid the instance, the following groupings may treat as separate activities those application of these rules. For more or may not be permissible: activities grouped together by the details on the self-charged interest A single activity, partnership or corporation. rules, see Regulations section A movie theater activity and a bakery activity, Passive Activity Income A Baltimore activity and a Passive Activity Income To figure your overall gain or loss from Philadelphia activity, or all passive activities or any passive Four separate activities. and Deductions activity, take into account only passive Take into account only passive activity activity income. Do not enter income Once you choose a grouping under income and passive activity deductions that is not passive activity income on these rules, you must continue using to figure your net income or net loss Form 8582 or the worksheets. that grouping in later tax years unless a from all passive activities or any material change in the facts and Passive activity income includes all passive activity. circumstances makes it clearly income from passive activities, inappropriate. including (with certain exceptions If your passive activity is reported on described in Temporary Regulations The IRS may regroup your activities Schedule C, C-EZ, E, or F, and the section T(c)(2) and Regulations if your grouping fails to reflect one or activity has no prior year unallowed section (c)(2)) gain from the more appropriate economic units and losses or any gain or loss from the disposition of an interest in a passive one of the primary purposes of your disposition of assets or an interest in activity or of property used in a passive grouping is to avoid the passive activity the activity, take into account only the activity at the time of the disposition. limitations. passive activity income and passive activity deductions from the activity to Passive activity income does not Limitation on grouping certain figure the amount to enter on Form include the following. activities. The following activities may 8582 and the worksheets. Income from an activity that is not a not be grouped together. passive activity. 1. A rental activity with a trade or If you own an interest in a passive Portfolio income, including interest business activity unless the activities activity through a partnership or an (other than self-charged interest treated being grouped together make up an S corporation, the partnership or as passive activity income), dividends, appropriate economic unit and: S corporation will generally provide you annuities, and royalties not derived in a. The rental activity is insubstantial with the net income or net loss from the the ordinary course of a trade or relative to the trade or business activity passive activity. If, however, the business, and gain or loss from the or vice versa, or partnership or S corporation must state disposition of property that produces b. Each owner of the trade or an item of gross income or deduction portfolio income or is held for business activity has the same separately to you, and the gross investment (see section 163(d)(5)). See proportionate ownership interest in the income or deduction is passive activity Temporary Regulations section rental activity. If so, the portion of the gross income or a passive activity T(c)(3). rental activity involving the rental of deduction (respectively), include that Alaska Permanent Fund dividends. property used in the trade or business amount in the net income or net loss Personal service income, including activity may be grouped with the trade entered on Form 8582 and the salaries, wages, commissions, or business activity. worksheets. self-employment income from trade or -5-!

6 business activities in which you Income from the following sources than passive activities. See Temporary materially participated for the tax year, may be subject to the net income Regulations section T(d)(7). deferred compensation, taxable social recharacterization rules. Deductions for losses from fire, security and other retirement benefits, Significant participation passive storm, shipwreck, or other casualty or and payments from partnerships to activities defined on page 4. from theft if losses similar in cause and partners for personal services. See Rental of property if less than 30% of severity do not recur regularly in the Temporary Regulations section the unadjusted basis of the property is activity T(c)(4). subject to depreciation. The deduction allowed for one-half of Income from positive section 481 Passive equity-financed lending self-employment taxes. adjustments allocated to activities other activities. than passive activities. See Temporary Rental of property incidental to a Former Passive Regulations section T(c)(5). development activity. Income or gain from investments of Rental of property to a nonpassive Activities working capital. activity. A former passive activity is any activity Acquisition of an interest in a Income from an oil or gas property if that was a passive activity in a prior tax pass-through entity that licenses you treated any loss from a working year but is not a passive activity in the intangible property. interest in the property for any tax year current tax year. A prior year unallowed beginning after 1986 as a nonpassive loss from a former passive activity is Passive Activity Deductions loss under the rule excluding working allowed to the extent of current year interests in oil and gas wells from To figure your overall gain or overall income from the activity. passive activities (see item 3 under loss from all passive activities or any passive activity, take into account only If current year net income from the Activities That Are Not Passive passive activity deductions. activity is less than the prior year Activities on page 2). See Regulations unallowed loss, enter the prior year section (c)(6). Passive activity deductions include unallowed loss and any current year Any income from intangible property all deductions from activities that are net income from the activity on Form if your personal efforts significantly passive activities for the current tax 8582 and the applicable worksheets. contributed to the creation of the year and all deductions from passive activities that were disallowed under the If current year net income from the property. PAL rules in prior tax years and carried activity is more than or equal to the Any income treated as not from a forward to the current tax year. See prior year unallowed loss from the passive activity under Temporary Regulations section (f)(4). activity, report the income and loss on Regulations section T(f) and the forms and schedules normally used; Regulations section (f). See Passive activity deductions include do not enter the amounts on Form Recharacterization of Passive Income losses from a disposition of property on this page. used in a passive activity at the time of Overall gain from any interest in a If the activity has a net loss for the the disposition and losses from a PTP (see item 2 under Special current year, enter the prior year disposition of less than your entire Instructions for PTPs beginning on unallowed loss (but not the current year interest in a passive activity. See page 11). loss) on Form 8582 and the applicable Dispositions on this page for the worksheets. State, local, and foreign income tax treatment of losses upon disposition of refunds. your entire interest in an activity. To report a disposition of a former Income from a covenant not to passive activity, follow the rules below Passive activity deductions do not compete. under Dispositions. include the following. Any reimbursement of a casualty or Deductions for expenses (other than theft loss included in income as interest expense) that are clearly and Dispositions recovery of all or part of a prior year directly allocable to portfolio income. loss deduction if the deduction for the Qualified home mortgage interest, Disposition of an Entire loss was not treated as a passive capitalized interest expenses, and other Interest activity deduction. interest expenses (except self-charged Cancellation of debt income to the interest treated as a passive activity If you disposed of your entire interest in extent that at the time the debt was deduction (discussed on page 5) and a passive activity or a former passive discharged, the debt was not properly interest expenses properly allocable to activity to an unrelated person in a fully allocable under Temporary Regulations passive activities). taxable transaction during the tax year, section T to passive activities. Losses from dispositions of property your losses allocable to the activity for that produce portfolio income or the year are not limited by the PAL property held for investment. rules. Recharacterization of State, local, and foreign income A fully taxable transaction is a Passive Income taxes. transaction in which you recognize all Certain income from passive activities Miscellaneous itemized deductions realized gain or loss. must be recharacterized and excluded that may be disallowed under from passive activity income. The section 67. If you are using the installment amount of income recharacterized Charitable contribution deductions. method to report this kind of equals the net income from the sources Net operating loss deductions, disposition, figure the loss for the given below. If during the tax year you percentage depletion carryovers under current year that is not limited by the received net income from any of these section 613A(d), and capital loss PAL rules by multiplying your overall sources (either directly or through a carryovers. loss (which does not include losses partnership or an S corporation), see Deductions and losses that would allowed in prior years) by the following Pub. 925 to find out how to report net have been allowed for tax years fraction: income or loss from these sources. For beginning before 1987, but for basis or more information, see Temporary Gain recognized in the current year at-risk limitations. Regulations section T(f) and Net negative section 481 Unrecognized gain as of the Regulations section (f). adjustments allocated to activities other beginning of the current year -6-

7 A partner in a PTP is not treated as the current year loss of $2,800 in Worksheet 3 is used for all other having disposed of an entire interest in column (b), and the prior year passive activities. an activity of a PTP until there is an unallowed loss of $12,650 in column See Pub. 925 for examples showing entire disposition of the partner s (c). how to complete the worksheets. interest in the PTP. Example 2. Activity with overall loss. You sell your entire interest in Worksheet 1 Reporting an Entire an oil and gas limited partnership that Individuals and qualifying estates who Disposition on Schedule D or was your only passive activity for a gain actively participated in rental real estate Form 4797 of $2,000. You have a current year activities must include the income or If you completely dispose of your entire Schedule E loss of $3,330 and a loss from those activities in Worksheet interest in a passive activity or a former Schedule E prior year unallowed loss of 1 to figure the amounts to enter on lines passive activity, you may have to report $1,115. 1a through 1c of Form Do not net income or loss and prior year Because you have an overall loss of include any commercial revitalization unallowed losses from the activity. All $2,445 after combining the gain and deductions (CRDs) from these activities the net income and losses are reported losses, none of the amounts are in the net income or loss reported in on the forms and schedules normally entered on Worksheet 3 or on Form Worksheet 1. used Do not enter a prior year unallowed Combine all income and losses You enter the net loss plus the prior loss in column (c) of Worksheet 1 (including any prior year unallowed year unallowed loss ($3,330 + $1,115 = unless you actively participated in the losses) from the activity for the tax year $4,445) on Schedule E, Part II, column activity in both the year the loss arose to see if you have an overall gain or (h), and the $2,000 gain on the sale on and the current tax year. If you did not loss. Schedule D, in either Part I or Part II, actively participate in both years, enter depending on how long you held the the prior year unallowed loss in column If you have an overall gain and you partnership interest. (c) of Worksheet 3. have other passive activities to report on Form 8582, include the income, Married individuals who file Disposition of Less Than an losses, and prior year unallowed losses! separate returns and lived with Entire Interest CAUTION on Worksheet 1, 2, or 3. their spouses at any time during If you have an overall gain and this Gains and losses from the disposition the tax year do not qualify under the is your only passive activity or a former of less than an entire interest in an active participation rule and must use passive activity, report all income and activity are treated as part of the net Worksheet 3 instead of Worksheet 1. losses (including any prior year income or net loss from the activity for Column (a). Enter the current year net unallowed losses) on the forms and the current year. income from each activity. Enter the schedules normally used and do not A disposition of less than total of column (a) on line 1a of Form use Form substantially all of an entire 8582.! If you have an overall loss when you CAUTION interest does not trigger the Example. A Schedule E rental combine the income and losses, do not allowance of prior year unallowed activity has current year profit of $5,000 use the worksheets or Form 8582 for losses. and a Form 4797 gain of $2,000. You the activity. All losses (including prior Disposition of substantially all of an enter $7,000 in column (a). year unallowed losses) are allowed in activity. You may treat the disposition Column (b). Enter the current year net full. Report the income and losses on of substantially all of an activity as a loss for each activity. Do not enter any the forms and schedules normally used. separate activity if you can prove with prior year unallowed losses in this An overall loss from an entire reasonable certainty: column. Enter the total of column (b) on disposition of a passive activity is a 1. The prior year unallowed losses, line 1b of Form nonpassive loss if you have an if any, allocable to the part of the If an activity has net income on one aggregate loss from all other passive activity disposed of, and form or schedule and a net loss on activities. When figuring your modified 2. The net income or loss for the another form or schedule, report the net adjusted gross income for line 7 of year of disposition allocable to the part amounts separately in columns (a) and Form 8582, be sure to take into of the activity disposed of. (b) of Worksheet 1. account the overall loss from the Example. A Schedule E rental disposition of the activity. activity has current year income of Example 1. Activity with overall $1,000 on line 22 of Schedule E and a gain. You sell your entire interest in a Specific Instructions current year Form 4797 loss of $4,500. rental real estate activity in which you You enter $1,000 in column (a) and actively participated for a gain of ($4,500) in column (b). Part I 2007 Passive $15,525. $7,300 of the gain is section Column (c). Enter the prior year 1231 gain reported on Form 4797, Activity Loss unallowed losses for each activity. You Part I, and $8,225 is ordinary recapture Use Part I to combine the net income find these amounts on Worksheet 5, income reported on Form 4797, Part II. and net loss from all passive activities column (c), of your 2006 Form On line 23 of Schedule E (Form 1040), to determine if you have a passive Enter the total of column (c) from your you report a total loss of $15,450, activity loss (PAL) for Use 2007 Worksheet 1 on line 1c of Form which includes a current year $2,800 Worksheets 1, 2, and 3 to determine net loss and a $12,650 prior year the entries for lines 1 3 of Part I, as Columns (d) and (e). Combine unallowed loss. You have an overall follows. income and losses in columns (a) gain from the disposition ($15,525 Worksheet 1 is used for rental real through (c) for each activity, and either $15,450 = $75). estate activities with active enter the overall gain for the activity in Because you had other passive participation. column (d) or enter the overall loss for activities reportable on Form 8582, you Worksheet 2 is used for commercial the activity in column (e). Do not enter make the following entries on revitalization deductions (CRDs) from amounts from columns (d) and (e) on Worksheet 1. You enter the $15,525 rental real estate activities (with or Form These amounts will be gain on the disposition in column (a), without active participation). used when Form 8582 is completed to -7-

8 figure the loss allowed for the current column (d) or enter the overall loss for bonds used to pay higher education year. the activity in column (e). Do not enter expenses, amounts from columns (d) and (e) on The exclusion of amounts received Worksheet 2 Form These amounts will be under an employer s adoption Use Worksheet 2 to figure the amounts to enter on lines 2a and 2b for commercial revitalization deductions (CRD) from rental real estate activities used when Form 8582 is completed to figure the loss allowed for the current year. assistance program, The student loan interest deduction, or The tuition and fees deduction. (see Commercial revitalization Part II Special Include in modified adjusted gross deduction (CRD) on page 4). Do not income any portfolio income and include the following amounts. Allowance for Rental expenses that are clearly and directly Income or other deductions from the Real Estate Activities allocable to portfolio income. Also same activity. Instead, report any net include any income that is treated as income or net loss from the activity, With Active Participation nonpassive income, such as overall except for the CRD, in Worksheet 1 if Use Part II to figure the maximum gain from a PTP and net income from you actively participated in the activity amount of rental loss allowed if you an activity or item of property subject to or in Worksheet 3 if you did not actively have a net loss from a rental real estate the recharacterization of passive participate. activity with active participation. income rules. When figuring modified CRDs from passive activities other adjusted gross income, include any than rental real estate activities. Enter all numbers in Part II as overall loss from the entire disposition Instead, report these deductions as part positive amounts (that is, greater than of a passive activity (considered a of the net income or loss from the zero). nonpassive loss). passive activity in Worksheet 3. Example. Line 5 has a loss of Column (a). Enter the current year Example. Your adjusted gross $42,000 (reported as a positive CRD from each rental real estate income on line 37 of Form 1040 is amount) and line 9 is $25,000. You activity. Enter the total of column (a) on $92,000, and you have taxable social enter $25,000 on line 10 (the smaller of line 2a of Form security benefits of $5,500 on line 20b. line 5 or line 9, both treated as positive Your modified adjusted gross income is Column (b). Enter the unallowed amounts). $86,500 ($92,000 $5,500). CRDs from the prior year for each rental real estate activity. Enter the total Married persons filing separate Line 9. Do not enter more than of column (b) on line 2b of Form 8582.! returns who lived with their $12,500 on line 9 if you are married CAUTION spouses at any time during the filing a separate return and you and Column (c). Combine the amounts in year are not eligible for the special your spouse lived apart at all times columns (a) and (b) for each activity allowance. They must enter -0- on line during the year. and enter the overall loss for the activity 10 and go to line 15. in column (c). Do not enter amounts from column (c) on Form These Line 5. Enter on line 5 the smaller of Part III Special amounts will be used when Form 8582 the loss on line 1d or the loss on line 4. Allowance for is completed to figure the loss allowed Example. Line 1d has a loss of for the current year. $3,000, line 2c is zero, and line 3d has Commercial a gain of $100. The combined loss on Worksheet 3 line 4 is $2,900. You enter $2,900 as a Revitalization Use Worksheet 3 to figure the amounts positive number on line 5 (the smaller Deductions From Rental to enter on lines 3a through 3c for: of the loss on line 1d or the loss on Real Estate Activities Passive trade or business activities, line 4). Passive rental real estate activities Line 6. Married persons filing separate Use Part III to figure the maximum that do not qualify for the special returns who lived apart from their amount of commercial revitalization allowance (but do not include CRDs spouses at all times during the year deductions allowed if you have a reported in Worksheet 2), and must enter $75,000 on line 6 instead of commercial revitalization deduction Rental activities other than rental real $150,000. from a rental real estate activity. estate activities. Line 7. To figure modified adjusted Enter all numbers in Part III as Column (a). Enter the current year gross income, combine all the amounts positive amounts (that is, greater than net income for each activity. Enter the used to figure adjusted gross income zero.) total of column (a) on line 3a of Form (See the example under Column except do not take into account: Married persons filing separate (a) for Worksheet 1, on page 7.) Passive income or loss included on returns who lived with their Form 8582,! Column (b). Enter the current year net CAUTION spouses at any time during the Any rental real estate loss allowed to loss for each activity. Enter the total of year are not eligible for the special real estate professionals (defined under column (b) on line 3b of Form allowance. They must enter -0- on line Activities That Are Not Passive (See the example under Column (b) for 14 and go to line 15. Activities on page 2), Worksheet 1, on page 7.) Any overall loss from a PTP, Line 11. Enter $12,500 (reduced by Column (c). Enter the unallowed The taxable amount of social security the amount, if any, on line 10) on line losses for the prior years for each and tier 1 railroad retirement benefits, 11 if you are married filing a separate activity. You find these amounts on The deduction allowed under section return and you and your spouse lived Worksheet 5, column (c), of your for contributions to IRAs and apart at all times during the year. Form Enter the total of column certain other qualified retirement plans, (c) from your 2007 Worksheet 3 on The domestic production activities Part IV Total Losses line 3c of Form deduction, Allowed Columns (d) and (e). Combine The deduction allowed for one-half of income and losses in columns (a) self-employment taxes, Use Part IV to figure the amount of the through (c) for each activity, and either The exclusion from income of interest PAL (as determined in Part I) allowed enter the overall gain for the activity in from series EE and I U.S. savings for 2007 from all passive activities. -8-

9 Line 16. Use the worksheets on Form If you entered an amount on line 14, Column (a). Enter the amounts, if any, 8582 and the following instructions for list on Worksheet 4 all activities with an from column (d) of Worksheet 4 (from those worksheets to figure the overall loss in column (c) of column (e) of Worksheet 1 or column unallowed loss to be carried forward Worksheet 2. (c) of Worksheet 2 if you did not have and the allowed loss to report on your If you entered amounts on both lines to complete Worksheet 4). Also enter forms and schedules for and 14 of Form 8582, you must the losses, if any, from column (e) of complete two separate Worksheets 4. Worksheet 3. Worksheets 1, 2, and 3 For the second worksheet, you either Column (b). Divide each of the Worksheets 1 and 3, columns (d) and may attach an extra copy of page 2 of individual losses shown in column (a) (e), show whether an activity had an Form 8582 or your own schedule in the by the total of all the losses in column overall gain or loss. Worksheet 2, same format as Worksheet 4. On the (a) and enter this ratio for each activity column (c), shows the overall loss for first Worksheet 4, list all activities with in column (b). The total of all the ratios CRDs from rental real estate activities. an overall loss in column (e) of must equal If you have activities that show overall Worksheet 1. On the second Column (c). Complete the following gain in column (d) of Worksheet 1 or 3, Worksheet 4, list all activities with an computation. report all the income and losses listed overall loss in column (c) of in columns (a), (b), and (c) for those Worksheet 2. activities on the proper forms and A. Enter as a positive amount Column (a). Enter the overall loss line 4 of Form schedules. from column (e) of Worksheet 1 or If you have activities that show an column (c) of Worksheet 2 for each B. Add lines 10 and 14 of activity. Form overall loss in column (e) of Worksheet 1 or 3 or column (c) of Worksheet 2, Column (b). Divide each of the C. Subtract line B from line A.. you must allocate your allowed loss on individual losses shown in column (a) line 16 of Form 8582 to those activities by the total of all the losses in column Multiply each ratio in column (b) by by completing Worksheets 4, 5, and 6 (a) and enter this ratio for each activity the amount on line C above, and enter or 7. in column (b). The total of all the ratios the result in column (c). Complete Worksheet 4 only if you in column (b) must equal entered an amount (other than zero) on Column (c). Multiply each ratio in Worksheets 6 and 7 line 10 or 14 of Form Otherwise, column (b) by the amount on line 10 or These worksheets allocate your skip Worksheet 4 and complete line 14 of Form 8582, and enter the unallowed and allowed losses for each Worksheet 5 for all activities in results in column (c). The total of activity. Worksheets 1 or 3 that have overall column (c) must be the same as line 10 If you have losses from any activity losses in column (e) and all activities in or line 14 of Form that are reported on two or more Worksheet 2. Column (c) total is the same as different forms or schedules, use column (a) total. If the total losses in Worksheet 7 instead of Worksheet 6 for Worksheet 4 column (c) are the same as those in that activity. Use Worksheet 4 to allocate the special column (a), the losses in Worksheets 1 Also use Worksheet 7 instead of allowance on line 10 or line 14 of Form and 2 are allowed in full and are not Worksheet 6 for any activity with two or 8582 among your rental real estate carried over to Worksheet 5. Report all more transactions that are reported on activities. amounts in columns (a), (b), and (c) of the same form or schedule but must be In the first column of Worksheet 4, Worksheet 1 and columns (a) and (b) of separately identified for tax purposes. enter the name of each activity. In the Worksheet 2 on the proper forms and Transactions that must be separately second column, enter the form or schedules. identified include capital losses that are schedule and line number on which the Column (c) total is less than 28% rate losses and those that are not. loss will be reported. column (a) total. If the total losses in Note. 28% rate gain or loss includes Example. You receive a Schedule column (c) are less than the total losses all collectibles gains and deductible K-1 from partnership P that reports in column (a), complete column (d). long-term losses and section 1202 gain losses from two rental real estate Column (d). Subtract column (c) from on the sale of qualified small business activities, Activity X and Activity Y. The column (a) and enter the results in stock. See the instructions for Schedule losses from partnership P are reported column (d). Also enter the amounts D (Form 1040) for details, including the on line 28A of Schedule E. In the first from column (d) of Worksheet 4 in definitions of collectibles gains and two columns of Worksheet 4, enter: column (a) of Worksheet 5. losses and section 1202 gain. Name of Activity Form or Schedule Worksheet 5 Worksheet 6 Complete Worksheet 5 if any activities Use Worksheet 6 for any activity listed Activity X Sch E, line 28A have an overall loss in column (e) of in Worksheet 5 if all the loss from that Activity Y Sch E, line 28A Worksheet 3 or losses in column (d) of activity is reported on one form or Worksheet 4 (in column (e) of schedule and no transactions need to If the loss from an activity is reported in Worksheet 1 or column (c) of be identified separately (as discussed more than one place, identify both Worksheet 2 if you did not have to above). locations in the second column (for complete Worksheet 4). Example. Use Worksheet 6 if all example, Sch E, line 28A/Form 4797, On Worksheet 5, enter the name of the loss from an activity is reported on line 2). If you need additional space, each activity and the form or schedule Schedule E, even though part of the show this information on an attached and line number on which the loss will loss is a current year Schedule E loss statement. be reported. See the example for and part of it is from a Schedule E prior Enter all activities with overall losses Worksheet 4. Identify any deduction year unallowed loss. from Worksheets 1 and 2 as follows. from Worksheet 2 on a separate line On Worksheet 6, enter the name of If you entered an amount on line 10, (even if the amount is from an activity each activity and the form or schedule list on Worksheet 4 all activities with an also shown on Worksheet 1 or 3) and and line number on which the loss is overall loss in column (e) of add CRD after the name of the reported. See the example for Worksheet 1. activity. Worksheet 4. Identify each CRD from -9-

10 Worksheet 5 on a separate line and from the activity that is reported on the Activity I has an overall loss of add CRD after the name of the same form or, in the case of Schedule $4,000 (current year long-term capital activity. D and Form 4797, the same part. loss of $3,000 and a prior year Column (a). For each activity entered If you have a Schedule D 28% rate unallowed long-term capital loss of in Worksheet 6, enter the net loss plus loss and a Schedule D non-28%-rate $1,000). Activity II has an overall gain the prior year unallowed loss for the loss, see Example of Schedule D (Form of $870 (current year net income of activity. Figure this amount by adding 1040) transactions on this page before $1,100 less a current year long-term the losses in columns (b) and (c) of completing Worksheet 7. capital loss of $230). Line 16 of Form Worksheets 1 and 3 or enter the loss 8582 shows an allowed loss of $1,100. Line 1b, column (a). Enter any net from column (c) of Worksheet 2. income from the activity that is reported Since Activity II has an overall gain, Column (b). For each activity entered on the same form or schedule (or on the amounts shown in columns (a) and in Worksheet 6, enter the amount from the same part of the same form or (b) of Worksheet 3 for that activity are column (c) of Worksheet 5 for the schedule) as the loss on line 1a, reported on the proper forms and activity. These are your unallowed column (a). schedules and are not shown on any losses for Keep a record of these other worksheet. Example. You enter a prior year amounts so the losses can be used to unallowed loss from Form 4797, Part I, Worksheet 5 figure your PAL next year. on line 1a. If the activity has a current Activity I has an unallowed loss of Column (c). Subtract column (b) from year Form 4797, Part I, gain, enter the $3,130 (line 4 of Form 8582 ($3,130) column (a). These are your allowed gain on line 1b, column (a). If the less the sum of lines 10 and 14 of Form losses for Report the amounts in activity does not have a Form 4797, 8582 (-0-) x 100%). this column on the forms and schedules Part I, gain, enter -0- on line 1b, column Worksheet 7 normally used. (a). This worksheet is used to figure the See the forms and schedules listed Line 1c, column (b). Subtract line 1b, portion of the unallowed loss under How To Report Allowed Losses column (a), from line 1a, column (a), attributable to the 28% rate loss and beginning on this page. Also, see Pub. and enter the result in column (b). If line the portion attributable to the 925 for an extensive example of how to 1b, column (a), is more than line 1a, non-28%-rate loss. report passive income and losses on column (a), enter -0- in column (b). the forms and schedules. The loss attributable to the 28% rate Column (c). Divide each of the losses loss ($1,000) and the loss attributable Worksheet 7 entered in column (b) by the total of to the non-28%-rate loss ($3,000) are Use Worksheet 7 for any activity listed column (b) and enter the ratio in separate entries in Worksheet 7. The in Worksheet 5 that has losses that are column (c). The total of this column ratio of each loss to the total of the two reported on two or more different forms must be losses is figured as follows. $1,000/ and schedules or on different parts of Column (d). Multiply the unallowed $4,000 =.25. $3,000/$4,000 =.75. the same form or schedule (for loss for this activity, found in Worksheet Each of these ratios is multiplied by the example, 28% rate and non-28%-rate 5, column (c), by each ratio in column unallowed loss for Activity I, shown in capital losses reported on Schedule D). (c) of Worksheet 7. If -0- is entered in column (c) of Worksheet 5 ($3,130). Worksheet 7 allocates the allowed and column (b) of Worksheet 7, also enter Unallowed losses for Activity I: unallowed loss for the activity and -0- for that form or schedule in column 28% rate loss:.25 x $3,130 = allocates the allowed loss to the (d). $ different forms or schedules (or The amount in column (d) is the Non-28%-rate loss:.75 x $3,130 = different parts of the same form or unallowed loss for Keep a record $2, schedule) used to report the losses. of this worksheet so you can use the Allowed losses for Activity I: Only losses that would cause a losses to figure your PAL next year. 28% rate loss: $1,000 $ = difference in tax liability if they were Column (e). Subtract the amount in $ reported on a different form or schedule column (d) from the loss entered on line Non-28%-rate loss: $3,000 or on different parts of the same form or 1a, column (a). This is the allowed loss $2, = $ schedule are kept separate. Those for 2007 to enter on the forms or The total loss allowed for Activity I forms, schedules, and parts are: schedules. The forms and schedules ($870) is entered in Part II of Schedule Schedules C, E, and F. you use must show the losses from this D (Form 1040). The 28% rate loss Schedule D (Parts I and II (28% rate column and the income, if any, for that ($217.50) is entered on the 28% Rate losses and non-28%-rate losses)). activity from column (a) of Worksheet 1 Gain Worksheet (see Schedule D Note. You must make a separate or Worksheet 3. instructions for line 18). Keep a record entry in Schedule D, Part I or Part II, for Example of Schedule D (Form of the unallowed 28% rate and each transaction reported. See the 1040) transactions. The taxpayer had non-28%-rate losses to figure the PAL Instructions for Schedule D (Form the following Schedule D (Form 1040) for these transactions next year. 1040). transactions from passive activities in See the forms and schedules listed Forms 4684 (Section B), under How To Report Allowed Losses (Parts I and II), and Activity I beginning below. Also, see Pub. 925 for Use a separate copy of Worksheet 7 A passive activity prior year an extensive example of how to report for each activity for which you have unallowed long-term capital loss (a 28% passive income and losses on the losses reported on two or more different rate loss) of $1,000 and a current year forms and schedules. forms or schedules or different parts of the same form or schedule. long-term capital loss (a non-28%-rate loss) of $3,000. How To Report On Worksheet 7, enter the form or schedule and line number on the dotted Activity II Allowed Losses line above each line 1a (for example, A current year collectibles loss (a Line 4 is income. If line 4 of Form Schedule D, line 12, to report a 28% 28% rate loss) of $230 and net income 8582 shows net income or zero, all the rate loss from a partnership). of $1,100 from Schedule E (Form losses in columns (b) and (c) of Line 1a, column (a). Enter the net 1040). Worksheets 1 and 3 and all the loss plus any prior year unallowed loss Worksheet 3 deductions in columns (a) and (b) of -10-

11 Worksheet 2 are allowed in full. Report passive gains and losses from the sale Entire disposition with an overall the income and losses in columns (a), of assets or of an interest in a passive gain. Gains and losses from this (b), and (c) of Worksheets 1 and 3 and activity. activity were included on Form 8582 so deductions in columns (a) and (b) of Schedule E, Part I. Enter the allowed that the gains might offset other PALs. Worksheet 2 on the forms and loss from the worksheet on line 23 of Report all the gains and losses on the schedules normally used. Schedule E. An activity that has net forms and schedules normally used, Line 16 is the same as the total of profit for the year and prior year and to the left of the entry space, enter lines 1b, 1c, 2a, 2b, 3b, and 3c. In unallowed losses will have net profit on EDPA. this case also, all the losses in columns line 22 and the allowed loss on line 23. (b) and (c) of Worksheets 1 and 3 and The allowed loss on line 23 will include Publicly Traded all the deductions in columns (a) and the loss allowed to the extent of the net Partnerships (PTPs) (b) of Worksheet 2 are allowed in full. profit. Line 24 of Schedule E will show Report the income and losses in total net profit and line 25 will show A PTP is a partnership whose interests columns (a), (b), and (c) of Worksheets total losses allowed (both passive and are traded on an established securities 1 and 3 and deductions in columns (a) nonpassive). Line 26 will show the total market or are readily tradable on a and (b) of Worksheet 2 on the forms net profit or loss. secondary market (or its substantial and schedules normally used. equivalent). Schedule E, Parts II and III. Any net Columns (a) and (c) of Worksheet 4 income shown on your Schedule K-1 An established securities market are the same amount. In this case, all that is passive income must be entered includes any national securities the losses in columns (b) and (c) of as passive income in the appropriate exchange and any local exchange Worksheet 1 and all the deductions in column of Schedule E, Part II or III. registered under the Securities columns (a) and (b) of Worksheet 2 are Enter the passive loss allowed from Exchange Act of 1934 or exempted allowed in full. Report the income and Worksheet 6 or 7 in the appropriate from registration because of the limited losses in columns (a), (b), and (c) of column for passive losses. The passive volume of transactions. It also includes Worksheet 1 and the deductions in losses allowed include the loss allowed any over-the-counter market. columns (a) and (b) of Worksheet 2 on to the extent of any net income from the A secondary market generally exists the forms and schedules normally used. activity. Passive net income or loss if a person stands ready to make a Losses allowed in column (c) of reportable on Schedule E, Part II, market in the interest. An interest is Worksheet 6. The amounts in column includes any self-charged interest treated as readily tradable if the interest (c) of Worksheet 6 are the losses or income and deductions treated as is regularly quoted by persons, such as deductions allowed for 2007 for the passive activity income and deductions. brokers or dealers, who are making a activities listed in that worksheet. See Schedule D and Form 4797 market in the interest. Report the loss allowed from column (c) of Worksheet 6 and the income, if any, instructions on this page if you also had The substantial equivalent of a for that activity from column (a) of passive gains or losses from the sale of secondary market exists if there is no Worksheet 1 or 3, on the form or assets or of an interest in a passive identifiable market maker, but holders schedule normally used. activity. of interests have a readily available, Form 4684, Section B. Any passive regular, and ongoing opportunity to sell Losses allowed in column (e) of activity gain from Form 4684 is or exchange interests through a public Worksheet 7. The amounts in column unchanged. It was used on Form 8582 means of obtaining or providing (e) of Worksheet 7 are the losses or to determine allowable PALs. If you do information on offers to buy, sell, or deductions allowed for 2007 for the not have passive losses on Form 4684, exchange interests. Similarly, the activity listed on that worksheet. Report complete Form 4684 and follow the substantial equivalent of a secondary the losses allowed from column (e) of instructions for that form for where to market exists if prospective buyers and Worksheet 7 and the income, if any, for report the gain. sellers have the opportunity to buy, sell, that activity from column (a) of or exchange interests in a timeframe Worksheet 1 or 3, on the forms or If you have passive losses on Form and with the regularity and continuity schedules normally used. 4684, cross through the amount you that the existence of a market maker Schedules C and F, and Form first entered on line 31, 32, 38a, 38b, or would provide. Enter on the net profit or loss line of 39 of that form, and enter the allowed your schedule or form the allowed loss from the worksheet. To the left of Special Instructions for PTPs passive loss from the worksheet. To the the entry space, enter PAL. Section 469(k) provides that the left of the entry space enter PAL. Schedule D and Form If you passive activity limitations must be If the net profit or loss line on your sold assets from a passive activity or applied separately to items from each form or schedule shows net profit for you sold an interest in your passive PTP. PALs from a PTP generally may the year, reduce the net profit by the activity, all gains from the activity must be used only to offset income or gain allowed loss from Worksheet 6 or 7, be entered on the appropriate line of from passive activities of the same and enter the result on the net profit or Schedule D or Form Identify the PTP. The special allowance (including loss line. gain as FPA. Enter any allowed CRDs) for rental real estate activities Example. Schedule C shows net losses for Schedule D or Form 4797 on does not apply to PALs from a PTP. profit for the year of $5,000 from a the appropriate line, and to the left of Passive activity loss rules for passive activity. The activity also has a the entry space, enter PAL. partners in PTPs. Do not report Form 4797 gain of $2,500 and a prior Entire disposition with an overall passive income, gains, or losses from a year unallowed Schedule C loss of loss. If you made an entire disposition PTP on Form Instead, use the $6,000. The loss allowed for 2007 is of your interest in a passive activity and following rules to figure and report your $6,000. You enter a net loss of $1,000 that activity had an overall loss, none of income, gains, and losses from passive on line 31 of Schedule C (the $5,000 the gains, if any, or losses were activities you held through each PTP net profit for the year less the $6,000 entered on Form 8582 or the you owned during the tax year. loss allowed for the year). To the left of worksheets. However, all the gains and 1. Combine any current year the entry space, you enter PAL. losses must be reported on the forms income, gains and losses, and any prior See Schedule D and Form 4797 or schedules normally used. To the left year unallowed losses to see if you instructions on this page if you also had of the entry space, enter EDPA. have an overall loss from the PTP. -11-

12 Include only the same types of income Form 4797 gain of $7,200 from the Report the income and losses on the and losses you would include to figure passive activities of a PTP. You report forms and schedules normally used. your net income or loss from a the $7,200 gain on the appropriate line For rules on the disposition of an non-ptp passive activity. See Passive of Form On Schedule E, Part II, entire interest reported using the Activity Income and Deductions on you report $7,200 of the losses as a installment method, see Disposition of page 5. passive loss in column (f). You carry an Entire Interest beginning on page If you have an overall gain, the forward the unallowed loss of $4,800 net gain portion (total gain minus total ($12,000 $7,200). Paperwork Reduction Act Notice. losses) is nonpassive income. If you have unallowed losses from We ask for the information on this form It is important to figure the more than one activity of the PTP or to carry out the Internal Revenue laws nonpassive income because it must be from the same activity of the PTP that of the United States. You are required included in modified adjusted gross must be reported on different forms or to give us the information. We need it to income to figure the special allowance schedules, allocate the unallowed ensure that you are complying with for active participation in a non-ptp losses on a pro rata basis to figure the these laws and to allow us to figure and rental real estate activity on Form amount allowed for each activity or on collect the right amount of tax. Also, you may be able to include the each form or schedule. You are not required to provide the nonpassive income in investment information requested on a form that is income when figuring your investment To allocate and keep a record of subject to the Paperwork Reduction Act interest expense deduction. See Form TIP the unallowed losses, use unless the form displays a valid OMB 4952, Investment Interest Expense Worksheets 5, 6, and 7 of Form control number. Books or records Deduction relating to a form or its instructions Report all gains and allowed losses List each activity of the PTP in must be retained as long as their from the activity on the forms or Worksheet 5. Enter the overall loss contents may become material in the schedules normally used, and to the left from each activity in column (a). administration of any Internal Revenue of each entry space, enter From PTP. Complete column (b) of Worksheet 5 law. Generally, tax returns and return according to its instructions. Multiply the information are confidential, as required Example. You have Schedule E total unallowed loss from the PTP by by section income of $8,000 and a Form 4797 prior year unallowed loss of $3,500 each ratio in column (b) and enter the The time needed to complete and from the passive activities of a PTP. result in column (c) of Worksheet 5. file this form will vary depending on You have a $4,500 overall gain ($8,000 Next, complete Worksheet 6 for individual circumstances. The $3,500) that is nonpassive income. each activity listed in Worksheet 5 if all estimated burden for individual On Schedule E, Part II, you report the the loss from that activity is reported on taxpayers filing this form is approved $4,500 net gain as nonpassive income one form or schedule. Use Worksheet 7 under OMB control number in column (j). In column (g), you report instead of Worksheet 6 for each activity and is included in the estimates shown the remaining Schedule E gain of with losses reported on two or more in the instructions for their individual $3,500 ($8,000 $4,500) as passive different forms or schedules (or on income tax return. The estimated income. On the appropriate line of Form different parts of the same form or burden for all other taxpayers who file 4797, you report the prior year schedule). Enter the net loss plus any this form is shown below. unallowed loss of $3,500. You enter prior year unallowed losses in column From PTP to the left of each entry (a) of Worksheet 6 (or Worksheet 7 if Recordkeeping... 1 hr., 26 min. space. applicable). The losses in column (c) of Learning about the law or 3. If you have an overall loss (but Worksheet 6 (column (e) of Worksheet the form... 1 hr., 43 min. did not dispose of your entire interest in 7) are the allowed losses to report on the PTP to an unrelated person in a your forms or schedules. Report these Preparing the form... 1 hr., 43 min. fully taxable transaction during the losses and any income from the PTP Copying, assembling, year), the losses are allowed only to the on the forms and schedules normally and sending the form to extent of the income, and the excess used. the IRS min. loss is carried forward to use in a future 4. If you have an overall loss and year if you have income to offset it. you disposed of your entire interest in If you have comments concerning Report as a passive loss on the the PTP to an unrelated person in a the accuracy of these time estimates or schedule or form you normally use the fully taxable transaction during the year, suggestions for making this form portion of the loss equal to the income. your losses (including prior year simpler, we would be happy to hear Report the income as passive income unallowed losses) allocable to the from you. See the instructions for the on the form or schedule you normally activity for the year are not limited by tax return with which this form is filed. use. the passive loss rules. A fully taxable Example. You have a Schedule E transaction is one in which you loss of $12,000 (current year losses recognize all your realized gain or loss. plus prior year unallowed losses) and -12-

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