Table of Contents
- Part I—2014 Passive Activity Loss
- Part II—Special Allowance for Rental Real Estate Activities With Active Participation
- Part III—Special Allowance for Commercial Revitalization Deductions From Rental Real Estate Activities
- Part IV—Total Losses Allowed
- How To ReportAllowed Losses
- Publicly Traded Partnerships (PTPs)
Use Part I to combine the net income and net loss from all passive activities to determine if you have a passive activity loss (PAL) for 2014. Use Worksheets 1, 2, and 3 to determine the entries for lines 1–3 of Part I, as follows.
Worksheet 1 is used for rental real estate activities with active participation.
Worksheet 2 is used for commercial revitalization deductions (CRDs) from rental real estate activities (with or without active participation).
Worksheet 3 is used for all other passive activities.
Individuals and qualifying estates who actively participated in rental real estate activities must include the income or loss from those activities in Worksheet 1 to figure the amounts to enter on lines 1a through 1c of Form 8582. Do not include any commercial revitalization deductions (CRDs) from these activities in the net income or loss reported in Worksheet 1.
Do not enter a prior year unallowed loss in column (c) of Worksheet 1 unless you actively participated in the activity in both the year the loss arose and the current tax year. If you did not actively participate in both years, enter the prior year unallowed loss in column (c) of Worksheet 3.
A Schedule E rental activity has current year profit of $5,000 and a Form 4797 gain of $2,000. You enter $7,000 in column (a).
A Schedule E rental activity has current year income of $1,000 on line 21 of Schedule E and a current year Form 4797 loss of $4,500. You enter $1,000 in column (a) and ($4,500) in column (b).
Use Worksheet 2 to figure the amount to enter on lines 2a and 2b for the commercial revitalization deduction (CRD) from rental real estate activities (see Commercial revitalization deduction (CRD) under Special Allowance for Rental Real Estate Activities, earlier).
Do not include the following amounts on Worksheet 2.
Income or other deductions from the same activity. Instead, report any net income or net loss from the activity, except for the CRD, in Worksheet 1 if you actively participated in the activity or in Worksheet 3 if you did not actively participate.
Any CRD from passive activities other than rental real estate activities. Instead, report these deductions as part of the net income or loss from the passive activity in Worksheet 3.
Use Worksheet 3 to figure the amounts to enter on lines 3a through 3c for:
Passive trade or business activities,
Passive rental real estate activities that do not qualify for the special allowance (but do not include CRDs reported in Worksheet 2), and
Rental activities other than rental real estate activities.
line 3c of Form 8582.
Use Part II to figure the maximum amount of rental loss allowed if you have an overall loss on line 1d from your rental real estate activities you actively participated in during 2014.
Enter all numbers in Part II as positive amounts (that is, greater than zero).
Line 5 has a loss of $42,000 (reported as a positive amount) and line 9 is $25,000. You enter $25,000 on line 10 (the smaller of line 5 or line 9, both treated as positive amounts).
Line 1d has a loss of $3,000, line 2c is zero, and line 3d has a gain of $100. The combined loss on line 4 is $2,900. You
enter $2,900 as a positive number on line 5 (the smaller of the loss on line 1d or the loss on
Passive income or loss included on Form 8582,
Any rental real estate loss allowed to real estate professionals (defined under Activities That Are Not Passive Activities, earlier),
Any overall loss from a PTP,
The taxable amount of social security and tier 1 railroad retirement benefits,
Deductible contributions to traditional individual retirement accounts (IRAs) and section 501(c)(18) pension plans,
The domestic production activities deduction,
The deduction allowed for the deductible part of self-employment taxes,
The exclusion from income of interest from series EE and I U.S. savings bonds used to pay higher education expenses,
The exclusion of amounts received under an employer's adoption assistance program,
The student loan interest deduction, or
The tuition and fees deduction.
Your adjusted gross income on line 37 of Form 1040 is $92,000, and you have taxable social security benefits of $5,500 on line 20b. Your modified adjusted gross income is $86,500 ($92,000 – $5,500).
Use Part III to figure the maximum commercial revitalization deduction (CRD) allowed from a rental real estate activity.
Enter all numbers in Part III as positive amounts (that is, greater than zero.)
Use Part IV to figure the amount of the losses from all passive activities (as determined in Part I) allowed for 2014.
Worksheets 1 and 3, columns (d) and (e), show whether an activity had an overall gain or loss. Worksheet 2, column (c), shows the CRDs from rental real estate activities. If you have activities that show overall gain in column (d) of Worksheet 1 or 3, report all the income and losses listed in columns (a), (b), and (c) for those activities on the proper forms and schedules, including Form 8582.
If you have activities that show an overall loss in column (e) of Worksheet 1 or 3 or column (c) of Worksheet 2, you must allocate your allowed loss on line 16 of Form 8582 to those activities by completing Worksheets 4, 5, and 6 or 7.
Complete Worksheet 4 only if you entered an amount (other than zero) on line 10 or 14 of Form 8582. Otherwise, skip Worksheet 4 and complete Worksheet 5 for all activities in Worksheet 1 or 3 that have overall losses in column (e) and all activities in Worksheet 2.
Use Worksheet 4 to allocate the special allowance on line 10 or line 14 of Form 8582 among your rental real estate activities.
In the first column of Worksheet 4, enter the name of each activity. In the second column, enter the form or schedule and line number on which the loss will be reported.
You receive a Schedule K-1 from partnership P that reports losses from two rental real estate activities, Activity X and Activity Y. The losses from partnership P are reported on line 28A of Schedule E. In the first two columns of Worksheet 4, enter:
|Name of Activity||Form or Schedule|
|Activity X||Sch E, line 28A|
|Activity Y||Sch E, line 28A|
If the loss from an activity is reported in more than one place, identify both locations in the second column (for example, Sch E, line 28A/Form 4797, line 2). If you need additional space, show this information on an attached statement.
Enter all activities with overall losses from Worksheets 1 and 2 as follows.
If you entered an amount on line 10, list on Worksheet 4 all activities with an overall loss in column (e) of
If you entered an amount on line 14, list on Worksheet 4 all activities with an overall loss in column (c) of
If you entered amounts on both lines 10 and 14 of Form 8582, you must complete two separate Worksheets 4. For the second worksheet, you either may attach an extra copy of page 2 of Form 8582 or your own schedule in the same format as Worksheet 4. On the first Worksheet 4, list all activities with an overall loss in column (e) of Worksheet 1. On the second Worksheet 4, list all activities with an overall loss incolumn (c) of Worksheet 2.
If the total losses in column (c) are the same as those in column (a), the losses in Worksheets 1 and 2 are allowed in full and are not carried over to Worksheet 5. Report all amounts in columns (a), (b), and (c) of Worksheet 1 and columns (a) and (b) of Worksheet 2 on the proper forms and schedules.
If the total losses in column (c) are less than the total losses in column (a), complete column (d).
Complete Worksheet 5 if any activities have an overall loss in column (e) of Worksheet 3 or losses in column (d) of Worksheet 4 (in column (e) of Worksheet 1 or column (c) of Worksheet 2 if you did not have to complete Worksheet 4).
On Worksheet 5, enter the name of each activity and the form or schedule and line number on which the loss will be reported. See the example for Worksheet 4. Identify any deduction from Worksheet 2 on a separate line (even if the amount is from an activity also shown on Worksheet 1 or 3) and add “CRD” after the name of the activity.
These worksheets figure your unallowed and allowed losses for each activity.
If you have losses from any activity that are reported on two or more different forms or schedules, use Worksheet 7 instead of Worksheet 6 for that activity.
Also use Worksheet 7 instead of Worksheet 6 for any activity with two or more transactions that are reported on the same form or schedule but must be separately identified for tax purposes. Transactions that must be separately identified include capital losses that are 28% rate losses and those that are not.
28% rate gain or loss includes all collectibles gains and deductible long-term losses and section 1202 gain on the sale of qualified small business stock. See Instructions for Schedule D for details.
Use Worksheet 6 for any activity listed in Worksheet 5 if all the loss from that activity is reported on one form or schedule and no transactions need to be identified separately (as discussed in Worksheet 7, later). Also, see Identification of Disallowed Passive Activity Deductions in Pub. 925 for more information.
You will report all the allowed loss from an activity listed in Worksheet 5 on Schedule E. Use Worksheet 6 to determine the allowed loss, even if part of the loss is a current year Schedule E loss and part of it is a prior year unallowed Schedule E loss.
On Worksheet 6, enter the name of each activity and the form or schedule and line number on which the loss is reported. See the example for Worksheet 4. Identify each CRD from Worksheet 5 on a separate line and add “CRD” after the name of the activity.
Use Worksheet 7 for any activity listed in Worksheet 5 that has losses that are reported on two or more different forms and schedules or on different parts of the same form or schedule (for example, 28% rate and non-28%-rate capital losses reported on Form 8949). Worksheet 7 allocates the allowed and unallowed loss for the activity and allocates the allowed loss to the different forms or schedules (or different parts of the same form or schedule) used to report the losses.
Only losses that would cause a difference in tax liability if they were reported on a different form or schedule or on different parts of the same form or schedule are kept separate. Those forms, schedules, and parts are:
Schedules C, E, and F.
Form 8949 (Parts I and II (28% rate losses and non-28%-rate losses)).
You must generally make a separate entry in Form 8949, Part I or Part II, for each transaction reported. See the Instructions for Form 8949.
Forms 4684 (Section B), 4797
(Parts I and II), and 4835.
Use a separate copy of Worksheet 7 for each activity for which you have losses reported on two or more different forms or schedules or different parts of the same form or schedule.
On Worksheet 7, enter the form or schedule and line number on the dotted line above each line 1a (for example, Schedule D, line 12, to report a 28% rate loss from a partnership).
You enter a prior year unallowed loss from Form 4797, Part I, on line 1a. If the activity has a current year Form 4797, Part I, gain, enter the gain on line 1b, column (a). If the activity does not have a Form 4797, Part I, gain, enter -0- on line 1b, column (a).
The taxpayer had the following Form 8949 transactions from passive activities in 2014.
A passive activity prior year unallowed long-term capital loss (a 28% rate loss) of $1,000 and a current year long-term capital loss (a non-28%-rate loss) of $3,000.
A current year collectibles loss (a 28% rate loss) of $230 and net income of $1,100 from Schedule E (Form 1040).
Activity I has an overall loss of $4,000 (current year long-term capital loss of $3,000 and a prior year unallowed long-term capital loss of $1,000). Activity II has an overall gain of $870 (current year net income of $1,100 less a current year long-term capital loss of $230). Line 16 of Form 8582 shows an allowed loss of $1,100.
Since Activity II has an overall gain, the amounts shown in columns (a) and (b) of Worksheet 3 for that activity are reported on the proper forms and schedules and are not shown on any other worksheet.
Activity I has an unallowed loss of $3,130 (line 4 of Form 8582 ($3,130) less the sum of lines 10 and 14 of Form 8582 (-0-) x 100%).
This worksheet is used to figure the portion of the unallowed loss attributable to the 28% rate loss and the portion attributable to the non-28%-rate loss.
The loss attributable to the 28% rate loss ($1,000) and the loss attributable to the non-28%-rate loss ($3,000) are separate entries in Worksheet 7. The ratio of each loss to the total of the two losses is figured as follows. $1,000/$4,000 = 0.25 and $3,000/$4,000 = 0.75. Each of these ratios is multiplied by the unallowed loss for Activity I, shown in column (c) of Worksheet 5 ($3,130).
Unallowed losses for Activity I:
28% rate loss: 0.25 x $3,130 = $782.50.
Non-28%-rate loss: 0.75 x $3,130 = $2,347.50.
Allowed losses for Activity I:
28% rate loss: $1,000 − $782.50 = $217.50.
Non-28%-rate loss: $3,000 − $2,347.50 = $652.50.
The total loss allowed for Activity I ($870) is entered in Part II of Form 8949. The allowed 28% rate loss ($217.50) is entered on the 28% Rate Gain Worksheet (see the instructions for Schedule D, line 18). Keep a record of the unallowed 28% rate and non-28%-rate losses to figure the PAL for next year.
Schedule C shows net profit for the year of $5,000 from a passive activity. The activity also has a Form 4797 gain of $2,500 and a prior year unallowed Schedule C loss of $6,000. The loss allowed for 2014 is $6,000. You enter a net loss of $1,000 on line 31 of Schedule C (the $5,000 net profit for the year less the $6,000 loss allowed for the year). To the left of the entry space, you enter “PAL.”
See Form 4797 and Form 8949,later, if you also had passive gains and losses from the sale of assets or of an interest in a passive activity.
A PTP is a partnership whose interests are traded on an established securities market or are readily tradable on a secondary market (or its substantial equivalent).
An established securities market includes any national securities exchange and any local exchange registered under the Securities Exchange Act of 1934 or exempted from registration because of the limited volume of transactions. It also includes any over-the-counter market.
A secondary market generally exists if a person stands ready to make a market in the interest. An interest is treated as readily tradable if the interest is regularly quoted by persons, such as brokers or dealers, who are making a market in the interest.
The substantial equivalent of a secondary market exists if there is no identifiable market maker, but holders of interests have a readily available, regular, and ongoing opportunity to sell or exchange interests through a public means of obtaining or providing information on offers to buy, sell, or exchange interests. Similarly, the substantial equivalent of a secondary market exists if prospective buyers and sellers have the opportunity to buy, sell, or exchange interests in a timeframe and with the regularity and continuity that the existence of a market maker would provide.
Section 469(k) provides that the passive activity limitations must be applied separately to items from each PTP. PALs from a PTP generally may be used only to offset income or gain from passive activities of the same PTP. The special allowance (including CRDs) for rental real estate activities does not apply to PALs from a PTP.
Combine any current year income, gains and losses, and any prior year unallowed losses to see if you have an overall loss from the PTP. Include only the same types of income and losses you would include to figure your net income or loss from a non-PTP passive activity. See Passive Activity Income and Deductions, earlier.
If you have an overall gain, the net gain portion (total gain minus total losses) is nonpassive income.
It is important to figure the nonpassive income because it must be included in modified adjusted gross income to figure the special allowance for active participation in a non-PTP rental real estate activity on Form 8582. Also, you may be able to include the nonpassive income in investment income when figuring your investment interest expense deduction. See Form 4952, Investment Interest Expense Deduction.
Report all gains and allowed losses from the activity on the forms or schedules normally used, and to the left of each entry space, enter “From PTP.”
You have Schedule E income of $8,000 and a Form 4797 prior year unallowed loss of $3,500 from the passive activities of a PTP. You have a $4,500 overall gain ($8,000 − $3,500) that is nonpassive income. On Schedule E, Part II, you report the $4,500 net gain as nonpassive income in column (j). In column (g), you report the remaining Schedule E gain of $3,500 ($8,000 − $4,500) as passive income. On the appropriate line of Form 4797, you report the prior year unallowed loss of $3,500. You enter “From PTP” to the left of each entry space.
If you have an overall loss (but did not dispose of your entire interest in the PTP to an unrelated person in a fully taxable transaction during the year), the losses are allowed only to the extent of the income, and the excess loss is carried forward to use in a future year if you have income to offset it. Report as a passive loss on the schedule or form you normally use the portion of the loss equal to the income. Report the income as passive income on the form or schedule you normally use.
You have a Schedule E loss of $12,000 (current year losses plus prior year unallowed losses) and Form 4797 gain of $7,200 from the passive activities of a PTP. You report the $7,200 gain on the appropriate line of Form 4797. On Schedule E, Part II, you report $7,200 of the losses as a passive loss in column (f). You carry forward the unallowed loss of $4,800 ($12,000 − $7,200).
If you have unallowed losses from more than one activity of the PTP or from the same activity of the PTP that must be reported on different forms or schedules, allocate the unallowed losses on a pro rata basis to figure the amount allowed for each activity or on each form or schedule.
List each activity of the PTP in Worksheet 5. Enter the overall loss from each activity in column (a). Complete column (b) of Worksheet 5 according to its instructions. Multiply the total unallowed loss from the PTP by each ratio in column (b) and enter the result in column (c) of Worksheet 5.
Next, complete Worksheet 6 for each activity listed in Worksheet 5 if all the loss from that activity is reported on one form or schedule. Use Worksheet 7 instead of Worksheet 6 for each activity with losses reported on two or more different forms or schedules (or on different parts of the same form or schedule). Enter the net loss plus any prior year unallowed losses in column (a) of Worksheet 6 (or line 1a, column (a), of Worksheet 7 if applicable). The losses in column (c) of Worksheet 6 (column (e) of Worksheet 7) are the allowed losses to report on your forms or schedules. Report these losses and any income from the PTP on the forms and schedules normally used.
4.If you have an overall loss and you disposed of your entire interest in the PTP to an unrelated person in a fully taxable transaction during the year, your losses (including prior year unallowed losses) allocable to the activity for the year are not limited by the passive loss rules. A fully taxable transaction is one in which you recognize all your realized gain or loss. Report the income and losses on the forms and schedules normally used.
For rules on the disposition of an entire interest reported using the installment method, see Disposition of an Entire Interest, earlier.
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