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activity over the “net income” from the

details on how to make or revoke this

Exceptions

activity or the prior year unallowed losses

election.

An activity is not a rental activity if:

from the activity plus the “net loss” from

A real property trade or business is

1. The average period of customer

the activity.

any real property development,

use (see 1b below) of the rental property

redevelopment, construction,

is:

Prior year unallowed losses means the

reconstruction, acquisition, conversion,

deductions and losses from an activity

a. 7 days or less or

rental, operation, management, leasing,

that were disallowed under the passive

b. 30 days or less and significant

or brokerage trade or business.

activity loss (PAL) limitations in a prior

personal services (see below) were

year and carried forward to the tax year

Note: If an activity qualifies for the

provided in making the rental property

under section 469(b). See Regulations

exception described above in 2001, but

available for customer use.

section 1.469-1(f)(4).

has a prior year unallowed passive loss,

Figure the average period of customer

the prior year unallowed loss is treated as

use for a class of property by dividing the

Coordination With Other

a loss from a former passive activity. See

total number of days in all rental periods

Former Passive Activities on page 5.

Limitations

by the number of rentals during the tax

3. A working interest in an oil or gas

year. If the activity involves renting more

Generally, PALs are subject to other

well. The working interest in an oil or gas

than one class of property, multiply the

limitations (for example, basis, section

well must be held directly or through an

average period of customer use of each

163(j) interest deduction limitations, and

entity that does not limit the corporation’s

class by the ratio of the gross rental

at-risk limitations) before they are subject

liability (such as a general partner interest

income from that class to the activity’s

to the passive loss limitations. Once a

in a partnership). In this case, it does not

total gross rental income. The activity’s

loss becomes allowable under these

matter whether the corporation materially

average period of customer use equals

other limitations, the corporation must

participated in the activity for the tax year.

the sum of these class-by-class average

determine whether the loss is limited

If, however, the corporation’s liability

periods weighted by gross income. See

under the passive loss rules. See Form

was limited for part of the year (for

Regulations section 1.469-1(e)(3)(iii).

6198, At-Risk Limitations, for details on

example, the corporation converted its

Significant personal services include

the at-risk rules. Also, capital losses that

general partner interest to a limited

only services performed by individuals. To

are allowable under the passive loss rules

partner interest during the year), some of

determine if personal services are

may be limited under the capital loss

the corporation’s income and losses from

significant, all the relevant facts and

limitations of section 1211(a). Percentage

the working interest may be treated as

circumstances are taken into

depletion deductions that are allowable

passive activity gross income and passive

consideration, including the frequency of

under the passive loss rules may also be

activity deductions. See Temporary

the services, the type and amount of labor

limited under section 613A(d).

Regulations section 1.469-1T(e)(4)(ii).

required to perform the services, and the

4. An activity of trading personal

value of the services relative to the

Special Rules for

property for the account of owners of

amount charged for the use of the

interests in the activity. For purposes of

property.

Consolidated Group

this rule, personal property means

Significant personal services do not

The passive activity loss and passive

property that is actively traded, such as

include excluded services. See

activity credit of an affiliated group of

stocks, bonds, and other securities. See

Temporary Regulations section

corporations filing a consolidated return

Temporary Regulations section

1.469-1T(e)(3)(iv)(B).

for the tax year (a consolidated group) are

1.469-1T(e)(6) for more details.

2. Extraordinary personal services

determined by taking into account the

Generally, income, losses, and credits

following items of each member of the

were provided in making the rental

from these activities are not entered on

property available for customer use.

group:

•

Form 8810. However, losses and credits

Passive activity gross income and

Extraordinary personal services are

from these activities may be subject to

deductions;

services provided in making rental

•

limitations other than the passive loss and

Gain or loss on dispositions;

property available for customer use only if

credit rules.

•

Net active income (for a consolidated

they are performed by individuals and the

group treated as a closely held

customers’ use of the property is

corporation); and

incidental to their receipt of the services.

Rental Activities

•

Credits from passive activities.

3. Rental of the property is incidental

A rental activity is a passive activity even

to a nonrental activity.

if the corporation materially participated in

Activities That Are Not

The rental of property is incidental to

the activity unless it meets the

Passive Activities

an activity of holding property for

requirements described in item 2 in

investment if the main purpose of holding

Activities That Are Not Passive

The following are not passive activities:

the property is to realize a gain from its

Activities above. In addition, if the

1. Trade or business activities in

appreciation and the gross rental income

corporation meets any of the five

which the corporation materially

is less than 2% of the smaller of the

exceptions listed below, the rental of the

participated for the tax year.

unadjusted basis or the fair market

property is not treated as a rental activity.

2. Any rental real estate activity in

value (FMV) of the property.

See Reporting Income, Deductions,

which the corporation materially

Losses, and Credits From the

Unadjusted basis is the cost of the

participated if the corporation was a

Activities on page 3 if the corporation

property without regard to depreciation

closely held corporation that derived more

meets any of the exceptions.

deductions or any other basis adjustment

than 50% of its gross receipts from real

described in section 1016.

property trades or businesses in which it

An activity is a rental activity if tangible

The rental of property is incidental to a

materially participated.

property (real or personal) is used by

trade or business activity if:

customers or held for use by customers

For purposes of this rule, each interest

a. The corporation owned an interest

in rental real estate is a separate activity,

and the gross income (or expected gross

in the trade or business activity during the

income) from the activity represents

unless the corporation elects to treat all

tax year;

amounts paid (or to be paid) mainly for

interests in rental real estate as one

activity. The corporation makes the

the use of the property. It does not matter

b. The rental property was mainly

whether the use of the property is under a

election by attaching a statement to its

used in the trade or business activity

original income tax return for the tax year.

lease, a service contract, or some other

during the tax year or during at least 2 of

See Regulations section 1.469-9(g) for

arrangement.

the 5 preceding tax years; and

-2-

Instructions For Form 8810 Corporate Passive Activity Loss And Credit Limitations - Department Of The Treasury Page 2

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