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2000 Department of the Treasury

Internal Revenue Service

Instructions for Form 8582

Passive Activity Loss Limitations
Section references are to the Internal Revenue Code, unless otherwise noted.

Contents Page participation may allow some losses Dispositions on page 7 for more
General Instructions . . . . . . 1 even if the losses exceed passive information.
Purpose of Form . . . . . . . . . 1 Exception 2
PALs that are not allowed in the
Who Must File . . . . . . . . . . . 1 current year are carried forward until You actively participated in rental
Coordination With Other Limitations 2 they are allowed either against real estate activities (see Active
Before Completing Form 8582 . 2 passive activity income, against the Participation in a Rental Real
special allowance, if applicable, or Estate Activity on page 4), and you
Definitions . . . . . . . . . . . . . 2 when you sell or exchange your entire meet all of the following conditions:
Activities That Are Not Passive interest in the activity in a fully taxable ● Rental real estate activities with
Activities . . . . . . . . . . . . . 2 transaction to an unrelated party. active participation were your only
Rental Activities . . . . . . . . . . 2 For more information, see Pub. passive activities.
Trade or Business Activities . . . 3 925, Passive Activity and At-Risk ● You have no prior year unallowed
Rules, which contains a filled-in losses from these activities.
Material Participation . . . . . . . 4 example of Form 8582 with ● Your total loss from the rental real
Grouping of Activities . . . . . . . 5 step-by-step instructions for reporting estate activities was not more than
Passive Activity Income and losses from passive activities. $25,000 ($12,500 if married filing
Deductions . . . . . . . . . . . 6 Note: Corporations subject to the separately and you lived apart from
Former Passive Activities . . . . 7 passive activity rules must use Form your spouse all year).
8810, Corporate Passive Activity Loss ● If you are married filing separately,
Dispositions . . . . . . . . . . . . 7 and Credit Limitations. you lived apart from your spouse all
Specific Instructions . . . . . . 8 year.
Part I . . . . . . . . . . . . . . . . 8 Who Must File ● You have no current or prior year

Part II . . . . . . . . . . . . . . . . 8 Form 8582 is filed by individuals, unallowed credits from a passive

Part III . . . . . . . . . . . . . . . 9 estates, and trusts who have losses activity.
(including prior year unallowed ● Your modified adjusted gross
How to Report Allowed Losses . 11 income was not more than $100,000
losses) from passive activities. You
Publicly Traded Partnerships do not have to file Form 8582 if you (not more than $50,000 if married
(PTPs) . . . . . . . . . . . . . . 11 meet Exception 1 or 2 below. filing separately and you lived apart
from your spouse all year).
General Instructions Exception 1 ● You do not hold any interest in a
You do not have an overall loss rental real estate activity as a limited
Purpose of Form when you combine all your net partner or as a beneficiary of an
income and net losses (including any estate or a trust.
Form 8582 is used by noncorporate prior year unallowed losses) from
taxpayers to figure the amount of any For the definition of modified
business or rental passive activities. adjusted gross income, see the
passive activity loss (PAL) for the Overall loss is defined under
current tax year and the total losses instructions for line 6 on page 8.
Definitions on page 2. If all the above conditions are met,
allowed from passive activities.
In figuring your overall gain or loss your rental real estate losses are not
A PAL occurs when total losses from all passive activities for the year,
(including prior year unallowed limited, and you do not need to
do not include the following: complete Form 8582. For losses
losses) from all your passive activities
exceed the total income from all your 1. Net income that is not passive reported on line 22, Part I, of
passive activities. activity income. See Passive Activity Schedule E (Form 1040), enter the
Income on page 6. amount of the loss from line 22 on
Generally, passive activities
2. Net losses that are not passive line 23 of Schedule E. For losses
activity net losses. See Activities from a partnership or an S
● Trade or business activities in
That Are Not Passive Activities on corporation, enter the amount of the
which you did not materially page 2. allowable loss from Schedule K-1 in
participate for the tax year. Part II, column (g), of Schedule E.
● Rental activities, regardless of your
3. Net income or net loss from
your interest in any publicly traded For losses reported on line 32 of
participation. partnership (PTP). See Publicly Form 4835, Farm Rental Income and
PALs cannot be used to offset Traded Partnerships (PTPs) on Expenses, enter the amount of the
income from nonpassive activities. page 11. allowable loss from line 32 on line 33c
However, a special allowance for 4. Any overall loss from an entire of Form 4835.
rental real estate activities with active disposition of a passive activity. See
Cat. No. 64294A
If you do not qualify for Exception Overall gain means the excess of the Note: If an activity qualifies for the
1 or 2, you must complete Form “net income” from the activity over the exception described above in 2000,
8582. prior year unallowed losses from the but has a prior year unallowed
activity. passive loss, the prior year unallowed
Coordination With Other Overall loss means the excess of the loss is treated as a loss from a former
Limitations prior year unallowed losses from the passive activity. See Former Passive
activity over the “net income” from the Activities on page 7.
Generally, PALs are subject to other activity or the prior year unallowed 3. A working interest in an oil or
limitations (for example, basis and losses from the activity plus the “net gas well. Your working interest must
at-risk limitations) before they are loss” from the activity. be held directly or through an entity
subject to the passive loss limitations. Prior year unallowed losses means that does not limit your liability (such
Once a loss becomes allowable the losses from an activity that were as a general partner interest in a
under these other limitations, you disallowed under the PAL limitations partnership). In this case, it does not
must determine whether the loss is in a prior year and carried forward to matter whether you materially
limited under the passive loss rules. the tax year under section 469(b). participated in the activity for the tax
See Form 6198, At-Risk Limitations, See Regulations section 1.469-1(f)(4) year.
for details on the at-risk rules. Also, and Pub. 925. If, however, your liability was limited
capital losses that are allowable for part of the year (for example, you
under the passive loss rules may be
limited under the capital loss Activities That Are Not converted your general partner
Passive Activities interest to a limited partner interest
limitations of section 1211. during the year), some of your income
Percentage depletion deductions that The following are not passive and losses from the working interest
are allowable under the passive loss activities: may be treated as passive activity
rules may be limited under section 1. Trade or business activities in gross income and passive activity
613A(d). which you materially participated for deductions. See Temporary
the tax year. Regulations section
Before Completing Form 2. Any rental real estate activity in 1.469-1T(e)(4)(ii).
8582 which you materially participated if 4. The rental of a dwelling unit
To find out if your activity is treated you were a “real estate professional” you used as a residence if section
as a passive activity, read: for the tax year. You were a real 280A(c)(5) applies. This section
● Trade or Business Activities if
estate professional only if: applies if you rented out a dwelling
your activity is a trade or business a. More than half of the personal unit that you also used as a home
activity (page 3). services you performed in trades or during the year for a number of days
● Rental Activities if your activity is
businesses were performed in real that exceeds the greater of 14 days
property trades or businesses in or 10% of the number of days during
the renting of tangible property (on the year that the home was rented at
this page). which you materially participated and
b. You performed more than 750 a fair rental.
● Material Participation (page 4).
hours of services in real property 5. An activity of trading personal
● Grouping of Activities (page 5).
trades or businesses in which you property for the account of owners of
To find out how to treat income and materially participated. interests in the activity. For purposes
deductions from your activity, read: For purposes of this rule, each of this rule, personal property means
● Passive Activity Income and property that is actively traded, such
interest in rental real estate is a
Deductions, Former Passive separate activity, unless you elect to as stocks, bonds, and other
Activities, and Dispositions (pages treat all interests in rental real estate securities. See Temporary
6 and 7). as one activity. For details on making Regulations section 1.469-1T(e)(6)
To find out how to enter income this election, see the instructions for for more details.
and losses on Form 8582, read the Schedule E (Form 1040). Generally, income and losses from
instructions for Worksheets 1 and 2 If you are married filing jointly, one these activities are not entered on
(page 8). spouse must separately meet both of Form 8582. However, losses from
the above conditions, without taking these activities may be subject to
Definitions into account services performed by limitations other than the passive loss
the other spouse. rules.
Except as otherwise indicated, the
following terms in these instructions A real property trade or business is
are defined as shown below. any real property development, Rental Activities
Net income means the excess of redevelopment, construction, A rental activity is a passive activity
current year income over current year reconstruction, acquisition, even if you materially participated in
deductions from the activity. This conversion, rental, operation, the activity (unless it is a rental real
includes any current year gains or management, leasing, or brokerage estate activity in which you materially
losses from the disposition of assets trade or business. Services you participated and you were a real
or an interest in the activity. performed as an employee are not estate professional).
Net loss means the excess of current treated as performed in a real However, if you meet any of the five
year deductions over current year property trade or business unless you exceptions listed on page 3, the rental
income from the activity. This owned more than 5% of the stock (or of the property is not treated as a
includes any current year gains or more than 5% of the capital or profits rental activity. See Reporting
losses from the disposition of assets interest) in the employer. Income and Losses From the
or an interest in the activity.

Page 2
Activities on page 3 if you meet any holding the property is to realize a (see Trade or Business Activities
of the exceptions. gain from its appreciation and the below) and, if so,
An activity is a rental activity if gross rental income is less than 2% 2. Whether you materially
tangible property (real or personal) is of the smaller of the unadjusted participated in the activity for the tax
used by customers or held for use by basis or the fair market value (FMV) year.
customers and the gross income (or of the property. ● If the activity is a trade or business
expected gross income) from the Unadjusted basis is the cost of the activity in which you did not
activity represents amounts paid (or property without regard to materially participate, enter the
to be paid) mainly for the use of the depreciation deductions or any other income and losses from the activity
property. It does not matter whether basis adjustment described in section on Worksheet 2.
the use is under a lease, a service 1016. ● If the activity meets any of the five
contract, or some other arrangement. The rental of property is incidental exceptions listed above and is a trade
to a trade or business activity if: or business activity in which you did
a. You owned an interest in the materially participate, report any
An activity is not a rental activity if: trade or business activity during the income or loss from the activity on the
1. The average period of tax year; forms or schedules normally used.
customer use is: b. The rental property was mainly If the rental activity did not meet
a. 7 days or less or used in the trade or business activity any of the five exceptions, it is
b. 30 days or less and during the tax year or during at least generally a passive activity. Special
significant personal services (see 2 of the 5 preceding tax years; and rules apply if you conduct the rental
below) were provided in making the c. The gross rental income from activity through a PTP or if any of the
rental property available for customer the property is less than 2% of the rules described under
use. smaller of the unadjusted basis or the Recharacterization of Passive
Figure the average period of FMV of the property. Income on page 6 apply. See the
customer use for a class of property Lodging provided for the employer's PTP rules on page 11.
by dividing the total number of days convenience to an employee or the If none of the special rules apply,
in all rental periods by the number of employee's spouse or dependents is enter the passive rental activity on
rentals during the tax year. If the incidental to the activity or activities in Worksheet 1 or 2.
activity involves renting more than which the employee performs Worksheet 1 is for passive rental
one class of property, multiply the services. real estate activities in which you
average period of customer use of 4. You customarily make the actively participated. See Active
each class by the ratio of the gross rental property available during Participation in a Rental Real
rental income from that class to the defined business hours for Estate Activity on page 4.
activity's total gross rental income. nonexclusive use by various Worksheet 2 is for passive rental
The activity's average period of customers. real estate activities in which you did
customer use equals the sum of 5. You provide property for use in not actively participate, activities of
these class-by-class average periods a nonrental activity of a partnership, renting personal property, and other
weighted by gross income. See S corporation, or a joint venture in passive trade or business activities.
Regulations section 1.469-1(e)(3)(iii). your capacity as an owner of an See the instructions for Worksheets
Significant personal services interest in the partnership, S 1 and 2 on page 8.
include only services performed by corporation, or joint venture.
individuals. To determine if personal Trade or Business
services are significant, all relevant Example. If a partner contributes
facts and circumstances are taken the use of property to a partnership, Activities
into consideration, including the none of the partner's distributive
share of partnership income is A trade or business activity is an
frequency of the services, the type activity (other than a rental activity or
and amount of labor required to income from a rental activity unless
the partnership is engaged in a rental an activity treated as incidental to an
perform the services, and the value activity of holding property for
of the services relative to the amount activity.
investment) that:
charged for use of the property. Also, a partner's gross income from
a guaranteed payment under section 1. Involves the conduct of a trade
2. Extraordinary personal or business (within the meaning of
services were provided in making the 707(c) is not income from a rental
activity. The determination of section 162),
rental property available for customer 2. Is conducted in anticipation of
use. whether the property used in the
activity is provided in the partner's starting a trade or business, or
Extraordinary personal services are capacity as an owner of an interest in 3. Involves research or
services provided in making rental the partnership is made on the basis experimental expenditures deductible
property available for customer use of all the facts and circumstances. under section 174 (or that would be
only if they are performed by if you chose to deduct rather than
individuals and the customers' use of Reporting Income and Losses capitalize them).
the property is incidental to their From the Activities Trade or business activities are
receipt of the services. generally reported on Schedule C,
If an activity meets any of the five
3. Rental of the property is exceptions listed above, it is not a C-EZ, or F, or in Part II or III of
incidental to a nonrental activity. rental activity. You must then Schedule E. See Publicly Traded
The rental of property is incidental determine: Partnerships (PTPs) on page 11.
to an activity of holding property for 1. Whether your rental of the See Pub. 925 for how to report
investment if the main purpose of property is a trade or business activity
Page 3
income or losses from significant ● Approving new tenants, means include, but are not limited to,
participation passive activities. ● Deciding on rental terms, identifying services performed over a
● Approving capital or repair
period of time and the approximate
Active Participation in a Rental number of hours spent performing the
Real Estate Activity expenditures, and
services during that period, based on
● Other similar decisions.
If you actively participated in a appointment books, calendars, or
passive rental real estate activity, you The maximum special allowance narrative summaries.
may be able to deduct from is: Tests for investors. Work done as
● $25,000 for single individuals and
nonpassive income up to $25,000 of an investor in an activity is not treated
loss from the activity. This special married individuals filing a joint return as participation unless you were
allowance is an exception to the for the tax year. directly involved in the day-to-day
general rule disallowing losses in ● $12,500 for married individuals who management or operations of the
excess of income from passive file separate returns for the tax year activity. For purposes of this test,
activities. and lived apart from their spouses at work done as an investor includes:
The special allowance is not all times during the tax year. 1. Studying and reviewing
available if you were married, are ● $25,000 for a qualifying estate financial statements or reports on
filing a separate return for the year, reduced by the special allowance for operations of the activity.
and lived with your spouse at any which the surviving spouse qualified. 2. Preparing or compiling
time during the year. If your modified adjusted gross summaries or analyses of the
Only an individual, a qualifying income (defined on page 8) is finances or operations of the activity
estate, or a qualified revocable $100,000 or less ($50,000 or less if for your own use.
trust that made an election to treat married filing separately), your loss is 3. Monitoring the finances or
the trust as part of the decedent's deductible up to the amount of the operations of the activity in a
estate may actively participate in a maximum special allowance referred nonmanagerial capacity.
rental real estate activity. Limited to in the preceding paragraph. Test for a spouse. Participation by
partners may not actively participate If your modified adjusted gross your spouse during the tax year in an
unless future regulations provide an income is more than $100,000 activity you own may be counted as
exception. ($50,000 if married filing separately), your participation in the activity even
A qualifying estate is the estate of your special allowance is limited to if your spouse did not own an interest
a decedent for tax years ending less 50% of the difference between in the activity and whether or not you
than 2 years after the date of the $150,000 ($75,000 if married filing and your spouse file a joint return for
decedent's death if the decedent separately) and your modified the tax year.
would have satisfied the active adjusted gross income. Tests for individuals. You
participation requirements for the If your modified adjusted gross materially participated for the tax year
rental real estate activity for the tax income is $150,000 or more ($75,000 in an activity if you satisfy at least one
year the decedent died. or more if married filing separately), of the following tests:
A qualified revocable trust may there is no special allowance. 1. You participated in the activity
elect to be treated as part of a If you qualify under the active for more than 500 hours.
decedent's estate for purposes of the participation rules, use Worksheet 1 2. Your participation in the activity
special allowance for active and see page 8 of the instructions. for the tax year was substantially all
participation in rental real estate of the participation in the activity of
activities. The election must be made Material Participation all individuals (including individuals
by both the executor (if any) of the who did not own any interest in the
decedent's estate and the trustee of For the material participation tests
listed below, participation generally activity) for the year.
the revocable trust. This rule is
effective for estates of decedents who includes any work done in connection 3. You participated in the activity
died after August 5, 1997. For details, with an activity if you owned an for more than 100 hours during the
see section 645. interest in the activity at the time you tax year, and you participated at least
did the work. The capacity in which as much as any other individual
You are not considered to actively you did the work does not matter. (including individuals who did not own
participate in a rental real estate However, work is not participation if any interest in the activity) for the
activity if at any time during the tax year.
● It is not work that an owner would
year your interest (including your
spouse's interest) in the activity was customarily do in the same type of 4. The activity is a significant
less than 10% (by value) of all activity and participation activity for the tax
interests in the activity. Active ● One of your main reasons for doing year, and you participated in all
participation is a less stringent the work was to avoid the significant participation activities
requirement than material disallowance of losses or credits from during the year for more than 500
participation (see Material the activity under the passive activity hours.
Participation on this page). rules. A significant participation activity is
You may be treated as actively Proof of participation. You may any trade or business activity in which
participating if, for example, you prove your participation in an activity you participated for more than 100
participated in making management by any reasonable means. You do not hours during the year and in which
decisions or arranged for others to have to maintain contemporaneous you did not materially participate
provide services (such as repairs) in daily time reports, logs, or similar under any of the material participation
a significant and bona fide sense. documents if you can establish your tests (other than this fourth test).
Management decisions that may participation by other reasonable 5. You materially participated in
count as active participation include: means. For this purpose, reasonable the activity for any 5 (whether or not
Page 4
consecutive) of the 10 immediately Special rules for certain retired or a material change in the facts and
preceding tax years. disabled farmers and surviving circumstances makes it clearly
6. The activity is a personal spouses of farmers. Certain retired inappropriate.
service activity in which you or disabled farmers and surviving The IRS may regroup your activities
materially participated for any 3 spouses of farmers are treated as if your grouping fails to reflect one or
(whether or not consecutive) materially participating in a farming more appropriate economic units and
preceding tax years. activity if the real property used in the one of the primary purposes of your
An activity is a personal service activity would meet the estate tax grouping is to avoid the passive
activity if it involves the performance rules for special valuation of farm activity limitations.
of personal services in the fields of property passed from a qualifying Limitation on grouping certain
health, law, engineering, architecture, decedent. See Temporary activities. The following activities
accounting, actuarial science, Regulations section 1.469-5T(h)(2). may not be grouped together:
performing arts, or consulting or in Estates and trusts. The PAL 1. A rental activity with a trade or
any other trade or business in which limitations apply in figuring the business activity unless the activities
capital is not a material distributable net income and taxable being grouped together make up an
income-producing factor. income of an estate or trust. See appropriate economic unit and
7. Based on all the facts and Temporary Regulations section a. The rental activity is
circumstances, you participated in the 1.469-1T(b)(2) and (3). The rules for insubstantial relative to the trade or
activity on a regular, continuous, and determining material participation for business activity or vice versa or
substantial basis during the tax year. this purpose have not yet been
issued. b. Each owner of the trade or
You did not materially participate in business activity has the same
the activity under this seventh test, proportionate ownership interest in
however, if you participated in the Grouping of Activities the rental activity. If so, the portion
activity for 100 hours or less during Generally, one or more trade or of the rental activity involving the
the tax year. Your participation in business activities or rental activities rental of property used in the trade
managing the activity does not count may be treated as a single activity if or business activity may be grouped
in determining whether you materially the activities make up an appropriate with the trade or business activity.
participated under this test if: economic unit for the measurement 2. An activity involving the rental
a. Any person (except you) of gain or loss under the passive of real property with an activity
received compensation for performing activity rules. Whether activities make involving the rental of personal
services in the management of the up an appropriate economic unit property (except personal property
activity or depends on all the relevant facts and provided in connection with the real
b. Any individual spent more circumstances. The factors given the property or vice versa).
hours during the tax year than you greatest weight in determining 3. Any activity with another
spent performing services in the whether activities make up an activity in a different type of business
management of the activity appropriate economic unit are: and in which you hold an interest as
(regardless of whether the individual 1. Similarities and differences in a limited partner or as a limited
was compensated for the types of trades or businesses, entrepreneur (as defined in section
management services). 2. The extent of common control, 464(e)(2)) if that other activity
Special rules for limited partners. 3. The extent of common engages in holding, producing, or
If you were a limited partner in an ownership, distributing motion picture films or
activity, you generally did not 4. Geographical location, and videotapes; farming; leasing section
materially participate in the activity. 5. Reliance between or among 1245 property; or exploring for or
You did materially participate in the the activities. exploiting oil and gas resources or
activity, however, if you met material geothermal deposits.
Example. You have a significant
participation test 1, 5, or 6 above for ownership interest in a bakery and a Activities conducted through
the tax year. movie theater in Baltimore and in a partnerships, S corporations, and
However, for purposes of the bakery and a movie theater in C corporations subject to section
material participation tests, you are Philadelphia. Depending on all the 469. Once a partnership or
not treated as a limited partner if you relevant facts and circumstances, corporation determines its activities
also were a general partner in the there may be more than one under these rules, a partner or
partnership at all times during the reasonable method for grouping your shareholder may use these rules to
partnership's tax year ending with or activities. For instance, the following group those activities with:
within your tax year (or, if shorter, ● Each other,
groupings may or may not be
during the portion of the partnership's permissible: ● Activities conducted directly by the
tax year in which you directly or ● A single activity, partner or shareholder, or
indirectly owned your limited partner ● A movie theater activity and a ● Activities conducted through other
interest). partnerships and corporations.
bakery activity,
A limited partner's share of an ● A Baltimore activity and a A partner or shareholder may not
electing large partnership's taxable treat as separate activities those
income or loss from all trade or Philadelphia activity, or
● Four separate activities. activities grouped together by the
business and rental activities is partnership or corporation.
treated as income or loss from the Once you choose a grouping under
conduct of a single passive trade or these rules, you must continue using
business activity. that grouping in later tax years unless

Page 5
Passive Activity Income ● Income from an activity that is not Recharacterization of Passive
a passive activity. Income
and Deductions ● Portfolio income, including interest,
Certain income from passive activities
Take into account only passive dividends, annuities, and royalties not must be recharacterized and
activity income and passive activity derived in the ordinary course of a excluded from passive activity
deductions to figure your net income trade or business and gain or loss income. The amount of income
or net loss from all passive activities from the disposition of property that recharacterized equals the net
or any passive activity. produces portfolio income or is held income from the sources below. If
Example. If your passive activity for investment (see section during the tax year you received net
is reported on Schedule C, C-EZ, E, 163(d)(5)). See Temporary income from any sources described
or F, and the activity has no prior year Regulations section 1.469-2T(c)(3). below (either directly or through a
unallowed losses or any gain or loss ● Alaska Permanent Fund dividends.
partnership or an S corporation), see
from the disposition of assets or an ● Personal service income, including Pub. 925 to find out how to report net
interest in the activity, take into salaries, wages, commissions, income or loss from these sources.
account only the passive activity self-employment income from trade For more information, see Temporary
income and passive activity or business activities in which you Regulations section 1.469-2T(f) and
deductions from the activity to figure materially participated for the tax Regulations section 1.469-2(f).
the amount to enter on Form 8582 year, deferred compensation, taxable Income from the following sources
and the worksheets. social security and other retirement may be subject to the net income
If you own an interest in a passive benefits, and payments from recharacterization rules.
activity through a partnership or an S partnerships to partners for personal ● Significant participation passive
corporation, the partnership or S services. See Temporary Regulations activities defined on page 4.
corporation will generally provide you section 1.469-2T(c)(4). ● Rental of property if less than 30%
with the net income or net loss from ● Income from positive section 481
the passive activity. If, however, the of the unadjusted basis of the
adjustments allocated to activities property is subject to depreciation.
partnership or S corporation must other than passive activities. See ● Passive equity-financed lending
state an item of gross income or Temporary Regulations section
deduction separately to you, and the 1.469-2T(c)(5). activities.
gross income or deduction is passive ● Rental of property incidental to a
● Income or gain from investments
activity gross income or a passive of working capital. development activity.
activity deduction (respectively), ● Income from an oil or gas property
● Rental of property to a nonpassive
include that amount in the net income activity.
or net loss entered on Form 8582 and if you treated any loss from a working
● Acquisition of an interest in a
the worksheets. interest in the property for any tax
year beginning after 1986 as a pass-through entity that licenses
The partnership or S nonpassive loss under the rule intangible property.
! corporation does not have a
CAUTION record of any prior year
excluding working interests in oil and
gas wells from passive activities. See
Passive Activity Deductions
unallowed losses from the passive Regulations section 1.469-2(c)(6). To figure your overall gain or overall
activities of the partnership or S ● Any income from intangible
loss from all passive activities or any
corporation. If you had prior year property if your personal efforts passive activity, take into account
unallowed losses from these significantly contributed to the only passive activity deductions.
activities, they can be found in creation of the property. Passive activity deductions include
column (c) of your 1999 Worksheet ● Any income treated as not from a
all deductions from activities that are
4. passive activity under Temporary passive activities for the current tax
Regulations section 1.469-2T(f) and year and all deductions from passive
Passive Activity Income activities that were disallowed under
Regulations section 1.469-2(f). See
To figure your overall gain or loss Recharacterization of Passive the PAL rules in prior tax years and
from all passive activities or any Income on this page. carried forward to the current tax year
passive activity, take into account ● Overall gain from any interest in a
under section 469(b). See
only passive activity income. Do not Regulations section 1.469-1(f)(4).
enter income that is not passive ● State, local, and foreign income tax
Passive activity deductions include
activity income on Form 8582 or the losses from a disposition of property
worksheets. refunds. used in a passive activity at the time
● Income from a covenant not to
Passive activity income includes all of the disposition and losses from a
income from passive activities, compete. disposition of less than your entire
● Any reimbursement of a casualty interest in a passive activity. See
including (with certain exceptions
described in Temporary Regulations or theft loss included in income as Dispositions on page 7 for the
section 1.469-2T(c)(2) and recovery of all or part of a prior year treatment of losses upon disposition
Regulations section 1.469-2(c)(2)) loss deduction if the deduction for the of your entire interest in an activity.
gain from the disposition of an loss was not treated as a passive Passive activity deductions do not
interest in a passive activity or of activity deduction. include the following:
property used in a passive activity at ● Cancellation of debt income to the ● Deductions for expenses (other
the time of the disposition. extent that at the time the debt was than interest expense) that are clearly
Passive activity income does not discharged the debt was not properly and directly allocable to portfolio
include the following: allocable under Temporary income.
Regulations section 1.163-8T to
passive activities.
Page 6
● Interest expense, other than If the activity has a net loss for prior year unallowed losses) on the
interest expense properly allocable the current year, enter the prior year forms and schedules normally used
under Temporary Regulations section unallowed loss (but not the current and do not include the income or
1.163-8T to passive activities (for year loss) on Form 8582 and the losses on the worksheets or Form
example, qualified home mortgage applicable worksheets. 8582.
interest and capitalized interest To report a disposition of a former If you have an overall loss when
expense are not passive activity passive activity, follow the rules under you combine the income and losses,
deductions). Dispositions below. do not use the worksheets or Form
● Losses from dispositions of 8582 for the activity. All losses
property that produce portfolio income Dispositions (including prior year unallowed
or property held for investment. losses) are allowed in full. Report the
● State, local, and foreign income Disposition of an Entire Interest income and losses on the forms and
taxes. If you disposed of your entire interest schedules normally used.
● Miscellaneous itemized deductions in a passive activity or a former An overall loss from an entire
that may be disallowed under section passive activity to an unrelated disposition of a passive activity is a
67. person in a fully taxable transaction nonpassive loss if you have an
● Charitable contribution deductions. during the tax year, your losses aggregate loss from all other passive
● Net operating loss deductions, allocable to the activity for the year activities. When figuring your modified
percentage depletion carryovers are not limited by the PAL rules. adjusted gross income for line 6 of
under section 613A(d), and capital A fully taxable transaction is a Form 8582, be sure to take into
loss carryovers. transaction in which you recognize all account the overall loss from the
realized gain or loss. disposition of the activity.
● Deductions and losses that would
have been allowed for tax years If you are using the installment Example 1. Activity with overall
beginning before 1987, but for basis method to report this kind of gain. You sell your entire interest in
or at-risk limitations. disposition, figure the loss for the a rental property in which you actively
● Net negative section 481 current year that is not limited by the participated for a gain of $15,525.
adjustments allocated to activities PAL rules by multiplying your overall $7,300 of the gain is section 1231
other than passive activities. See loss (which does not include losses gain reported on Form 4797, Part I,
Temporary Regulations section allowed in prior years) by the and $8,225 is ordinary recapture
1.469-2T(d)(7). following fraction: income reported on Form 4797, Part
II. On line 23 of Schedule E (Form
● Deductions for losses from fire, Gain recognized in the current year 1040), you report a total loss of
storm, shipwreck, or other casualty Unrecognized gain as of the beginning $15,450, which includes a current
or from theft if losses similar in cause of the current year year $2,800 net loss and a $12,650
and severity do not recur regularly in prior year unallowed loss. You have
the activity. A partner in a PTP is not treated
as having disposed of an entire an overall gain from the disposition
● The deduction allowed under
interest in an activity of a PTP until ($15,525 – $15,450 = $75).
section 164(f) for one-half of Because you had other passive
self-employment taxes. there is an entire disposition of the
partner's interest in the PTP. activities reportable on Form 8582,
you make the following entries on
Former Passive Activities Reporting an Entire Disposition Worksheet 1. You enter the $15,525
A former passive activity is any on Schedule D or Form 4797 gain on the disposition in column (a),
activity that was a passive activity in If you completely dispose of your the current year loss of $2,800 in
a prior tax year but is not a passive entire interest in a passive activity or column (b), and the prior year
activity in the current tax year. A prior a former passive activity, you may unallowed loss of $12,650 in column
year unallowed loss from a former have to report net income or loss and (c).
passive activity is allowed to the prior year unallowed losses from the Example 2. Activity with overall
extent of current year income from activity. All the net income and losses loss. You sell your entire interest in
the activity. are reported on the forms and a limited partnership that was your
If current year net income from schedules normally used. only passive activity for a gain of
the activity is less than the prior Combine all income and losses $2,000. You have a current year
year unallowed loss, enter the prior (including any prior year unallowed Schedule E loss of $3,330 and a
year unallowed loss and any current losses) from the activity for the tax Schedule E prior year unallowed loss
year net income from the activity on year to see if you have an overall gain of $1,115.
Form 8582 and the applicable or loss. Because you have an overall loss
worksheets. If you have an overall gain from a of $2,445 after combining the gain
If current year net income from passive activity and you have other and losses, none of the amounts are
the activity is more than or equal passive activities to report on Form entered on Worksheet 2 or on Form
to the prior year unallowed loss 8582, include the income, losses, and 8582.
from the activity, report the income prior year unallowed losses on You enter the net loss plus the prior
and loss on the forms and schedules Worksheet 1 or 2. year unallowed loss ($3,330 + $1,115
normally used; do not enter the If this is your only passive activity = $4,445) on Schedule E, Part II,
amounts on Form 8582. or a former passive activity, report all column (i), and the $2,000 gain on the
income and losses (including any sale on Schedule D, in either Part I
or Part II, depending on how long you
held the partnership interest.

Page 7
Disposition of Less Than an Column (a). Enter the current year Column (c). Enter the unallowed
Entire Interest net income from each activity. Enter losses for the prior years for each
the total of column (a) on line 1a of activity. You find these amounts on
Gains and losses from the disposition Form 8582. Worksheet 4, column (c), of your
of less than an entire interest in an 1999 Form 8582. Enter the total of
activity are treated as part of the net Example. A Schedule C activity
has current year profit of $5,000 and column (c) from your 2000 Worksheet
income or net loss from the activity for 2 on line 2c of Form 8582.
the current year. a Form 4797 gain of $2,000. You
enter $7,000 in column (a). Columns (d) and (e). Combine
Note: A disposition of less than income and losses in columns (a)
substantially all of an entire interest Column (b). Enter the current year
net loss for each activity. Do not enter through (c) for each activity, and
does not trigger the allowance of either enter the overall gain for the
prior year unallowed losses. any prior year unallowed losses in
this column. Enter the total of column activity in column (d) or enter the
Disposition of substantially all of overall loss for the activity in column
an activity. You may treat the (b) on line 1b of Form 8582.
If an activity has net income on one (e). Do not enter amounts from
disposition of substantially all of an columns (d) and (e) on Form 8582.
activity as a separate activity if you form or schedule and a net loss on
another form or schedule, report the These amounts will be used when
can prove with reasonable certainty: Form 8582 is completed to figure the
1. The prior year unallowed net amounts separately in columns
(a) and (b) of Worksheet 1. loss allowed for the current year.
losses, if any, allocable to the part of
the activity disposed of and Example. A Schedule E rental
activity has current year income of
Part II — Special
2. The net income or loss for the Allowance for Rental Real
year of disposition allocable to the $1,000 on line 22 of Schedule E and
part of the activity disposed of. a current year Form 4797 loss of Estate With Active
$4,500. You enter $1,000 in column Participation
(a) and ($4,500) in column (b).
Column (c). Enter the prior year Use Part II to figure the maximum
Specific Instructions unallowed losses for each activity. amount of rental loss allowed if you
You find these amounts on have a net loss from a rental real
Part I — 2000 Passive Worksheet 4, column (c), of your estate activity with active
Activity Loss (PAL) 1999 Form 8582. Enter the total of participation.
column (c) from your 2000 Worksheet Enter all numbers in Part II as
Use Part I to combine the net income 1 on line 1c of Form 8582. positive amounts (that is, greater than
and net loss from all passive activities zero).
Columns (d) and (e). Combine
to determine if you have a PAL for Examples.
income and losses in columns (a)
through (c) for each activity, and 1. Line 1d has a loss of $47,000
Note: See Pub. 925 for examples either enter the overall gain for the and line 3 has a loss of $42,000. You
showing how to complete the activity in column (d) or enter the enter $42,000 as a positive number
worksheets. overall loss for the activity in column on line 4.
Worksheet 1 (e). Do not enter amounts from 2. Line 4 has a loss of $42,000
columns (d) and (e) on Form 8582. and line 8 is $25,000. You enter
Individuals and qualifying estates who These amounts will be used when
actively participated in rental real $25,000 as a positive number on line
Form 8582 is completed to figure the 9.
estate activities must include the loss allowed for the current year.
income or loss from those activities in Line 5. Married persons filing
Worksheet 1 to figure the amounts to Worksheet 2 separate returns who lived apart from
enter on lines 1a through 1c of Form their spouses at all times during the
Use Worksheet 2 to figure the year must enter $75,000 on line 5
8582. Use Worksheet 2 to figure the amounts to enter on lines 2a through
amounts to enter on lines 2a through instead of $150,000. Married persons
2c for: filing separate returns who lived with
2c if you did not actively participate
1. Passive trade or business their spouses at any time during the
in a rental real estate activity.
activities, year are not eligible for the special
Note: Do not enter a prior year
2. Passive rental real estate allowance. They must enter zero on
unallowed loss in column (c) of
activities that do not qualify for the line 9 and go to line 10.
Worksheet 1 unless you actively
special allowance, and Line 6. To figure modified adjusted
participated in the activity in both the
year the loss arose and the current 3. Rental activities other than gross income, combine all the
tax year. If you did not actively rental real estate activities. amounts used to figure adjusted
participate in both years, enter the Column (a). Enter the current year gross income except:
prior year unallowed loss in column net income for each activity. Enter the ● Passive income or loss included on

(c) of Worksheet 2. total of column (a) on line 2a of Form Form 8582;

8582. (See the example in the ● Any rental real estate loss allowed
Married individuals who file instructions under column (a) for under section 469(c)(7) to real estate
! separate returns and lived with
CAUTION their spouses at any time
Worksheet 1, above.) professionals (defined under
Column (b). Enter the current year Activities That Are Not Passive
during the tax year do not qualify net loss for each activity. Enter the Activities on page 2);
under the active participation rule and total of column (b) on line 2b of Form ● Any overall loss from a PTP;
must use Worksheet 2 instead of 8582. (See the example in the ● The taxable amount of social
Worksheet 1. instructions under column (b) of security and tier 1 railroad retirement
Worksheet 1, above.) benefits;
Page 8
● The deduction allowed under activities that show overall gain in The losses in Worksheet 1 are
section 219 for contributions to IRAs column (d) of Worksheet 1 or 2, allowed in full and are not carried
and certain other qualified retirement report all the income and losses listed over to Worksheet 4. Complete
plans; in columns (a), (b), and (c) for those Worksheet 4 only if any activities
● The deduction allowed under activities on the proper forms and have an overall loss in column (e) of
section 164(f) for one-half of schedules. Worksheet 2.
self-employment taxes; If you have activities that show an Column (c) total is less than
● The exclusion from income of overall loss in column (e) of column (a) total. If the total losses
interest from series EE and I U.S. Worksheet 1 or 2, you must allocate in column (c) are less than the total
savings bonds used to pay higher your allowed loss on line 11 of Form losses in column (a), complete
education expenses; 8582 to those activities by completing column (d).
● The exclusion allowed under Worksheets 3, 4, and 5 or 6. Column (d). Subtract column (c)
section 137 for expenses related to Complete Worksheet 3 only if you from column (a) and enter the results
adoption assistance programs; or entered an amount on line 9 of Form in column (d). Also enter the amounts
● The student loan interest deduction. 8582 and any activities in Worksheet from column (d) of Worksheet 3 in
1 have an overall loss in column (e). column (a) of Worksheet 4.
Include in modified adjusted gross
income any portfolio income and If you did not enter an amount on line
9 or none of the activities in Worksheet 4
expenses that are clearly and directly
allocable to portfolio income. Also Worksheet 1 have an overall loss, Complete Worksheet 4 if any
include any income that is treated as skip Worksheet 3 and complete activities have an overall loss in
nonpassive income, such as overall Worksheet 4 for all activities in column (e) of Worksheet 2 or losses
gain from a PTP and net income from Worksheet 1 or 2 that have an overall in column (d) of Worksheet 3 (in
an activity or item of property subject loss in column (e). column (e) of Worksheet 1 if you did
to the recharacterization of passive Note: Because of the 28% capital not have to complete Worksheet 3).
income rules. When figuring modified gain rate, you must identify the 28% On Worksheet 4, enter the name
adjusted gross income, any overall rate gains and losses, which must be of each activity and the form or
loss from the entire disposition of a reported separately on Schedule D schedule on which the loss will be
passive activity is taken into account of your return (and on Form 6781, if reported.
as a nonpassive loss. But it is not used). Column (a). Enter the amounts, if
included on Form 8582. 28% rate gain or loss includes all any, from column (d) of Worksheet 3
Example. Your adjusted gross collectibles gains and deductible (from column (e) of Worksheet 1 if
income on line 33 of Form 1040 is long-term losses and section 1202 you did not have to complete
$92,000, and you have taxable social gain on the sale of qualified small Worksheet 3). Also enter the losses,
security benefits of $5,500 on line business stock. See the instructions if any, from column (e) of Worksheet
20b. Your modified adjusted gross for Schedule D (Form 1040) for 2.
income is $86,500 ($92,000 – details, including the definitions of Column (b). Divide each of the
$5,500). “collectibles gains and losses” and individual losses shown in column (a)
“section 1202 gain.” by the total of all the losses in column
Line 8. Do not enter more than
$12,500 on line 8 if you are married (a) and enter this ratio for each
Worksheet 3 activity in column (b). The total of all
filing a separate return and you and If you entered an amount on line 9 of
your spouse lived apart at all times the ratios must equal 1.00.
Form 8582, use Worksheet 3 for all Column (c). Complete the following
during the year. Married persons filing activities with an overall loss in
separate returns who lived with their computation:
column (e) of Worksheet 1.
spouses at any time during the year
are not eligible for the special Column (a). Enter the overall loss A. Enter line 3 of Form 8582 ...................
allowance. They must enter zero on from column (e) of Worksheet 1 for B. Enter line 9 of Form 8582 ...................
C. Subtract line B from line A..................
line 9 and go to line 10. each activity.
Column (b). Divide each of the Multiply each ratio in column (b) by
individual losses shown in column (a) the amount on line C above, and
Part III — Total Losses enter the result in column (c).
by the total of all the losses in column
Allowed (a) and enter this ratio for each If you have losses from any activity
Use Part III to figure the amount of activity in column (b). The total of all that are reported on two or more
the PAL (as determined in Part I) the ratios in column (b) must equal different forms or schedules, use
allowed for 2000 from all passive 1.00. Worksheet 6 instead of Worksheet 5
activities. Column (c). Multiply each ratio in for that activity.
Line 11. Use the worksheets on column (b) by the amount on line 9 Also use Worksheet 6 instead of
Form 8582 and the following of Form 8582, and enter the results Worksheet 5 for any activity with two
instructions for those worksheets to in column (c). The total of column (c) or more transactions that are reported
figure the unallowed loss to be carried must be the same as line 9 of Form on the same form or schedule but
forward and the allowed loss to report 8582. must be separately identified for tax
on your forms and schedules for Column (c) total is the same as purposes; for example, capital losses
2000. column (a) total. If the total losses that are 28% rate losses and those
in column (c) are the same as those that are not.
Worksheets 1 and 2 in column (a), report all amounts in
Worksheets 1 and 2, columns (d) and columns (a), (b), and (c) of Worksheet Worksheet 5
(e), show whether an activity had an 1 on the proper forms and schedules. Use Worksheet 5 for any activity
overall gain or loss. If you have listed in Worksheet 4 if all the loss
Page 9
from that activity is reported on one Use a separate copy of Worksheet Example of Schedule D (Form
form or schedule. 6 for each activity for which you have 1040) Transactions. The taxpayer
Example. Use Worksheet 5 if all losses reported on two or more had the following Schedule D (Form
the loss from an activity is reported different forms or schedules or 1040) transactions from two passive
on Schedule E, even though part of different parts of the same form or activities in 2000.
the loss is a current year Schedule E schedule (for example, 28%-rate and Activity I
loss and part of it is from a Schedule non-28%-rate capital losses reported A passive activity prior year
E prior year unallowed loss. in Part II of Schedule D). Enter the unallowed long-term capital loss (a
Column (a). For each activity name of the form or schedule and 28% rate loss) of $1,000 and a
entered in Worksheet 5, enter the net part on the line above line 1a of current year long-term capital loss of
loss plus the prior year unallowed Worksheet 6. $3,000.
loss for the activity. Figure this Line 1a, column (a). Enter the net Activity II
amount by adding the losses in loss plus any prior year unallowed A current year collectibles loss (a
columns (b) and (c) of Worksheets 1 loss from the activity that is reported 28% rate loss) of $230 and net
and 2. on the same form or, in the case of income of $1,100 from Schedule E
Column (b). For each activity Schedule D and Form 4797, the (Form 1040).
entered in Worksheet 5, enter the same part.
Worksheet 2
amount from column (c) of Worksheet If you have a Schedule D 28% rate
loss and a Schedule D non-28%-rate Activity I has an overall loss of
4 for the activity. These are your $4,000 (current year long-term capital
unallowed losses for 2000. Keep a loss, see the example on this page
before completing Worksheet 6. loss of $3,000 and a prior year
record of these amounts so the unallowed long-term capital loss of
losses can be used to figure your PAL Line 1b, column (a). Enter any net $1,000). Activity II has an overall gain
next year. income from the activity that is of $870 (current year net income of
Column (c). Subtract column (b) reported on the same form or $1,100 less a current year long-term
from column (a). These are your schedule as the loss on line 1a, capital loss of $230). Line 11 of Form
allowed losses for 2000. Report the column (a). 8582 shows an allowed loss of
amounts in this column on the forms Example. You enter a prior year $1,100.
and schedules normally used. unallowed loss from Form 4797, Part
Worksheet 4
See the forms and schedules listed I, on line 1a. If the activity has a
current year Form 4797, Part I, gain, Activity I has an unallowed loss of
under How To Report Allowed $3,130 (line 3 of Form 8582 ($3,130)
Losses on page 11. Also, see Pub. enter the gain on line 1b, column (a).
If the activity does not have a Form less line 9 of Form 8582 (-0-) x
925 for an extensive example of how 100%). All of the $230 loss is allowed
to report passive income and losses 4797, Part I, gain, enter zero on line
1b, column (a). for Activity II.
on the forms and schedules.
Line 1c, column (b). Subtract line Worksheet 6
Worksheet 6 1b, column (a), from line 1a, column Worksheet 6 is used to figure the
Use Worksheet 6 for any activity (a), and enter the result in column (b). portion of the unallowed loss
listed in Worksheet 4 that has losses If line 1b, column (a), is more than attributable to the 28% rate loss and
that are reported on two or more line 1a, column (a), enter zero in the portion attributable to the
different forms and schedules or column (b). non-28%-rate loss.
different parts of the same form or Column (c). Divide each of the The loss attributable to the 28%
schedule (for example, 28%-rate and losses entered in column (b) by the rate loss ($1,000) and the loss
non-28%-rate capital losses reported total of column (b) and enter the ratio attributable to the non-28%-rate loss
in Part II of Schedule D). Worksheet in this column. The total of this ($3,000) are separate entries in
6 allocates the loss allowed and column must be 1.00. Worksheet 6 (that is, losses entered
unallowed for the activity and Column (d). Multiply the unallowed as if they were reported on different
allocates the allowed loss to the loss for this activity, found in forms or schedules). The ratio of
different forms or schedules used to Worksheet 4, column (c), by each each loss to the total of the two
report the losses. ratio in column (c) of Worksheet 6. If losses is figured as follows.
Only losses that would cause a zero is entered in column (b) of $1,000/$4,000 = .25. $3,000/$4,000
difference in tax liability if they were Worksheet 6, also enter zero for that = .75. Each of these ratios is
reported on a different form or form or schedule in column (d). multiplied by the unallowed loss for
schedule or different parts of the Activity I, shown in column (c) of
The amount in column (d) is the
same form or schedule are kept Worksheet 4 ($3,130).
unallowed loss for 2000. Keep a
separate. Those forms, schedules, record of this worksheet so you can Unallowed losses for Activity I:
and parts are: use the losses to figure your PAL next ● 28% rate loss: .25 x $3,130 =

● Schedules C, D (Parts I and II (28% year. $782.50.

rate losses and non-28%-rate Column (e). Subtract the amount in ● Non-28%-rate loss: .75 x $3,130 =

losses)), E, and F. column (d) from the loss entered on $2,347.50.

Note: You must make a separate line 1a, column (a). This is the Allowed losses for Activity I:
entry in Schedule D, Part I or Part II, allowed loss for 2000 to enter on the ● 28% rate loss: $1,000 – $782.50 =
for each transaction reported. See the forms or schedules. The forms and $217.50.
instructions for Schedule D (Form schedules you use must show the ● Non-28%-rate loss: $3,000 –
1040). losses from this column and the $2,347.50 = $652.50.
● Forms 4684 (Section B), 4797 income, if any, for that activity from
(Parts I and II), and 4835. column (a) of Worksheet 1 or 2.

Page 10
The total loss allowed for Activity I the left of the entry space enter allowed loss from the worksheet. To
($870) is entered in column (f), Part “PAL.” the left of the entry space, enter
II, Schedule D (Form 1040), and the If the net profit or loss line on your “PAL.”
28% rate loss ($217.50) is entered in form or schedule shows net profit for Schedule D and Form 4797. If you
column (g). Keep a record of the the year, reduce the net profit by the sold assets from a passive activity or
unallowed 28%-rate and allowed loss from Worksheet 5 or 6, you sold an interest in your passive
non-28%-rate losses to figure the and enter the result on the net profit activity, all gains from the activity
PAL for these transactions next year. or loss line. must be entered on the appropriate
See the forms and schedules listed Example. Schedule C shows net line of Schedule D or Form 4797.
under How To Report Allowed profit for the year of $5,000 from a Identify the gain as “From passive
Losses below. Also, see Pub. 925 for passive activity. The activity also has activity.” Enter any allowed losses for
an extensive example of how to a Form 4797 gain of $2,500 and a Schedule D or Form 4797 on the
report passive income and losses on prior year unallowed Schedule C loss appropriate line, and to the left of the
the forms and schedules. of $6,000. The loss allowed for 2000 entry space, enter “PAL.”
is $6,000. You enter a net loss of Entire disposition with an overall
How To Report Allowed $1,000 on line 31 of Schedule C (the loss. If you made an entire
Losses $5,000 net profit for the year less the disposition of your interest in a
$6,000 loss allowed for the year). To passive activity and that activity had
Line 3 is income. If line 3 of Form the left of the entry space, you enter an overall loss, none of the gains, if
8582 shows net income or zero, all “PAL.” any, or losses were entered on Form
the losses in columns (b) and (c) of See Schedule D and Form 4797 8582 or the worksheets. However, all
Worksheets 1 and 2 are allowed in instructions on this page if you also the gains and losses must be
full. Report the income and losses in had passive gains and losses from reported on the forms or schedules
columns (a), (b), and (c) of the sale of assets or of an interest in normally used. To the left of each
Worksheets 1 and 2 on the forms and a passive activity. entry space, enter “Entire disposition
schedules normally used. of passive activity.”
Schedule E, Part I. Enter the
Line 11 is the same as the total of allowed loss from the worksheet on Entire disposition with an overall
lines 1b, 1c, 2b, and 2c. In this case line 23 of Schedule E. An activity that gain. Gains and losses from this
also, all the losses in columns (b) and has net profit for the year and prior activity were included on Form 8582
(c) of Worksheets 1 and 2 are allowed year unallowed losses will have net so that the gains might offset other
in full. Report the income and losses profit on line 22 and the allowed loss PALs. Report all the gains and losses
in columns (a), (b), and (c) of on line 23. The allowed loss on line on the forms and schedules normally
Worksheets 1 and 2 on the forms and 23 will include the loss allowed to the used, and to the left of each entry
schedules normally used. extent of the net profit. Line 24 of space, enter “Entire disposition of
Columns (a) and (c) of Worksheet Schedule E will show total net profit passive activity.”
3 are the same amount. In this and line 25 will show total losses
case, all the losses in columns (b) allowed (both passive and Publicly Traded
and (c) of Worksheet 1 are allowed in nonpassive). Line 26 will show the
full. Report the income and losses in Partnerships (PTPs)
total net profit or loss.
columns (a), (b), and (c) of Worksheet Schedule E, Parts II and III. Any net A PTP is a partnership whose
1 on the forms and schedules income shown on your Schedule K-1 interests are traded on an established
normally used. that is passive income must be securities market or are readily
Losses allowed in column (c) of entered as passive income in the tradable on a secondary market (or its
Worksheet 5. The amounts in appropriate column of Schedule E, substantial equivalent).
column (c) of Worksheet 5 are the Part II or III. Enter the passive loss An established securities market
losses allowed for 2000 for the allowed from Worksheet 5 or 6 in the includes any national securities
activities listed in that worksheet. appropriate column for passive exchange and any local exchange
Report the loss allowed from column losses. The passive losses allowed registered under the Securities
(c) of Worksheet 5 and the income, if include the loss allowed to the extent Exchange Act of 1934 or exempted
any, for that activity, from column (a) of any net income from the activity. from registration because of the
of Worksheet 1 or 2, on the form or See Schedule D and Form 4797 limited volume of transactions. It also
schedule normally used. instructions on this page if you also includes any over-the-counter market.
Losses allowed in column (e) of had passive gains or losses from the A secondary market generally
Worksheet 6. The amounts in sale of assets or of an interest in a exists if a person stands ready to
column (e) of Worksheet 6 are the passive activity. make a market in the interest. An
losses allowed for 2000 for the Form 4684, Section B. Any passive interest is treated as readily tradable
activity listed in that worksheet. activity gain from Form 4684 is if the interest is regularly quoted by
Report the losses allowed from unchanged. It was used on Form persons, such as brokers or dealers,
column (e) of Worksheet 6 and the 8582 to determine allowable PALs. If who are making a market in the
income, if any, for that activity, from you do not have passive losses on interest.
column (a) of Worksheet 1 or 2, on Form 4684, complete Form 4684 and The substantial equivalent of a
the forms or schedules normally follow the instructions for that form for secondary market exists if there is no
used. where to report the gain. identifiable market maker, but holders
Schedules C and F, and Form 4835. If you have passive losses on Form of interests have a readily available,
Enter on the net profit or loss line of 4684, cross through the amount you regular, and ongoing opportunity to
your schedule or form the allowed first entered on line 31, 32, 38a, 38b, sell or exchange interests through a
passive loss from the worksheet. To or 39 of that form, and enter the public means of obtaining or providing

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information on offers to buy, sell, or nonpassive income in column (k). In applicable). The losses in column (c)
exchange interests. Similarly, the column (h), you report the remaining of Worksheet 5 (column (e) of
substantial equivalent of a secondary Schedule E gain of $3,500 ($8,000 – Worksheet 6) are the allowed losses
market exists if prospective buyers $4,500). On the appropriate line of to report on your forms or schedules.
and sellers have the opportunity to Form 4797, you report the prior year Report these losses and any income
buy, sell, or exchange interests in a unallowed loss of $3,500. You enter from the PTP on the forms and
timeframe and with the regularity and “From PTP” to the left of each entry schedules normally used.
continuity that the existence of a space. 4. If you have an overall loss and
market maker would provide. 3. If you have an overall loss (but you disposed of your entire interest in
did not dispose of your entire interest the PTP to an unrelated person in a
Special Instructions for PTPs in the PTP to an unrelated person in fully taxable transaction during the
Section 469(k) provides that the a fully taxable transaction during the year, your losses (including prior year
passive activity limitations must be year), the losses are allowed only to unallowed losses) allocable to the
applied separately to items from each the extent of the income, and the activity for the year are not limited by
PTP. PALs from a PTP generally may excess loss is carried forward to use the passive loss rules. A fully taxable
be used only to offset income or gain in a future year if you have income to transaction is one in which you
from passive activities of the same offset it. Report as a passive loss on recognize all your realized gain or
PTP. the schedule or form you normally loss. Report the income and losses
Passive activity loss rules for use the portion of the loss equal to on the forms and schedules normally
partners in PTPs. Do not report the income. Report the income as used.
passive income, gains, or losses from passive income on the form or Note: For rules on the disposition of
a PTP on Form 8582. Instead, use schedule you normally use. an entire interest reported using the
the following rules to figure and report Example. You have a Schedule E installment method, see Disposition
your income, gains, and losses from loss of $12,000 (current year losses of an Entire Interest on page 7.
passive activities you held through plus prior year unallowed losses) and
each PTP you owned during the tax Form 4797 gain of $7,200 from the
year: passive activities of a PTP. You Paperwork Reduction Act Notice.
1. Combine any current year report the $7,200 gain on the We ask for the information on this
income, gains and losses, and any appropriate line of Form 4797. On form to carry out the Internal Revenue
prior year unallowed losses to see if Schedule E, Part II, you report $7,200 laws of the United States. You are
you have an overall loss from the of the losses as a passive loss in required to give us the information.
PTP. Include only the same types of column (g). You carry forward to 2001 We need it to ensure that you are
income and losses you would include the unallowed loss of $4,800 complying with these laws and to
to figure your net income or loss from ($12,000 – $7,200). allow us to figure and collect the right
a non-PTP passive activity. See If you have unallowed losses from amount of tax.
Passive Activity Income and more than one activity of the PTP or You are not required to provide the
Deductions on page 6. from the same activity of the PTP that information requested on a form that
2. If you have an overall gain, the must be reported on different forms is subject to the Paperwork Reduction
net gain portion (total gain minus total or schedules, allocate the unallowed Act unless the form displays a valid
losses) is nonpassive income. losses on a pro rata basis to figure OMB control number. Books or
It is important to figure the the amount allowed for each activity records relating to a form or its
nonpassive income because it must or on each form or schedule. instructions must be retained as long
be included in modified adjusted as their contents may become
To allocate and keep a record material in the administration of any
gross income to figure the special
allowance for active participation in a TIP of the unallowed losses, use Internal Revenue law. Generally, tax
Worksheets 4, 5, and 6 of returns and return information are
non-PTP rental real estate activity on
Form 8582. confidential, as required by section
Form 8582. Also, you may be able to
include the nonpassive income in List each activity of the PTP in 6103.
investment income when figuring your Worksheet 4. Enter the overall loss The time needed to complete and
investment interest expense from each activity in column (a). file this form will vary depending on
deduction. See Form 4952, Complete column (b) of Worksheet 4 individual circumstances. The
Investment Interest Expense according to its instructions. Multiply estimated average time is:
Deduction. the total unallowed loss from the PTP
by each ratio in column (b) and enter Recordkeeping .................. 1 hr., 5 min.
Report all gains and allowed losses
the result in column (c) of Worksheet Learning about the law
from the activity on the forms or or the form ........................ 1 hr., 43 min.
schedules normally used, and to the
left of each entry space, enter “From Next, complete Worksheet 5 for Preparing the form ........... 1 hr., 31 min.
PTP.” each activity listed in Worksheet 4 if Copying, assembling,
all the loss from that activity is and sending the form to
Example. You have Schedule E reported on one form or schedule. the IRS ............................... 20 min.
income of $8,000 and a Form 4797 Use Worksheet 6 instead of
prior year unallowed loss of $3,500 Worksheet 5 for each activity with If you have comments concerning
from the passive activities of a PTP. losses reported on two or more the accuracy of these time estimates
You have a $4,500 overall gain different forms or schedules. Enter or suggestions for making this form
($8,000 – $3,500) that is nonpassive the net loss plus any prior year simpler, we would be happy to hear
income. On Schedule E, Part II, you unallowed losses in column (a) of from you. See the instructions for the
report the $4,500 net gain as Worksheet 5 (or Worksheet 6 if tax return with which this form is filed.

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