taxmap/pubs/p925-000.htm#en_us_publink1000104552taxmap/pubs/p925-000.htm#en_us_publink1000248480Commercial revitalization deduction (CRD).(p1)
CRDs for rental real estate activities are not allowed for buildings
placed in service after December 31, 2009. See
Commercial revitalization deduction (CRD) later.
taxmap/pubs/p925-000.htm#en_us_publink1000248481Disclosure requirements for groupings.(p1)
For tax years beginning after January 24, 2010, disclosure requirements
for groupings of trade or business activities or rental activities apply. See
Disclosure Requirement later.
taxmap/pubs/p925-000.htm#en_us_publink1000104554At-risk amounts.(p1)
The following rules apply to amounts borrowed after May 3, 2004.
- You must file Form 6198, At-Risk Limitations, if you are engaged
in an activity included in (6) under
Activities Covered by the At-Risk Rules and you have borrowed certain amounts described in
Certain borrowed amounts excluded under
At-Risk Amounts in this publication.
- You may be considered at risk for certain amounts described
in
Certain borrowed amounts excluded under
At-Risk Amounts
secured by real property used in the activity of holding real property (other
than mineral property) that, if nonrecourse, would be qualified nonrecourse
financing.
Photographs of missing children.(p2)
The Internal Revenue Service is a proud partner with the National
Center for Missing and Exploited Children. Photographs of missing children
selected by the Center may appear in this publication on pages that would
otherwise be blank. You can help bring these children home by looking at the
photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a
child.
This publication discusses two sets of rules that may limit the
amount of your deductible loss from a trade, business, rental, or other
income-producing activity. The first part of the publication discusses the
passive activity rules. The second part discusses the at-risk rules. However,
when you figure your allowable losses from any activity, you must apply the
at-risk rules before the passive activity rules.
taxmap/pubs/p925-000.htm#en_us_publink1000256815We welcome your comments about this publication and your suggestions
for future editions.
You can write to us at the following address:
Internal Revenue Service
Individual Forms and Publications Branch
SE:W:CAR:MP:T:I
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224
We respond to many letters by telephone. Therefore, it would
be helpful if you would include your daytime phone number, including the area
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You can email us at
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about."
Although we cannot respond individually to each comment received,
we do appreciate your feedback and will consider your comments as we revise our
tax products.
taxmap/pubs/p925-000.htm#en_us_publink1000256816Visit
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to download forms and publications, call 1-800-829-3676, or write to the address
below and receive a response within 10 days after your request is received.
Internal Revenue Service
1201 N. Mitsubishi Motorway
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IRS.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of
the above addresses.
taxmap/pubs/p925-000.htm#TXMP517d0964Useful items
You may want to see:
Publication 527 Residential Rental Property (Including Rental of Vacation Homes) 541
Partnerships Form (and Instructions) 4952 :
Investment Interest Expense Deduction 6198 :
At-Risk Limitations 8582 :
Passive Activity Loss Limitations 8582-CR :
Passive Activity Credit Limitations 8810 :
Corporate Passive Activity Loss and Credit Limitations See
How To Get Tax Help
near the end of this publication for information about getting
these publications and forms.
taxmap/pubs/p925-000.htm#en_us_publink1000104559In general, you can deduct passive activity losses only from
passive activity income (a limit on loss deductions). You carry any excess loss
forward to the following year or years until used, or until deducted in the year
you dispose of your entire interest in the activity in a fully taxable
transaction. See
Dispositions,
later.
 | Before applying this limit on passive activity losses, you
must first determine the amount of your loss disallowed under the at-risk rules
explained in the second part of this publication. |
taxmap/pubs/p925-000.htm#en_us_publink1000104561You can subtract passive activity credits only from the tax on
net passive income. Passive activity credits include the general business
credit. Credits that are more than the tax on income from passive activities are
carried forward.
Unallowed passive activity credits, unlike unallowed passive
activity losses, cannot be claimed when you dispose of your entire interest in
an activity. However, to determine your gain or loss from the disposition, you
can elect to increase the basis of the credit property by the amount of the
original basis reduction for the credit, to the extent that the credit was not
allowed because of the passive activity limits. You cannot elect to adjust the
basis for a partial disposition of your interest in a passive activity.
See the instructions for Form 8582-CR for more information.
taxmap/pubs/p925-000.htm#en_us_publink1000104562You must apply the rules in this part separately to your income
or loss from a passive activity held through a publicly traded partnership
(PTP). You also must apply the limit on passive activity credits separately to
your credits from a passive activity held through a PTP.
You can offset losses from passive activities of a PTP only against
income or gain from passive activities of the same PTP. Likewise, you can offset
credits from passive activities of a PTP only against the tax on the net passive
income from the same PTP. This separate treatment rule also applies to a
regulated investment company holding an interest in a PTP for the items
attributable to that interest.
For more information on how to apply the passive activity loss
rules to PTPs, and on how to apply the limit on passive activity credits to
PTPs, see
Publicly Traded Partnerships (PTPs) in the instructions for Forms 8582 and 8582-CR, respectively.
taxmap/pubs/p925-000.htm#en_us_publink1000256342If you receive an applicable subsidy for any tax year and you
have an excess farm loss for the tax year, special rules apply. This does not
apply to a C corporation. For information, see the Instructions for Schedule F
(Form 1040), Profit or Loss From Farming.
taxmap/pubs/p925-000.htm#en_us_publink1000104563The passive activity rules apply to:
- Individuals,
- Estates,
- Trusts (other than grantor trusts),
- Personal service corporations, and
- Closely held corporations.
Even though the rules do not apply to grantor trusts, partnerships,
and S corporations directly, they do apply to the owners of these entities.
For information about personal service corporations and closely
held corporations, including definitions and how the passive activity rules
apply to these corporations, see Form 8810 and its instructions.
taxmap/pubs/p925-000.htm#en_us_publink1000104564A closely held corporation can offset net active income with
its passive activity loss. It also can offset the tax attributable to its net
active income with its passive activity credits. However, a closely held
corporation cannot offset its portfolio income (defined later, under
Passive Activity Income) with its passive activity loss.
Net active income is the corporation's taxable income figured
without any income or loss from a passive activity or any portfolio income or
loss.
taxmap/pubs/p925-000.htm#en_us_publink1000104565There are two kinds of passive activities.
- Trade or business activities in which you do not materially
participate during the year.
- Rental activities, even if you do materially participate in
them, unless you are a real estate professional.
Material participation in a trade or business is discussed later,
under
Activities That Are Not Passive Activities.A former passive activity is an activity that was a passive activity
in any earlier tax year, but is not a passive activity in the current tax year.
You can deduct a prior year's unallowed loss from the activity up to the amount
of your current year net income from the activity. Treat any remaining prior
year unallowed loss like you treat any other passive loss.
In addition, any prior year unallowed passive activity credits
from a former passive activity offset the allocable part of your current year
tax liability. The allocable part of your current year tax liability is that
part of this year's tax liability that is allocable to the current year net
income from the former passive activity. You figure this after you reduce your
net income from the activity by any prior year unallowed loss from that activity
(but not below zero).
taxmap/pubs/p925-000.htm#en_us_publink1000104567A trade or business activity is an activity that:
- Involves the conduct of a trade or business (that is, deductions
would be allowable under section 162 of the Internal Revenue Code if other
limitations, such as the passive activity rules, did not apply),
- Is conducted in anticipation of starting a trade or business,
or
- Involves research or experimental expenditures that are deductible
under Internal Revenue Code section 174 (or that would be deductible if you
chose to deduct rather than capitalize them).
A trade or business activity does not include a rental activity
or the rental of property that is incidental to an activity of holding the
property for investment.
You generally report trade or business activities on Schedule
C, C-EZ, F, or in Part II or III of Schedule E.
taxmap/pubs/p925-000.htm#en_us_publink1000104568A rental activity is a passive activity even if you materially
participated in that activity, unless you materially participated as a real
estate professional. See
Real Estate Professional under
Activities That Are Not Passive Activities,
later. An activity is a rental activity if tangible property (real or personal)
is used by customers or held for use by customers, and the gross income (or
expected gross income) from the activity represents amounts paid (or to be paid)
mainly for the use of the property. It does not matter whether the use is under
a lease, a service contract, or some other arrangement.
taxmap/pubs/p925-000.htm#en_us_publink1000104569Your activity is not a rental activity if any of the following
apply.
- The average period of customer use of the property is 7 days
or less. You figure the average period of customer use by dividing the total
number of days in all rental periods by the number of rentals during the tax
year. If the activity involves renting more than one class of property, multiply
the average period of customer use of each class by a fraction. The numerator of
the fraction is the gross rental income from that class of property and the
denominator is the activity's total gross rental income. The activity's average
period of customer use will equal the sum of the amounts for each class.
- The average period of customer use of the property, as figured
in (1) above, is 30 days or less and you provide significant personal services
with the rentals. Significant personal services include only services performed
by individuals. To determine if personal services are significant, all relevant
facts and circumstances are taken into consideration, including the frequency of
the services, the type and amount of labor required to perform the services, and
the value of the services relative to the amount charged for use of the
property. Significant personal services do not include the following.
- Services needed to permit the lawful use of the property,
- Services to repair or improve property that would extend
its useful life for a period substantially longer than the average rental, and
- Services that are similar to those commonly provided with
long-term rentals of real estate, such as cleaning and maintenance of common
areas or routine repairs.
- You provide extraordinary personal services in making the
rental property available for customer use. Services are extraordinary personal
services if they are performed by individuals and the customers' use of the
property is incidental to their receipt of the services.
- The rental is incidental to a nonrental activity. The rental
of property is incidental to an activity of holding property for investment if
the main purpose of holding the property is to realize a gain from its
appreciation and the gross rental income from the property is less than 2% of
the smaller of the property's unadjusted basis or fair market value. The
unadjusted basis of property is its cost not reduced by depreciation or any
other basis adjustment. The rental of property is incidental to a trade or
business activity if all of the following apply.
- You own an interest in the trade or business activity during
the year.
- The rental property was used mainly in that trade or business
activity during the current year, or during at least 2 of the 5 preceding tax
years.
- Your gross rental income from the property is less than
2% of the smaller of its unadjusted basis or fair market value. Lodging provided
to an employee or the employee's spouse or dependents is incidental to the
activity or activities in which the employee performs services if the lodging is
furnished for the employer's convenience.
- You customarily make the rental property available during
defined business hours for nonexclusive use by various customers.
- You provide the property for use in a nonrental activity in
your capacity as an owner of an interest in the partnership, S corporation, or
joint venture conducting that activity.
 | If you meet any of the exceptions listed above, see the instructions
for Form 8582 for information about how to report any income or loss from the
activity. |
taxmap/pubs/p925-000.htm#en_us_publink1000104571If you or your spouse actively participated in a passive rental
real estate activity, you can deduct up to $25,000 of loss from the activity
from your nonpassive income. This special allowance is an exception to the
general rule disallowing losses in excess of income from passive activities.
Similarly, you can offset credits from the activity against the tax on up to
$25,000 of nonpassive income after taking into account any losses allowed under
this exception.
If you are married, filing a separate return, and lived apart
from your spouse for the entire tax year, your special allowance cannot be more
than $12,500. If you lived with your spouse at any time during the year and are
filing a separate return, you cannot use the special allowance to reduce your
nonpassive income or tax on nonpassive income.
The maximum special allowance is reduced if your modified adjusted
gross income exceeds certain amounts. See
Phaseout rule, later.
taxmap/pubs/p925-000.htm#en_us_publink1000104572Kate, a single taxpayer, has $70,000 in wages, $15,000 income
from a limited partnership, a $26,000 loss from rental real estate activities in
which she actively participated, and is not subject to the modified adjusted
gross income phaseout rule. She can use $15,000 of her $26,000 loss to offset
her $15,000 passive income from the partnership. She actively participated in
her rental real estate activities, so she can use the remaining $11,000 rental
real estate loss to offset $11,000 of her nonpassive income (wages).
taxmap/pubs/p925-000.htm#en_us_publink1000256812The special allowance must first be applied to losses from rental
real estate activities figured without the CRD. Any remaining part of the
special allowance is available for the CRD from the rental real estate
activities and is not subject to the active participation rules or the phaseout
based on modified adjusted gross income.
| You cannot claim a CRD for a building placed in service after
December 31, 2009. |
You can claim a current year CRD for 2010 only if you were a
partner or shareholder in a pass-through entity that uses a fiscal year and
- the tax year began in 2009,
- the building was placed in service in 2009, and
- the qualified revitalization expenditures were made in 2009.
If you had a CRD for a building placed in service before 2010
and elected to amortize the CRD over a period of 120 months, the portion of that
CRD that would be deductible in the current year should be reported as a current
year CRD with a notation as to the origination of the amount.
Active participation is not the same as material participation
(defined later). Active participation is a less stringent standard than material
participation. For example, you may be treated as actively participating if you
make management decisions in a significant and bona fide sense. Management
decisions that count as active participation include approving new tenants,
deciding on rental terms, approving expenditures, and similar decisions.
Only individuals can actively participate in rental real estate
activities. However, a decedent's estate is treated as actively participating
for its tax years ending less than 2 years after the decedent's death, if the
decedent would have satisfied the active participation requirement for the
activity for the tax year the decedent died.
A decedent's qualified revocable trust can also be treated as
actively participating if both the trustee and the executor (if any) of the
estate choose to treat the trust as part of the estate. The choice applies to
tax years ending after the decedent's death and before:
- 2 years after the decedent's death if no estate tax return
is required, or
- 6 months after the estate tax liability is finally determined
if an estate tax return is required.
The choice is irrevocable and cannot be made later than the due
date for the estate's first income tax return (including any extensions).
Limited partners are not treated as actively participating in
a partnership's rental real estate activities.
You are not treated as actively participating in a rental real
estate activity unless your interest in the activity (including your spouse's
interest) was at least 10% (by value) of all interests in the activity
throughout the year.
Active participation is not required to take the low-income housing
credit, the rehabilitation investment credit, or CRD from rental real estate
activities.
taxmap/pubs/p925-000.htm#en_us_publink1000104574Mike, a single taxpayer, had the following income and loss during
the tax year:
| Salary | $42,300 |
| Dividends | 300 |
| Interest | 1,400 |
| Rental loss | (4,000) |
The rental loss came from a house Mike owned. He advertised and
rented the house to the current tenant himself. He also collected the rents and
did the repairs or hired someone to do them.
Even though the rental loss is a loss from a passive activity,
Mike can use the entire $4,000 loss to offset his other income because he
actively participated.
taxmap/pubs/p925-000.htm#en_us_publink1000104575The maximum special allowance of $25,000 ($12,500 for married
individuals filing separate returns and living apart at all times during the
year) is reduced by 50% of the amount of your modified adjusted gross income
that is more than $100,000 ($50,000 if you are married filing separately). If
your modified adjusted gross income is $150,000 or more ($75,000 or more if you
are married filing separately), you generally cannot use the special allowance.
Modified adjusted gross income for this purpose is your adjusted gross income
figured without the following.
- Taxable social security and tier 1 railroad retirement benefits.
- Deductible contributions to individual retirement accounts
(IRAs) and section 501(c)(18) pension plans.
- The exclusion from income of interest from qualified U.S.
savings bonds used to pay qualified higher education expenses.
- The exclusion from income of amounts received from an employer's
adoption assistance program.
- Passive activity income or loss included on Form 8582.
- Any rental real estate loss allowed because you materially
participated in the rental activity as a real estate professional (as discussed
later, under
Activities That Are Not Passive Activities).
- Any overall loss from a publicly traded partnership (see
Publicly Traded Partnerships (PTPs) in the instructions for Form 8582).
- The deduction for one-half of self-employment tax.
- The deduction for domestic production activities.
- The deduction allowed for interest on student loans.
- The deduction for qualified tuition and related expenses.
During 2010, John was unmarried and was not a real estate professional.
For 2010, he had $120,000 in salary and a $31,000 loss from his rental real
estate activities in which he actively participated. His modified adjusted gross
income is $120,000. When he files his 2010 return, he can deduct only $15,000 of
his passive activity loss. He must carry over the remaining $16,000 passive
activity loss to 2011. He figures his deduction and carryover as follows:
Adjusted gross income, modified as
required
| $120,000 |
| | | |
| Minus amount not subject to phaseout | 100,000 |
| Amount subject to phaseout rule | $20,000 |
| Multiply by 50% | × 50% |
| Required reduction to special allowance | $10,000 |
| Maximum special allowance | $25,000 |
| Minus required reduction (see above) | 10,000 |
| Adjusted special allowance | $15,000 |
| Passive loss from rental real estate | $31,000 |
Deduction allowable/Adjusted
special allowance (see above)
| 15,000 |
| | | |
| Amount that must be carried forward | $16,000 |
A higher phaseout range applies to rehabilitation investment
credits from rental real estate activities. For those credits, the phaseout of
the $25,000 special allowance starts when your modified adjusted gross income
exceeds $200,000 ($100,000 if you are a married individual filing a separate
return and living apart at all times during the year).
There is no phaseout of the $25,000 special allowance for low-income
housing credits or for the CRD.
taxmap/pubs/p925-000.htm#en_us_publink1000104578If you have more than one of the exceptions to the phaseout rules
in the same tax year, you must apply the $25,000 phaseout against your passive
activity losses and credits in the following order.
- The portion of passive activity losses not attributable to
the CRD.
- The portion of passive activity losses attributable to the
CRD.
- The portion of passive activity credits attributable to credits
other than the rehabilitation and low-income housing credits.
- The portion of passive activity credits attributable to the
rehabilitation credit.
- The portion of passive activity credits attributable to the
low-income housing credit.
The following are not passive activities.
- Trade or business activities in which you materially participated
for the tax year.
- A working interest in an oil or gas well which you hold directly
or through an entity that does not limit your liability (such as a general
partner interest in a partnership). It does not matter whether you materially
participated in the activity for the tax year. However, if your liability was
limited for part of the year (for example, you converted your general partner
interest to a limited partner interest during the year) and you had a net loss
from the well for the year, some of your income and deductions from the working
interest may be treated as passive activity gross income and passive activity
deductions.
See Temporary Regulations section 1.469-1T(e)(4)(ii).
- The rental of a dwelling unit that you also used for personal
purposes during the year for more than the greater of 14 days or 10% of the
number of days during the year that the home was rented at a fair rental.
- An activity of trading personal property for the account of
those who own interests in the activity. See Temporary Regulations section
1.469-1T(e)(6).
- Rental real estate activities in which you materially participated
as a real estate professional. See
Real Estate Professional,
later.
| You should not enter income and losses from these activities
on Form 8582. Instead, enter them on the forms or schedules you would normally
use. |
taxmap/pubs/p925-000.htm#en_us_publink1000104581A trade or business activity is not a passive activity if you
materially participated in the activity.
taxmap/pubs/p925-000.htm#en_us_publink1000104582
You materially participated in a trade or business activity for a tax year if
you satisfy any of the following tests.
- You participated in the activity for more than 500 hours.
- Your participation was substantially all the participation
in the activity of all individuals for the tax year, including the participation
of individuals who did not own any interest in the activity.
- You participated in the activity for more than 100 hours during
the tax year, and you participated at least as much as any other individual
(including individuals who did not own any interest in the activity) for the
year.
- The activity is a significant participation activity, and
you participated in all significant participation activities for more than 500
hours. A significant participation activity is any trade or business activity in
which you participated for more than 100 hours during the year and in which you
did not materially participate under any of the material participation tests,
other than this test. See
Significant Participation Passive Activities,
under
Recharacterization of Passive Income, later.
- You materially participated in the activity for any 5 (whether
or not consecutive) of the 10 immediately preceding tax years.
- The activity is a personal service activity in which you materially
participated for any 3 (whether or not consecutive) preceding tax years. An
activity is a personal service activity if it involves the performance of
personal services in the fields of health (including veterinary services), law,
engineering, architecture, accounting, actuarial science, performing arts,
consulting, or any other trade or business in which capital is not a material
income-producing factor.
- Based on all the facts and circumstances, you participated
in the activity on a regular, continuous, and substantial basis during the year.
You did not materially participate in the activity under test
(7) if you participated in the activity for 100 hours or less during the year.
Your participation in managing the activity does not count in determining
whether you materially participated under this test if:
- Any person other than you received compensation for managing
the activity, or
- Any individual spent more hours during the tax year managing
the activity than you did (regardless of whether the individual was compensated
for the management services).
In general, any work you do in connection with an activity in
which you own an interest is treated as participation in the activity.
taxmap/pubs/p925-000.htm#en_us_publink1000104584You do not treat the work you do in connection with an activity
as participation in the activity if both of the following are true.
- The work is not work that is customarily done by the owner
of that type of activity.
- One of your main reasons for doing the work is to avoid the
disallowance of any loss or credit from the activity under the passive activity
rules.
You do not treat the work you do in your capacity as an investor
in an activity as participation unless you are directly involved in the
day-to-day management or operations of the activity. Work you do as an investor
includes:
- Studying and reviewing financial statements or reports on
operations of the activity,
- Preparing or compiling summaries or analyses of the finances
or operations of the activity for your own use, and
- Monitoring the finances or operations of the activity in a
nonmanagerial capacity.
Your participation in an activity includes your spouse's participation.
This applies even if your spouse did not own any interest in the activity and
you and your spouse do not file a joint return for the year.
 | Proof of participation.
You can use any reasonable method to prove your participation
in an activity for the year. You do not have to keep contemporaneous daily time
reports, logs, or similar documents if you can establish your participation in
some other way. For example, you can show the services you performed and the
approximate number of hours spent by using an appointment book, calendar, or
narrative summary.
|
taxmap/pubs/p925-000.htm#en_us_publink1000104588If you owned an activity as a limited partner, you generally
are not treated as materially participating in the activity. However, you are
treated as materially participating in the activity if you met test (1), (5), or
(6) under
Material participation tests, discussed earlier, for the tax year.
You are not treated as a limited partner, however, if you also
were a general partner in the partnership at all times during the partnership's
tax year ending with or within your tax year (or, if shorter, during that part
of the partnership's tax year in which you directly or indirectly owned your
limited partner interest).
taxmap/pubs/p925-000.htm#en_us_publink1000104589If you are a retired or disabled farmer, you are treated as materially
participating in a farming activity if you materially participated for 5 or more
of the 8 years before your retirement or disability. Similarly, if you are a
surviving spouse of a farmer, you are treated as materially participating in a
farming activity if the real property used in the activity meets the estate tax
rules for special valuation of farm property passed from a qualifying decedent,
and you actively manage the farm.
taxmap/pubs/p925-000.htm#en_us_publink1000104590A closely held corporation or a personal service corporation
is treated as materially participating in an activity only if one or more
shareholders holding more than 50% by value of the outstanding stock of the
corporation materially participate in the activity.
A closely held corporation can also satisfy the material participation
standard by meeting the first two requirements for the qualifying business
exception from the at-risk limits. See
Special exception for qualified corporations
under
Activities Covered by the At-Risk Rules,
later.
taxmap/pubs/p925-000.htm#en_us_publink1000104591Generally, rental activities are passive activities even if you
materially participated in them. However, if you qualified as a real estate
professional, rental real estate activities in which you materially participated
are not passive activities. For this purpose, each interest you have in a rental
real estate activity is a separate activity, unless you choose to treat all
interests in rental real estate activities as one activity. See the Instructions
for Schedule E (Form 1040), Supplemental Income and Loss, for information about
making this choice.
If you qualified as a real estate professional for 2010, report
income or losses from rental real estate activities in which you materially
participated as nonpassive income or losses, and complete line 43 of Schedule E
(Form 1040). If you also have an unallowed loss from these activities from an
earlier year when you did not qualify, see
Treatment of former passive activities
under
Passive Activities, earlier.
taxmap/pubs/p925-000.htm#en_us_publink1000104592You qualified as a real estate professional for the year if you
met both of the following requirements.
- More than half of the personal services you performed in all
trades or businesses during the tax year were performed in real property trades
or businesses in which you materially participated.
- You performed more than 750 hours of services during the tax
year in real property trades or businesses in which you materially participated.
Do not count personal services you performed as an employee in
real property trades or businesses unless you were a 5% owner of your employer.
You were a 5% owner if you owned (or are considered to have owned) more than 5%
of your employer's outstanding stock, outstanding voting stock, or capital or
profits interest.
If you file a joint return, do not count your spouse's personal
services to determine whether you met the preceding requirements. However, you
can count your spouse's participation in an activity in determining if you
materially participated.
taxmap/pubs/p925-000.htm#en_us_publink1000104593A real property trade or business is a trade or business that
does any of the following with real property.
- Develops or redevelops it.
- Constructs or reconstructs it.
- Acquires it.
- Converts it.
- Rents or leases it.
- Operates or manages it.
- Brokers it.
A closely held corporation can qualify as a real estate professional
if more than 50% of the gross receipts for its tax year came from real property
trades or businesses in which it materially participated.
taxmap/pubs/p925-000.htm#en_us_publink1000104595In figuring your net income or loss from a passive activity,
take into account only passive activity income and passive activity deductions.
taxmap/pubs/p925-000.htm#en_us_publink1000104596Certain self-charged interest income or deductions may be treated
as passive activity gross income or passive activity deductions if the loan
proceeds are used in a passive activity.
Generally, self-charged interest income and deductions result
from loans between you and a partnership or S corporation in which you had a
direct or indirect ownership interest. This includes both loans you made to the
partnership or S corporation and loans the partnership or S corporation made to
you.
It also includes loans from one partnership or S corporation
to another partnership or S corporation if each owner in the borrowing entity
has the same proportional ownership interest in the lending entity.
Exception.
The self-charged interest rules do not apply to your interest in a partnership
or S corporation if the entity made an election under Regulations section
1.469-7(g) to avoid the application of these rules. For more details on the
self-charged interest rules, see Regulations section 1.469-7.
taxmap/pubs/p925-000.htm#en_us_publink1000104597Passive activity income includes all income from passive activities
and generally includes gain from disposition of an interest in a passive
activity or property used in a passive activity.
Passive activity income does not include the following items.
- Income from an activity that is not a passive activity. These
activities are discussed under
Activities That Are Not Passive Activities, earlier.
- Portfolio income. This includes interest, dividends, annuities,
and royalties not derived in the ordinary course of a trade or business. It
includes gain or loss from the disposition of property that produces these types
of income or that is held for investment. The exclusion for portfolio income
does not apply to self-charged interest treated as passive activity income. For
more information on self-charged interest, see
Self-charged interest, earlier.
- Personal service income. This includes salaries, wages, commissions,
self-employment income from trade or business activities in which you materially
participated, deferred compensation, taxable social security and other
retirement benefits, and payments from partnerships to partners for personal
services.
- Income from positive section 481 adjustments allocated to
activities other than passive activities. (Section 481 adjustments are
adjustments that must be made due to changes in your accounting method.)
- Income or gain from investments of working capital.
- Income from an oil or gas property if you treated any loss
from a working interest in the property for any tax year beginning after 1986 as
a nonpassive loss, as discussed in item (2) under
Activities That Are Not Passive Activities,
earlier. This also applies to income from other oil and gas property the basis
of which is determined wholly or partly by the basis of the property in the
preceding sentence.
- Any income from intangible property, such as a patent, copyright,
or literary, musical, or artistic composition, if your personal efforts
significantly contributed to the creation of the property.
- Any other income that must be treated as nonpassive income.
See
Recharacterization of Passive Income, later.
- Overall gain from any interest in a publicly traded partnership.
See
Publicly Traded Partnerships (PTPs) in the instructions for Form 8582.
- State, local, and foreign income tax refunds.
- Income from a covenant not to compete.
- Reimbursement of a casualty or theft loss included in gross
income to recover all or part of a prior year loss deduction, if the loss
deduction was not a passive activity deduction.
- Alaska Permanent Fund dividends.
- Cancellation of debt income, if at the time the debt is discharged
the debt is not allocated to passive activities under the interest expense
allocation rules. See chapter 4 of Publication 535, Business Expenses, for
information about the rules for allocating interest.
Gain on the disposition of an interest in property generally
is passive activity income if, at the time of the disposition, the property was
used in an activity that was a passive activity in the year of disposition. The
gain generally is not passive activity income if, at the time of disposition,
the property was used in an activity that was not a passive activity in the year
of disposition. An exception to this general rule may apply if you previously
used the property in a different activity.
taxmap/pubs/p925-000.htm#en_us_publink1000104599If you used the property in more than one activity during the
12-month period before its disposition, you must allocate the gain between the
activities on a basis that reasonably reflects the property's use during that
period. Any gain allocated to a passive activity is passive activity income.
For this purpose, an allocation of the gain solely to the activity
in which the property was mainly used during that period reasonably reflects the
property's use if the fair market value of your interest in the property is not
more than the lesser of:
- $10,000, or
- 10% of the total of the fair market value of your interest
in the property and the fair market value of all other property used in that
activity immediately before the disposition.
The gain is passive activity income if the fair market value
of the property at disposition was more than 120% of its adjusted basis and
either of the following conditions applies.
- You used the property in a passive activity for 20% of the
time you held your interest in the property.
- You used the property in a passive activity for the entire
24-month period before its disposition.
If neither condition applies, the gain is not passive activity
income. However, it is treated as portfolio income only if you held the property
for investment for more than half of the time you held it in nonpassive
activities.
For this purpose, treat property you held through a corporation
(other than an S corporation) or other entity whose owners receive only
portfolio income as property held in a nonpassive activity and as property held
for investment. Also, treat the date you agree to transfer your interest for a
fixed or determinable amount as the disposition date.
If you used the property in more than one activity during the
12-month period before its disposition, this exception applies only to the part
of the gain allocated to a passive activity under the rules described in the
preceding discussion.
taxmap/pubs/p925-000.htm#en_us_publink1000104601If you disposed of property that you had converted to inventory
from its use in another activity (for example, you sold condominium units you
previously held for use in a rental activity), a special rule may apply. Under
this rule, you disregard the property's use as inventory and treat it as if it
were still used in that other activity at the time of disposition. This rule
applies only if you meet all of the following conditions.
- At the time of disposition, you held your interest in the
property in a dealing activity (an activity that involves holding the property
or similar property mainly for sale to customers in the ordinary course of a
trade or business).
- Your other activities included a nondealing activity (an activity
that does not involve holding similar property for sale to customers in the
ordinary course of a trade or business) in which you used the property for more
than 80% of the period you held it.
- You did not acquire or hold your interest in the property
for the main purpose of selling it to customers in the ordinary course of a
trade or business.
Passive activity deductions include all deductions from activities
that are passive activities for the current tax year and all deductions from
passive activities that were disallowed under the passive loss rules in prior
tax years and carried forward to the current tax year. They also include losses
from dispositions of property used in a passive activity at the time of the
disposition and losses from a disposition of less than your entire interest in a
passive activity.
Passive activity deductions do not include the following items.
- Deductions for expenses (other than interest expense) that
are clearly and directly allocable to portfolio income.
- Qualified home mortgage interest, capitalized interest expenses,
and other interest expenses (other than self-charged interest) properly
allocable to passive activities. For more information on self-charged interest,
see
Self-charged interest under
Passive Activity Income and Deductions, earlier.
- Losses from dispositions of property that produce portfolio
income or property held for investment.
- State, local, and foreign income taxes.
- Miscellaneous itemized deductions that may be disallowed because
of the 2%-of-adjusted-gross-income limit.
- Charitable contribution deductions.
- Net operating loss deductions.
- Percentage depletion carryovers for oil and gas wells.
- Capital loss carrybacks and carryovers.
- Deductions and losses that would have been allowed for tax
years beginning before 1987 but for basis or at-risk limits.
- Net negative section 481 adjustments allocated to activities
other than passive activities. (Section 481 adjustments are adjustments required
due to changes in accounting methods.)
- Casualty and theft losses, unless losses similar in cause
and severity recur regularly in the activity.
- The deduction for one-half of self-employment tax.
You can treat one or more trade or business activities, or rental
activities, as a single activity if those activities form an appropriate
economic unit for measuring gain or loss under the passive activity rules.
Grouping is important for a number of reasons. If you group two
activities into one larger activity, you need only show material participation
in the activity as a whole. But if the two activities are separate, you must
show material participation in each one. On the other hand, if you group two
activities into one larger activity and you dispose of one of the two, then you
have disposed of only part of your entire interest in the activity. But if the
two activities are separate and you dispose of one of them, then you have
disposed of your entire interest in that activity.
Grouping can also be important in determining whether you meet
the 10% ownership requirement for actively participating in a rental real estate
activity.
taxmap/pubs/p925-000.htm#en_us_publink1000104604Generally, to determine if activities form an appropriate economic
unit, you must consider all the relevant facts and circumstances. You can use
any reasonable method of applying the relevant facts and circumstances in
grouping activities. The following factors have the greatest weight in
determining whether activities form an appropriate economic unit. All of the
factors do not have to apply to treat more than one activity as a single
activity. The factors that you should consider are:
- The similarities and differences in the types of trades or
businesses,
- The extent of common control,
- The extent of common ownership,
- The geographical location, and
- The interdependencies between or among activities, which may
include the extent to which the activities:
- Buy or sell goods between or among themselves,
- Involve products or services that are generally provided
together,
- Have the same customers,
- Have the same employees, or
- Use a single set of books and records to account for the
activities.
Example 1.(p7)
John Jackson owns a bakery and a movie theater at a shopping
mall in Baltimore and a bakery and movie theater in Philadelphia. Based on all
the relevant facts and circumstances, there may be more than one reasonable
method for grouping John's activities. For example, John may be able to group
the movie theaters and the bakeries into:
- One activity,
- A movie theater activity and a bakery activity,
- A Baltimore activity and a Philadelphia activity, or
- Four separate activities.
Example 2.(p7)
Betty is a partner in ABC partnership, which sells nonfood items
to grocery stores. Betty is also a partner in DEF (a trucking business). ABC and
DEF are under common control. The main part of DEF's business is transporting
goods for ABC. DEF is the only trucking business in which Betty is involved.
Based on the rules of this section, Betty treats ABC's wholesale activity and
DEF's trucking activity as a single activity.
taxmap/pubs/p925-000.htm#en_us_publink1000104607Generally, when you group activities into appropriate economic
units, you may not regroup those activities in a later tax year. You must meet
any disclosure requirements of the Internal Revenue Service (IRS) when you first
group your activities and when you add or dispose of any activities in your
groupings.
However, if the original grouping is clearly inappropriate or
there is a material change in the facts and circumstances that makes the
original grouping clearly inappropriate, you must regroup the activities and
comply with any disclosure requirements of the IRS.
See
Disclosure Requirement, later.
taxmap/pubs/p925-000.htm#en_us_publink1000104608If any of the activities resulting from your grouping is not
an appropriate economic unit and one of the primary purposes of your grouping
(or failure to regroup) is to avoid the passive activity rules, the IRS may
regroup your activities.
taxmap/pubs/p925-000.htm#en_us_publink1000104609In general, you cannot group a rental activity with a trade or
business activity. However, you can group them together if the activities form
an appropriate economic unit and:
- The rental activity is insubstantial in relation to the trade
or business activity,
- The trade or business activity is insubstantial in relation
to the rental activity, or
- Each owner of the trade or business activity has the same
ownership interest in the rental activity, in which case the part of the rental
activity that involves the rental of items of property for use in the trade or
business activity may be grouped with the trade or business activity.
Herbert and Wilma are married and file a joint return. Healthy
Food, an S corporation, is a grocery store business. Herbert is Healthy Food's
only shareholder. Plum Tower, an S corporation, owns and rents out the building.
Wilma is Plum Tower's only shareholder. Plum Tower rents part of its building to
Healthy Food. Plum Tower's grocery store rental business and Healthy Food's
grocery business are not insubstantial in relation to each other.
Herbert and Wilma file a joint return, so they are treated as
one taxpayer for purposes of the passive activity rules. The same owner (Herbert
and Wilma) owns both Healthy Food and Plum Tower with the same ownership
interest (100% in each). If the grouping forms an appropriate economic unit, as
discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental
and Healthy Food's grocery business into a single trade or business activity.
taxmap/pubs/p925-000.htm#en_us_publink1000104611In general, you cannot treat an activity involving the rental
of real property and an activity involving the rental of personal property as a
single activity. However, you can treat them as a single activity if you provide
the personal property in connection with the real property or the real property
in connection with the personal property.
taxmap/pubs/p925-000.htm#en_us_publink1000104612In general, if you own an interest as a limited partner or a
limited entrepreneur in one of the following activities, you may not group that
activity with any other activity in another type of business.
- Holding, producing, or distributing motion picture films or
video tapes.
- Farming.
- Leasing any section 1245 property (as defined in section 1245(a)(3)
of the Internal Revenue Code). For a list of section 1245 property, see
Section 1245 property
under
Activities Covered by the At-Risk Rules, later.
- Exploring for, or exploiting, oil and gas resources.
- Exploring for, or exploiting, geothermal deposits.
If you own an interest as a limited partner or a limited entrepreneur
in an activity described in the list above, you may group that activity with
another activity in the same type of business if the grouping forms an
appropriate economic unit as discussed earlier.
taxmap/pubs/p925-000.htm#en_us_publink1000104613A limited entrepreneur is a person who:
- Has an interest in an enterprise other than as a limited partner,
and
- Does not actively participate in the management of the enterprise.
A personal service corporation, closely held corporation, partnership,
or S corporation must group its activities using the rules discussed in this
section. Once the entity groups its activities, you, as the partner or
shareholder of the entity, may group those activities (following the rules of
this section):
- With each other,
- With activities conducted directly by you, or
- With activities conducted through other entities.
| You may not treat activities grouped together by the entity
as separate activities.
|
taxmap/pubs/p925-000.htm#en_us_publink1000104616You may group an activity conducted through a personal service
or closely held corporation with your other activities only to determine whether
you materially or significantly participated in those other activities. See
Material Participation, earlier, and
Significant Participation Passive Activities, later.
taxmap/pubs/p925-000.htm#en_us_publink1000104617You may not group activities conducted through a PTP with any
other activity, including an activity conducted through another PTP.
taxmap/pubs/p925-000.htm#en_us_publink1000104618If you dispose of substantially all of an activity during your
tax year, you may treat the part disposed of as a separate activity. However,
you can do this only if you can show with reasonable certainty:
- The amount of deductions and credits disallowed in prior years
under the passive activity rules that is allocable to the part of the activity
disposed of, and
- The amount of gross income and any other deductions and credits
for the current tax year that is allocable to the part of the activity disposed
of.
taxmap/pubs/p925-000.htm#en_us_publink1000256343For tax years beginning after January 24, 2010, the following
disclosure requirements for groupings apply. You are required to report certain
changes to your groupings that occur during the tax year to the IRS. If you fail
to report these changes, each trade or business activity or rental activity will
be treated as a separate activity. You will be considered to have made a timely
disclosure if you filed all affected income tax returns consistent with the
claimed grouping and make the required disclosure on the income tax return for
the year in which you first discovered the failure to disclose. If the IRS
discovered the failure to disclose, you must have reasonable cause for not
making the required disclosure.
taxmap/pubs/p925-000.htm#en_us_publink1000256344You must file a written statement with your original income tax
return for the first tax year in which two or more activities are originally
grouped into a single activity. The statement must provide the names, addresses,
and employer identification numbers (EIN), if applicable, for the activities
being grouped as a single activity. In addition, the statement must contain a
declaration that the grouped activities make up an appropriate economic unit for
the measurement of gain or loss under the passive activity rules.
taxmap/pubs/p925-000.htm#en_us_publink1000256345You must file a written statement with your original income tax
return for the tax year in which you add a new activity to an existing group.
The statement must provide the name, address, and EIN, if applicable, for the
activity that is being added and for the activities in the existing group. In
addition, the statement must contain a declaration that the activities make up
an appropriate economic unit for the measurement of gain or loss under the
passive activity rules.
taxmap/pubs/p925-000.htm#en_us_publink1000256346You must file a written statement with your original income tax
return for the tax year in which you regroup the activities. The statement must
provide the names, addresses, and EINs, if applicable, for the activities that
are being regrouped. If two or more activities are being regrouped into a single
activity, the statement must contain a declaration that the regrouped activities
make up an appropriate economic unit for the measurement of gain or loss under
the passive activity rules. In addition, the statement must contain an
explanation of the material change in the facts and circumstances that made the
original grouping clearly inappropriate.
taxmap/pubs/p925-000.htm#en_us_publink1000256347Partnerships and S corporations are not subject to the rules
for new grouping, addition to an existing grouping, or regrouping. Instead, they
must comply with the disclosure instructions for grouping activities provided in
their Form 1065, U.S. Return of Partnership Income, or Form 1120S, U.S. Income
Tax Return for an S Corporation, whichever is applicable.
The partner or shareholder is not required to make a separate
disclosure of the groupings disclosed by the entity unless the partner or
shareholder:
- Groups together any of the activities that the entity does
not group together,
- Groups the entity's activities with activities conducted directly
by the partner or shareholder, or
- Groups an entity's activities with activities conducted through
another entity.
A partner or shareholder may not treat activities grouped together
by the entity as separate activities.
taxmap/pubs/p925-000.htm#en_us_publink1000104619Net income from the following passive activities may have to
be recharacterized and excluded from passive activity income.
- Significant participation passive activities,
- Rental of property when less than 30% of the unadjusted basis
of the property is subject to depreciation,
- Equity-financed lending activities,
- Rental of property incidental to development activities,
- Rental of property to nonpassive activities, and
- Licensing of intangible property by
pass-through entities.
If you are engaged in or have an interest in one of these activities
during the tax year (either directly or through a partnership or an S
corporation), combine the income and losses from the activity to determine if
you have a net loss or net income from that activity.
If the result is a net loss, treat the income and losses the
same as any other income or losses from that type of passive activity (trade or
business activity or rental activity).
If the result is net income, do not enter any of the income or
losses from the activity or property on Form 8582 or its worksheets. Instead,
enter income or losses on the form and schedules you normally use. However, see
Significant Participation Passive Activities,
later, if the activity is a significant participation passive activity and you
also have a net loss from a different significant participation passive
activity.
taxmap/pubs/p925-000.htm#en_us_publink1000104620The total amount that you treat as nonpassive income under the
rules described later in this discussion for significant participation passive
activities, rental of nondepreciable property, and equity-financed lending
activities cannot exceed the greatest amount that you treat as nonpassive income
under any one of these rules.
taxmap/pubs/p925-000.htm#en_us_publink1000104621To figure your investment interest expense limitation on Form
4952, treat as investment income any net passive income recharacterized as
nonpassive income from rental of nondepreciable property, equity-financed
lending activity, or licensing of intangible property by a pass-through entity.
taxmap/pubs/p925-000.htm#en_us_publink1000104622A significant participation passive activity is any trade or
business activity in which you participated for more than 100 hours during the
tax year but did not materially participate.
If your gross income from all significant participation passive
activities is more than your deductions from those activities, a part of your
net income from each significant participation passive activity is treated as
nonpassive income.
taxmap/pubs/p925-000.htm#en_us_publink1000104623An activity of a personal service corporation or closely held
corporation is a significant participation passive activity if both of the
following statements are true.
- The corporation is not treated as materially participating
in the activity for the year.
- One or more individuals, each of whom is treated as significantly
participating in the activity, directly or indirectly hold (in total) more than
50% (by value) of the corporation's outstanding stock.
Complete Worksheet A, Significant Participation Passive Activities,
on page 8, if you have income or losses from any significant participation
activity. Begin by entering the name of each activity in the left column.
taxmap/pubs/p925-000.htm#en_us_publink100083471 | Worksheet A.
Significant Participation Passive Activities
Name of activity
| (a) Hours of participation |
(b) Net loss
|
(c) Net income
| (d) Combine totals of cols. (b) and (c) | | | | ( | ) | | ///////////////////////////////////////// | | | | ( | ) | | ///////////////////////////////////////// | | | | ( | ) | | ///////////////////////////////////////// | | | | ( | ) | | ///////////////////////////////////////// | | | | ( | ) | | ///////////////////////////////////////// | | | | ( | ) | | ///////////////////////////////////////// | | | | ( | ) | | ///////////////////////////////////////// | | Totals | | ( | ) | | |
|
Enter the number of hours you participated in each activity and
total the column.
If the total is more than 500, do not complete Worksheet A or
B. None of the activities are passive activities because you satisfy test 4 for
material participation. (See
Material participation tests,
earlier.) Report all the income and losses from these activities on the forms
and schedules you normally use. Do not include the income and losses on Form
8582.
taxmap/pubs/p925-000.htm#en_us_publink1000104626Enter the net loss, if any, from the activity. Net loss from
an activity means either:
- The activity's current year net loss (if any) plus prior year
unallowed losses (if any), or
- The excess of prior year unallowed losses over the current
year net income (if any). Enter -0- here if the prior year unallowed loss is the
same as the current year net income.
Enter net income, if any, from the activity. Net income means
the excess of the current year's net income from the activity over any prior
year unallowed losses from the activity.
taxmap/pubs/p925-000.htm#en_us_publink1000104628Combine amounts in the
Totals
row for columns (b) and (c) and enter the total net income or net loss in the
Totals
row of column (d). If column (d) is a net loss, skip Worksheet B, Significant
Participation Activities With Net Income. Include the income and losses in
Worksheet 3 of Form 8582 (or Worksheet 2 of Form 8810).
If column (d) shows net income and you must complete Form 8582
because you have other passive activities to report, complete Worksheet B on
page 10. However, you do not have to complete Form 8582 if column (d) shows net
income and you have only significant participation activities. If you do not
have to complete Form 8582, skip Worksheet B and report the net income and net
losses from columns (b) and (c) on the forms and schedules you normally use.
taxmap/pubs/p925-000.htm#en_us_publink1000104629On Worksheet B on page 10, list only the significant participation
passive activities that have net income as shown in column (c) of Worksheet A.
taxmap/pubs/p925-000.htm#en_us_publink1000104630Enter the net income of each activity from column (c) of Worksheet
A.
taxmap/pubs/p925-000.htm#en_us_publink1000104631Divide each of the individual net income amounts in column (a)
by the total of column (a). The result is a ratio. In column (b), enter the
ratio for each activity as a decimal (rounded to at least three places). The
total of these ratios must equal 1.000.
taxmap/pubs/p925-000.htm#en_us_publink1000104632Multiply the amount in the
Totals
row of column (d) of Worksheet A by each of the ratios in column (b). Enter the
results in column (c).
taxmap/pubs/p925-000.htm#en_us_publink1000104633Subtract column (c) from column (a). To this figure, add the
amount of prior year unallowed losses, if any, that reduced the current year net
income. Enter the result in column (d). Enter these amounts on Worksheet 3 of
Form 8582 or Worksheet 2 of Form 8810. (Also, see
Limit on recharacterized passive income, earlier.)
taxmap/pubs/p925-000.htm#en_us_publink1000104634If you have net passive income (including prior year unallowed
losses) from renting property in a rental activity, and less than 30% of the
unadjusted basis of the property is subject to depreciation, you treat the net
passive income as nonpassive income.
taxmap/pubs/p925-000.htm#en_us_publink1000104635Calvin acquires vacant land for $300,000, constructs improvements
at a cost of $100,000, and leases the land and improvements to a tenant. He then
sells the land and improvements for $600,000, realizing a gain of $200,000 on
the disposition.
The unadjusted basis of the improvements ($100,000) equals 25%
of the unadjusted basis of all property ($400,000) used in the rental activity.
Calvin's net passive income from the activity (which is figured with the gain
from the disposition, including gain from the improvements) is treated as
nonpassive income.
taxmap/pubs/p925-000.htm#en_us_publink1000104636If you have gross income from an equity-financed lending activity,
the lesser of the net passive income or the equity-financed interest income is
nonpassive income.
For more information, see Temporary Regulations section 1.469-2T(f)(4).
taxmap/pubs/p925-000.htm#en_us_publink1000104637Net income from this type of activity will be treated as nonpassive
income if all of the following apply.
- You recognize gain from the sale, exchange, or other disposition
of the rental property during the tax year.
- You started to rent the property less than 12 months before
the date of disposition.
- You materially participated or significantly participated
for any tax year in an activity that involved the performance of services for
the purpose of enhancing the value of the property (or any other item of
property if the basis of the property disposed of is determined in whole or in
part by reference to the basis of that item of property).
For more information, see Regulations section 1.469-2(f)(5).
taxmap/pubs/p925-000.htm#en_us_publink1000104638If you rent property to a trade or business activity in which
you materially participated, net rental income from the property is treated as
nonpassive income. This rule does not apply to net income from renting property
under a written binding contract entered into before February 19, 1988. It also
does not apply to property just described under
Rental of Property Incidental to a Development Activity.
taxmap/pubs/p925-000.htm#en_us_publink1000104639Net royalty income from intangible property held by a pass-through
entity in which you own an interest may be treated as nonpassive royalty income.
This applies if you acquired your interest in the pass-through entity after the
partnership, S corporation, estate, or trust created the intangible property or
performed substantial services or incurred substantial costs for developing or
marketing the intangible property.
This recharacterization rule does not apply if:
- The expenses reasonably incurred by the entity in developing
or marketing the property exceed 50% of the gross royalties from licensing the
property that are includible in your gross income for the tax year, or
- Your share of the expenses reasonably incurred by the entity
in developing or marketing the property for all tax years exceeded 25% of the
fair market value of your interest in the intangible property at the time you
acquired your interest in the entity.
For purposes of (2) above, capital expenditures are taken into
account for the entity's tax year in which the expenditure is chargeable to a
capital account, and your share of the expenditure is figured as if it were
allowed as a deduction for the tax year.
taxmap/pubs/p925-000.htm#en_us_publink1000104640Any passive activity losses (but not credits) that have not been
allowed (including current year losses) generally are allowed in full in the tax
year you dispose of your entire interest in the passive (or former passive)
activity. However, for the losses to be allowed, you must dispose of your entire
interest in the activity in a transaction in which all realized gain or loss is
recognized. Also, the person acquiring the interest from you must not be related
to you.
taxmap/pubs/p925-000.htm#id2010_w64265x02 | Worksheet B.
Significant Participation Activities With Net Income Name of activity
with net income
|
(a) Net income
| (b) Ratio
See instructions
| (c) Nonpassive income
See instructions
| (d) Passive income
Subtract col. (c) from col. (a)
|
|---|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Totals | | 1.000 | | |
|
| If you have a capital loss on the disposition of an interest
in a passive activity, the loss may be limited by the capital loss rules. The
limit is generally $3,000 for individuals ($1,500 in the case of married
individuals filing separate returns). See Publication 544, Sales and Other
Dispositions of Assets, for more information.
|
taxmap/pubs/p925-000.htm#en_us_publink1000104642Ray earned a $60,000 salary and owned one passive activity through
a 5% interest in the B Limited Partnership. In 2010, he sold his entire
partnership interest to an unrelated person for $30,000. His adjusted basis in
the partnership interest was $42,000, and he had carried over $2,000 of passive
activity losses from the activity.
Ray's deductible loss for 2010 is $5,000, figured as follows:
| Sales price | $30,000 |
| Minus: adjusted basis | 42,000 |
| Capital loss | $12,000 |
| Minus: capital loss limit | 3,000 |
| Capital loss carryover | $9,000 |
| Allowable capital loss on sale | $3,000 |
| Carryover losses allowable | 2,000 |
| Total current deductible loss | $5,000 |
| | | |
Ray deducts the $5,000 total current deductible loss in 2010.
He must carry over the remaining $9,000 capital loss, which is not subject to
the passive activity loss limit. He will treat it like any other capital loss
carryover.
taxmap/pubs/p925-000.htm#en_us_publink1000104643If you sell your entire interest in a passive activity through
an installment sale, to figure the loss for the current year that is not limited
by the passive activity rules, multiply your overall loss (not including losses
allowed in prior years) by a fraction. The numerator of the fraction is the gain
recognized in the current year, and the denominator is the total gain from the
sale minus all gains recognized in prior years.
taxmap/pubs/p925-000.htm#en_us_publink1000104644John Ash has a total gain of $10,000 from the sale of an entire
interest in a passive activity. Under the installment method he reports $2,000
of gain each year, including the year of sale. For the first year, 20%
(2,000/10,000) of the losses are allowed. For the second year, 25% (2,000/8,000)
of the remaining losses are allowed.
taxmap/pubs/p925-000.htm#en_us_publink1000104645Generally, any gain or loss on the disposition of a partnership
interest must be allocated to each trade or business, rental, or investment
activity in which the partnership owns an interest. If you dispose of your
entire interest in a partnership, the passive activity losses from the
partnership that have not been allowed generally are allowed in full. They also
will be allowed if the partnership (other than a PTP) disposes of all the
property used in that passive activity.
If you do not dispose of your entire interest, the gain or loss
allocated to a passive activity is treated as passive activity income or
deduction in the year of disposition. This includes any gain recognized on a
distribution of money from the partnership that you receive in excess of the
adjusted basis of your partnership interest.
These rules also apply to the disposition of stock in an S corporation.
taxmap/pubs/p925-000.htm#en_us_publink1000104646If you give away your interest in a passive activity, the unused
passive activity losses allocable to the interest cannot be deducted in any tax
year. Instead, the basis of the transferred interest must be increased by the
amount of these losses.
taxmap/pubs/p925-000.htm#en_us_publink1000104647If a passive activity interest is transferred because the owner
dies, unused passive activity losses are allowed (to a certain extent) as a
deduction against the decedent's income in the year of death. The decedent's
losses are allowed only to the extent they exceed the amount by which the
transferee's basis in the passive activity has been increased under the rules
for determining the basis of property acquired from a decedent. For example, if
the basis of an interest in a passive activity in the hands of a transferee is
increased by $6,000 and unused passive activity losses of $8,000 were allocable
to the interest at the date of death, then the decedent's deduction for the tax
year would be limited to $2,000 ($8,000 − $6,000).
If you inherited property from a decedent who died in 2010, special
rules may apply if the executor of the estate files Form 8939, Allocation of
Increase in Basis for Property Received from a Decedent. The IRS will be issuing
guidance on those rules and when available the information will be published in
Publication 4895, Tax Treatment of Property Acquired from a Decedent Dying in
2010.
taxmap/pubs/p925-000.htm#en_us_publink1000104648If you dispose of substantially all of an activity during your
tax year, you may be able to treat the part of the activity disposed of as a
separate activity. See
Partial dispositions under
Grouping Your Activities, earlier.
taxmap/pubs/p925-000.htm#en_us_publink1000104649More than one form or schedule may be required for reporting
your passive activities. The actual number of forms depends on the number and
types of activities you must report. Some forms and schedules that may be
required are:
- Schedule C (Form 1040), Profit or Loss From Business,
- Schedule D (Form 1040), Capital Gains and Losses,
- Schedule E (Form 1040), Supplemental Income and Loss,
- Schedule F (Form 1040), Profit or Loss From Farming,
- Form 4797, Sales of Business Property,
- Form 6252, Installment Sale Income,
- Form 8582, Passive Activity Loss Limitations, and
- Form 8582-CR, Passive Activity Credit Limitations.
Regardless of the number or complexity of passive activities
you have, you should use only one Form 8582. If you need additional lines for
any of the Form 8582 worksheets, you can either use copies of Form 8582 page 2
or page 3, whichever is applicable, or your own schedule that is in the same
format as the worksheet.
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