Instructions For Form 8582 Passive Activity Loss Limitations

CRDs) for rental real estate activities

year if you have income to offset it.

your losses (including prior year

does not apply to PALs from a PTP.

Report as a passive loss on the

unallowed losses) allocable to the

schedule or form you normally use the

activity for the year are not limited by

Passive activity loss rules for

portion of the loss equal to the income.

the passive loss rules. A fully taxable

partners in PTPs. Do not report

Report the income as passive income

transaction is one in which you

passive income, gains, or losses from a

on the form or schedule you normally

recognize all your realized gain or loss.

PTP on Form 8582. Instead, use the

use.

Report the income and losses on the

following rules to figure and report your

forms and schedules normally used.

income, gains, and losses from passive

Example. You have a Schedule E

activities you held through each PTP

loss of $12,000 (current year losses

For rules on the disposition of an

you owned during the tax year.

plus prior year unallowed losses) and

entire interest reported using the

Form 4797 gain of $7,200 from the

installment method, see Disposition of

1. Combine any current year

passive activities of a PTP. You report

an Entire Interest on page 6.

income, gains and losses, and any prior

the $7,200 gain on the appropriate line

year unallowed losses to see if you

Paperwork Reduction Act Notice.

of Form 4797. On Schedule E, Part II,

have an overall loss from the PTP.

We ask for the information on this form

you report $7,200 of the losses as a

Include only the same types of income

to carry out the Internal Revenue laws

passive loss in column (f). You carry

and losses you would include to figure

of the United States. You are required

forward the unallowed loss of $4,800

your net income or loss from a

($12,000 − $7,200).

to give us the information. We need it to

non-PTP passive activity. See Passive

ensure that you are complying with

Activity Income and Deductions on

If you have unallowed losses from

these laws and to allow us to figure and

page 5.

more than one activity of the PTP or

collect the right amount of tax.

2. If you have an overall gain, the

from the same activity of the PTP that

You are not required to provide the

net gain portion (total gain minus total

must be reported on different forms or

information requested on a form that is

losses) is nonpassive income.

schedules, allocate the unallowed

subject to the Paperwork Reduction Act

losses on a pro rata basis to figure the

It is important to figure the

unless the form displays a valid OMB

amount allowed for each activity or on

nonpassive income because it must be

control number. Books or records

each form or schedule.

included in modified adjusted gross

relating to a form or its instructions

income to figure the special allowance

must be retained as long as their

To allocate and keep a record of

for active participation in a non-PTP

contents may become material in the

TIP

the unallowed losses, use

rental real estate activity on Form 8582.

administration of any Internal Revenue

Worksheets 5, 6, and 7 of Form

Also, you may be able to include the

law. Generally, tax returns and return

8582.

nonpassive income in investment

information are confidential, as required

income when figuring your investment

List each activity of the PTP in

by section 6103.

interest expense deduction. See Form

Worksheet 5. Enter the overall loss

The time needed to complete and

4952, Investment Interest Expense

from each activity in column (a).

file this form will vary depending on

Deduction.

Complete column (b) of Worksheet 5

individual circumstances. The

according to its instructions. Multiply the

Report all gains and allowed losses

estimated burden for individual

total unallowed loss from the PTP by

from the activity on the forms or

taxpayers filing this form is approved

each ratio in column (b) and enter the

schedules normally used, and to the left

under OMB control number 1545 – 0074

result in column (c) of Worksheet 5.

of each entry space, enter “From PTP.”

and is included in the estimates shown

Next, complete Worksheet 6 for

Example. You have Schedule E

in the instructions for their individual

each activity listed in Worksheet 5 if all

income of $8,000 and a Form 4797

income tax return. The estimated

the loss from that activity is reported on

prior year unallowed loss of $3,500

burden for all other taxpayers who file

one form or schedule. Use Worksheet 7

from the passive activities of a PTP.

this form is shown below.

instead of Worksheet 6 for each activity

You have a $4,500 overall gain ($8,000

− $3,500) that is nonpassive income.

with losses reported on two or more

Recordkeeping . . . . . . . . 1 hr., 26 min.

different forms or schedules (or on

On Schedule E, Part II, you report the

different parts of the same form or

Learning about the law or

$4,500 net gain as nonpassive income

schedule). Enter the net loss plus any

the form . . . . . . . . . . . . . 1 hr., 43 min.

in column (j). In column (g), you report

prior year unallowed losses in column

the remaining Schedule E gain of

Preparing the form . . . . . 1 hr., 43 min.

$3,500 ($8,000 − $4,500) as passive

(a) of Worksheet 6 (or Worksheet 7 if

applicable). The losses in column (c) of

Copying, assembling,

income. On the appropriate line of Form

Worksheet 6 (column (e) of Worksheet

and sending the form to

4797, you report the prior year

7) are the allowed losses to report on

the IRS . . . . . . . . . . . . . .

48 min.

unallowed loss of $3,500. You enter

your forms or schedules. Report these

“From PTP” to the left of each entry

If you have comments concerning

losses and any income from the PTP

space.

the accuracy of these time estimates or

on the forms and schedules normally

3. If you have an overall loss (but

suggestions for making this form

used.

did not dispose of your entire interest in

simpler, we would be happy to hear

the PTP to an unrelated person in a

4. If you have an overall loss and

from you. See the instructions for the

fully taxable transaction during the

you disposed of your entire interest in

tax return with which this form is filed.

year), the losses are allowed only to the

the PTP to an unrelated person in a

extent of the income, and the excess

fully taxable transaction during the year,

loss is carried forward to use in a future

-12-

Instructions For Form 8582 Passive Activity Loss Limitations - 2006 Page 12

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