Instructions For Form 8582 Passive Activity Loss Limitations

See the forms and schedules listed

and enter the result on the net profit or

gain as “FPA.” Enter any allowed

under How To Report Allowed Losses

loss line.

losses for Schedule D or Form 4797 on

beginning below. Also, see Pub. 925 for

the appropriate line, and to the left of

Example. Schedule C shows net

an extensive example of how to report

the entry space, enter “PAL.”

profit for the year of $5,000 from a

passive income and losses on the

passive activity. The activity also has a

Entire disposition with an overall

forms and schedules.

Form 4797 gain of $2,500 and a prior

loss. If you made an entire disposition

year unallowed Schedule C loss of

of your interest in a passive activity and

How To Report

$6,000. The loss allowed for 2006 is

that activity had an overall loss, none of

$6,000. You enter a net loss of $1,000

the gains, if any, or losses were

Allowed Losses

on line 31 of Schedule C (the $5,000

entered on Form 8582 or the

net profit for the year less the $6,000

Line 4 is income. If line 4 of Form

worksheets. However, all the gains and

loss allowed for the year). To the left of

8582 shows net income or zero, all the

losses must be reported on the forms

the entry space, you enter “PAL.”

losses in columns (b) and (c) of

or schedules normally used. To the left

Worksheets 1 and 3 and all the

of the entry space, enter “EDPA.”

See Schedule D and Form 4797

deductions in columns (a) and (b) of

instructions on this page if you also had

Entire disposition with an overall

Worksheet 2 are allowed in full. Report

passive gains and losses from the sale

gain. Gains and losses from this

the income and losses in columns (a),

of assets or of an interest in a passive

activity were included on Form 8582 so

(b), and (c) of Worksheets 1 and 3 and

activity.

that the gains might offset other PALs.

deductions in columns (a) and (b) of

Report all the gains and losses on the

Schedule E, Part I. Enter the allowed

Worksheet 2 on the forms and

forms and schedules normally used,

loss from the worksheet on line 23 of

schedules normally used.

and to the left of the entry space, enter

Schedule E. An activity that has net

Line 16 is the same as the total of

“EDPA.”

profit for the year and prior year

lines 1b, 1c, 2a, 2b, 3b, and 3c. In

unallowed losses will have net profit on

Publicly Traded

this case also, all the losses in columns

line 22 and the allowed loss on line 23.

(b) and (c) of Worksheets 1 and 3 and

The allowed loss on line 23 will include

Partnerships (PTPs)

all the deductions in columns (a) and

the loss allowed to the extent of the net

(b) of Worksheet 2 are allowed in full.

profit. Line 24 of Schedule E will show

A PTP is a partnership whose interests

Report the income and losses in

total net profit and line 25 will show

are traded on an established securities

columns (a), (b), and (c) of Worksheets

total losses allowed (both passive and

market or are readily tradable on a

1 and 3 and deductions in columns (a)

nonpassive). Line 26 will show the total

secondary market (or its substantial

and (b) of Worksheet 2 on the forms

net profit or loss.

equivalent).

and schedules normally used.

Schedule E, Parts II and III. Any net

An established securities market

Columns (a) and (c) of Worksheet 4

income shown on your Schedule K-1

includes any national securities

are the same amount. In this case, all

that is passive income must be entered

exchange and any local exchange

the losses in columns (b) and (c) of

as passive income in the appropriate

registered under the Securities

Worksheet 1 and all the deductions in

column of Schedule E, Part II or III.

Exchange Act of 1934 or exempted

columns (a) and (b) of Worksheet 2 are

Enter the passive loss allowed from

from registration because of the limited

allowed in full. Report the income and

Worksheet 6 or 7 in the appropriate

volume of transactions. It also includes

losses in columns (a), (b), and (c) of

column for passive losses. The passive

any over-the-counter market.

Worksheet 1 and the deductions in

losses allowed include the loss allowed

A secondary market generally exists

columns (a) and (b) of Worksheet 2 on

to the extent of any net income from the

if a person stands ready to make a

the forms and schedules normally used.

activity. Passive net income or loss

market in the interest. An interest is

reportable on Schedule E, Part II,

Losses allowed in column (c) of

treated as readily tradable if the interest

includes any self-charged interest

Worksheet 6. The amounts in column

is regularly quoted by persons, such as

income and deductions treated as

brokers or dealers, who are making a

passive activity income and deductions.

deductions allowed for 2006 for the

market in the interest.

activities listed in that worksheet.

See Schedule D and Form 4797

The substantial equivalent of a

Report the loss allowed from column (c)

instructions on this page if you also had

secondary market exists if there is no

of Worksheet 6 and the income, if any,

passive gains or losses from the sale of

identifiable market maker, but holders

for that activity from column (a) of

assets or of an interest in a passive

of interests have a readily available,

Worksheet 1 or 3, on the form or

activity.

regular, and ongoing opportunity to sell

schedule normally used.

Form 4684, Section B. Any passive

or exchange interests through a public

Losses allowed in column (e) of

activity gain from Form 4684 is

means of obtaining or providing

Worksheet 7. The amounts in column

unchanged. It was used on Form 8582

information on offers to buy, sell, or

(e) of Worksheet 7 are the losses or

to determine allowable PALs. If you do

exchange interests. Similarly, the

deductions allowed for 2006 for the

not have passive losses on Form 4684,

substantial equivalent of a secondary

activity listed on that worksheet. Report

complete Form 4684 and follow the

market exists if prospective buyers and

the losses allowed from column (e) of

instructions for that form for where to

sellers have the opportunity to buy, sell,

Worksheet 7 and the income, if any, for

report the gain.

or exchange interests in a timeframe

that activity from column (a) of

If you have passive losses on Form

and with the regularity and continuity

Worksheet 1 or 3, on the forms or

4684, cross through the amount you

that the existence of a market maker

schedules normally used.

first entered on line 34, 35, 41a, 41b, or

would provide.

Schedules C and F, and Form 4835.

42 of that form, and enter the allowed

Special Instructions for PTPs

Enter on the net profit or loss line of

loss from the worksheet. To the left of

your schedule or form the allowed

the entry space, enter “PAL.”

Section 469(k) provides that the

passive loss from the worksheet. To the

Schedule D and Form 4797. If you

passive activity limitations must be

left of the entry space enter “PAL.”

sold assets from a passive activity or

applied separately to items from each

If the net profit or loss line on your

you sold an interest in your passive

PTP. PALs from a PTP generally may

form or schedule shows net profit for

activity, all gains from the activity must

be used only to offset income or gain

the year, reduce the net profit by the

be entered on the appropriate line of

from passive activities of the same

allowed loss from Worksheet 6 or 7,

Schedule D or Form 4797. Identify the

PTP. The special allowance (including

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Instructions For Form 8582 Passive Activity Loss Limitations - 2006 Page 11

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