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8582 or Form 8582-CR (or Form 8810), to

3. If you have an overall loss (but did

you may be able to deduct up to $25,000

see if your deductions, losses, and credits

not dispose of your entire interest in the

of the loss from the activity from

are limited under the passive activity

PTP to an unrelated person in a fully

nonpassive income. This “special

rules.

taxable transaction during the year), the

allowance” is an exception to the general

losses are allowed to the extent of the

rule disallowing losses in excess of

Publicly traded partnerships. The

income, and the excess loss is carried

income from passive activities. The

passive activity limitations are applied

forward to use in a future year when you

special allowance is not available if you

separately for items (other than the

have income to offset it. Report as a

were married, file a separate return for

low-income housing credit and the

passive loss on the schedule or form you

the year, and did not live apart from your

rehabilitation credit) from each publicly

normally use the portion of the loss equal

spouse at all times during the year.

traded partnership (PTP). Thus, a net

to the income. Report the income as

Only individuals and qualifying estates

passive loss from a PTP may not be

passive income on the form or schedule

can actively participate in a rental real

deducted from other passive income.

you normally use.

estate activity. Estates (other than

Instead, a passive loss from a PTP is

Example. You have a Schedule E loss

qualifying estates), trusts, and

suspended and carried forward to be

of $12,000 (current year losses plus prior

corporations cannot actively participate.

applied against passive income from the

year unallowed losses) and a Form 4797

Limited partners cannot actively

same PTP in later years. If the partner’s

gain of $7,200. Report the $7,200 gain on

participate unless future regulations

entire interest in the PTP is completely

the appropriate line of Form 4797. On

provide an exception.

disposed of, any unused losses are

Schedule E, Part II, report $7,200 of the

You are not considered to actively

allowed in full in the year of disposition.

losses as a passive loss in column (g).

participate in a rental real estate activity if

If you have an overall gain from a PTP,

Carry forward to 2001 the unallowed loss

at any time during the tax year your

of $4,800 ($12,000 − $7,200).

the net gain is nonpassive income. In

interest (including your spouse’s interest)

addition, the nonpassive income is

If you have unallowed losses from

in the activity was less than 10% (by

included in investment income to figure

more than one activity of the PTP or from

value) of all interests in the activity.

your investment interest expense

the same activity of the PTP that must be

Active participation is a less stringent

deduction.

reported on different forms, you must

requirement than material participation.

allocate the unallowed losses on a pro

Do not report passive income, gains,

You may be treated as actively

rata basis to figure the amount allowed

or losses from a PTP on Form 8582.

participating if you participated, for

from each activity or on each form.

Instead, use the following rules to figure

example, in making management

and report on the proper form or schedule

Tax tip. To allocate and keep a record

decisions or arranging for others to

your income, gains, and losses from

of the unallowed losses, use Worksheets

provide services (such as repairs) in a

passive activities that you held through

4, 5, and 6 of Form 8582. List each

significant and bona fide sense.

each PTP you owned during the tax year:

activity of the PTP in Worksheet 4. Enter

Management decisions that can count as

the overall loss from each activity in

1. Combine any current year income,

active participation include approving new

column (a). Complete column (b) of

gains and losses, and any prior year

tenants, deciding rental terms, approving

Worksheet 4 according to its instructions.

unallowed losses to see if you have an

capital or repair expenditures, and other

Multiply the total unallowed loss from the

overall gain or loss from the PTP. Include

similar decisions.

PTP by each ratio in column (b) and enter

only the same types of income and losses

An estate is a qualifying estate if the

the result in column (c) of Worksheet 4.

you would include in your net income or

decedent would have satisfied the active

Then complete Worksheet 5 if all the loss

loss from a non-PTP passive activity. See

participation requirement for the activity

from the same activity is to be reported on

Pub. 925, Passive Activity and At-Risk

for the tax year the decedent died. A

one form or schedule. Use Worksheet 6

Rules, for more details.

qualifying estate is treated as actively

instead of Worksheet 5 if you have more

2. If you have an overall gain, the net

participating for tax years ending less

than one loss to be reported on different

gain portion (total gain minus total losses)

than 2 years after the date of the

forms or schedules for the same activity.

is nonpassive income. On the form or

decedent’s death.

Enter the net loss plus any prior year

schedule you normally use, report the net

unallowed losses in column (a) of

The maximum special allowance that

gain portion as nonpassive income and

Worksheet 5 (or Worksheet 6 if

single individuals and married individuals

the remaining income and the total losses

applicable). The losses in column (c) of

filing a joint return can qualify for is

as passive income and loss. To the left of

Worksheet 5 (column (e) of Worksheet 6)

$25,000. The maximum is $12,500 for

the entry space, write “From PTP.” It is

are the allowed losses to report on the

married individuals who file separate

important to identify the nonpassive

forms or schedules. Report both these

returns and who lived apart all times

income because the nonpassive portion is

losses and any income from the PTP on

during the year. The maximum special

included in modified adjusted gross

the forms and schedules you normally

allowance for which an estate can qualify

income for purposes of figuring on Form

use.

is $25,000 reduced by the special

8582 the “special allowance” for active

4. If you have an overall loss and you

allowance for which the surviving spouse

participation in a non-PTP rental real

disposed of your entire interest in the PTP

qualifies.

estate activity. In addition, the nonpassive

to an unrelated person in a fully taxable

income is included in investment income

If your modified adjusted gross income

transaction during the year, your losses

when figuring your investment interest

(defined below) is $100,000 or less

(including prior year unallowed losses)

expense deduction on Form 4952.

($50,000 or less if married filing

allocable to the activity for the year are

Example. If you have Schedule E

separately), your loss is deductible up to

not limited by the passive loss rules. A

income of $8,000, and a Form 4797 prior

the amount of the maximum special

fully taxable transaction is one in which

year unallowed loss of $3,500 from the

allowance referred to in the preceding

you recognize all your realized gain or

passive activities of a particular PTP, you

paragraph. If your modified adjusted

loss. Report the income and losses on the

have a $4,500 overall gain ($8,000 −

gross income is more than $100,000

forms and schedules you normally use.

$3,500). On Schedule E, Part II, report

(more than $50,000 if married filing

the $4,500 net gain as nonpassive

separately), the special allowance is

Note: For rules on the disposition of an

income in column (k). In column (h),

limited to 50% of the difference between

entire interest reported using the

report the remaining Schedule E gain of

$150,000 ($75,000 if married filing

$3,500 ($8,000 − $4,500). On the

installment method, see the Instructions

separately) and your modified adjusted

for Form 8582.

appropriate line of Form 4797, report the

gross income. When modified adjusted

prior year unallowed loss of $3,500. Be

Active participation in a rental real

gross income is $150,000 or more

sure to write “From PTP” to the left of

estate activity. If you actively

($75,000 or more if married filing

each entry space.

participated in a rental real estate activity,

separately), there is no special allowance.

-4-

Partner’s Instructions for Schedule K-1 (Form 1065)

Partner'S Instructions For Schedule K-1 (Form 1065) - Partner'S Share Of Income, Credits, Deductions, Etc. (For Partner'S Use Only) - 2001 Page 4

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