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b. Preparing or compiling summaries or

nonpassive income. On the form or

Report both these losses and any income

analyses of the finances or operations of the

schedule you normally use, report the net

from the PTP on the forms and schedules

activity for your own use.

gain portion as nonpassive income and the

you normally use.

c. Monitoring the finances or operations

remaining income and the total losses as

4. If you have an overall loss and you

of the activity in a nonmanagerial capacity.

passive income and loss. To the left of the

disposed of your entire interest in the PTP to

entry space, write “From PTP.” It is

an unrelated person in a fully taxable

Effect of determination. Income (loss),

important to identify the nonpassive income

transaction during the year, your losses

deductions, and credits from an activity are

because the nonpassive portion is included

(including prior year unallowed losses)

nonpassive if you determine that:

in modified adjusted gross income for

allocable to the activity for the year are not

•

You materially participated in a trade or

purposes of figuring on Form 8582 the

limited by the passive loss rules. A fully

business activity of the partnership or

“special allowance” for active participation in

taxable transaction is one in which you

•

You were a real estate professional

a non-PTP rental real estate activity. In

recognize all your realized gain or loss.

(defined on page 3) in a rental real estate

addition, the nonpassive income is included

Report the income and losses on the forms

activity of the partnership.

in investment income when figuring your

and schedules you normally use.

investment interest expense deduction on

If you determine that you did not

Note. For rules on the disposition of an

Form 4952.

materially participate in a trade or business

entire interest reported using the installment

activity of the partnership or if you have

Example. If you have Schedule E income

method, see the Instructions for Form 8582.

income (loss), deductions, or credits from a

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

rental activity of the partnership (other than

Special allowance for a rental real estate

unallowed loss of $3,500 from the passive

a rental real estate activity in which you

activity. If you actively participated in a

activities of a particular PTP, you have a

$4,500 overall gain ($8,000 − $3,500). On

materially participated as a real estate

rental real estate activity, you may be able

professional), the amounts from that activity

to deduct up to $25,000 of the loss from the

Schedule E, line 28, report the $4,500 net

are passive. Report passive income

activity from nonpassive income. This

gain as nonpassive income in column (j). In

(losses), deductions, and credits as follows:

“special allowance” is an exception to the

column (g), report the remaining Schedule E

gain of $3,500 ($8,000 − $4,500). On the

general rule disallowing losses in excess of

1. If you have an overall gain (the

income from passive activities. The special

appropriate line of Form 4797, report the

excess of income over deductions and

allowance is not available if you were

prior year unallowed loss of $3,500. Be sure

losses, including any prior year unallowed

married, file a separate return for the year,

to write “From PTP” to the left of each entry

loss) from a passive activity, report the

and did not live apart from your spouse at all

space.

income, deductions, and losses from the

times during the year.

3. If you have an overall loss (but did not

activity as indicated in these instructions.

dispose of your entire interest in the PTP to

2. If you have an overall loss (the

Only individuals and qualifying estates

an unrelated person in a fully taxable

excess of deductions and losses, including

can actively participate in a rental real estate

any prior year unallowed loss, over income)

transaction during the year), the losses are

activity. Estates (other than qualifying

or credits from a passive activity, report the

allowed to the extent of the income, and the

estates), trusts, and corporations cannot

income, deductions, losses, and credits from

excess loss is carried forward to use in a

actively participate. Limited partners cannot

future year when you have income to offset

all passive activities using the Instructions

actively participate unless future regulations

it. Report as a passive loss on the schedule

for Form 8582 or Form 8582-CR (or Form

provide an exception.

8810), to see if your deductions, losses, and

or form you normally use the portion of the

You are not considered to actively

credits are limited under the passive activity

loss equal to the income. Report the income

participate in a rental real estate activity if at

rules.

as passive income on the form or schedule

any time during the tax year your interest

you normally use.

(including your spouse’s interest) in the

Publicly traded partnerships. The passive

Example. You have a Schedule E loss of

activity was less than 10% (by value) of all

activity limitations are applied separately for

$12,000 (current year losses plus prior year

interests in the activity.

items (other than the low-income housing

unallowed losses) and a Form 4797 gain of

credit and the rehabilitation credit) from

Active participation is a less stringent

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

each publicly traded partnership (PTP).

requirement than material participation. You

appropriate line of Form 4797. On Schedule

Thus, a net passive loss from a PTP may

may be treated as actively participating if

E, line 28, report $7,200 of the losses as a

not be deducted from other passive income.

you participated, for example, in making

passive loss in column (f). Carry forward to

Instead, a passive loss from a PTP is

management decisions or arranging for

2006 the unallowed loss of $4,800 ($12,000

suspended and carried forward to be

others to provide services (such as repairs)

− $7,200).

applied against passive income from the

in a significant and bona fide sense.

If you have unallowed losses from more

same PTP in later years. If the partner’s

Management decisions that can count as

than one activity of the PTP or from the

entire interest in the PTP is completely

active participation include approving new

same activity of the PTP that must be

disposed of, any unused losses are allowed

tenants, deciding rental terms, approving

reported on different forms, you must

in full in the year of disposition.

capital or repair expenditures, and other

allocate the unallowed losses on a pro rata

similar decisions.

If you have an overall gain from a PTP,

basis to figure the amount allowed from

the net gain is nonpassive income. In

An estate is a qualifying estate if the

each activity or on each form.

addition, the nonpassive income is included

decedent would have satisfied the active

Tax tip. To allocate and keep a record of

in investment income to figure your

participation requirement for the activity for

the unallowed losses, use Worksheets 5, 6,

the tax year the decedent died. A qualifying

investment interest expense deduction.

and 7 of Form 8582. List each activity of the

estate is treated as actively participating for

Do not report passive income, gains, or

PTP in Worksheet 5. Enter the overall loss

tax years ending less than 2 years after the

losses from a PTP on Form 8582. Instead,

from each activity in column (a). Complete

date of the decedent’s death.

use the following rules to figure and report

column (b) of Worksheet 5 according to its

Modified adjusted gross income

on the proper form or schedule your income,

instructions. Multiply the total unallowed loss

limitation. The maximum special allowance

gains, and losses from passive activities that

from the PTP by each ratio in column (b)

that single individuals and married

you held through each PTP you owned

and enter the result in column (c) of

individuals filing a joint return can qualify for

during the tax year.

Worksheet 5. Then, complete Worksheet 6 if

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

1. Combine any current year income,

all the loss from the same activity is to be

married individuals who file separate returns

gains and losses, and any prior year

reported on one form or schedule. Use

and who lived apart all times during the

unallowed losses to see if you have an

Worksheet 7 instead of Worksheet 6 if you

year. The maximum special allowance for

overall gain or loss from the PTP. Include

have more than one loss to be reported on

which an estate can qualify is $25,000

only the same types of income and losses

different forms or schedules for the same

reduced by the special allowance for which

you would include in your net income or loss

activity. Enter the net loss plus any prior

the surviving spouse qualifies.

from a non-PTP passive activity. See Pub.

year unallowed losses in column (a) of

925, Passive Activity and At-Risk Rules, for

Worksheet 6 (or Worksheet 7 if applicable).

If your modified adjusted gross income

more details.

The losses in column (c) of Worksheet 6

(defined below) is $100,000 or less ($50,000

2. If you have an overall gain, the net

(column (e) of Worksheet 7) are the allowed

or less if married filing separately), your loss

gain portion (total gain minus total losses) is

losses to report on the forms or schedules.

is deductible up to the amount of the

-4-

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

Partner'S Instructions For Schedule K-1 (Form 1065) - Partner'S Share Of Income, Deductions, Credits, Etc. (For Partner'S Use Only) - 2005 Page 4

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