Instructions For Form 8582 Passive Activity Loss Limitations

Definitions

A real property trade or business is

Losses From the Activities on page 3 if

any real property development,

you meet any of the exceptions.

Except as otherwise indicated, the

redevelopment, construction,

following terms in these instructions are

An activity is a rental activity if

reconstruction, acquisition, conversion,

defined as shown below.

tangible property (real or personal) is

rental, operation, management, leasing,

used by customers or held for use by

Net income. This is the excess of

or brokerage trade or business.

customers and the gross income (or

current year income over current year

Services you performed as an

expected gross income) from the

deductions from the activity. This

employee are not treated as performed

activity represents amounts paid (or to

includes any current year gains or

in a real property trade or business

be paid) mainly for the use of the

losses from the disposition of assets or

unless you owned more than 5% of the

property. It does not matter whether the

an interest in the activity.

stock (or more than 5% of the capital or

use is under a lease, a service contract,

profits interest) in the employer.

Net loss. This is the excess of current

or some other arrangement.

year deductions over current year

Note. If a rental real estate activity is

income from the activity. This includes

not a passive activity for the current

Exceptions

any current year gains or losses from

year, any prior year unallowed loss is

An activity is not a rental activity if:

the disposition of assets or an interest

treated as a loss from a former passive

1. The average period of customer

in the activity.

activity. See Former Passive Activities

use is:

on page 6.

Overall gain. This is the excess of the

a. 7 days or less, or

3. A working interest in an oil or gas

“net income” from the activity over the

b. 30 days or less and significant

well. Your working interest must be held

prior year unallowed losses from the

personal services were provided in

directly or through an entity that does

activity.

making the rental property available for

not limit your liability (such as a general

Overall loss. This is (a) the excess of

customer use.

partner interest in a partnership). In this

the prior year unallowed losses from

case, it does not matter whether you

Figure the average period of

the activity over the “net income” from

materially participated in the activity for

customer use for a class of property by

the activity or (b) the prior year

the tax year.

dividing the total number of days in all

unallowed losses from the activity plus

rental periods by the number of rentals

If, however, your liability was limited

the “net loss” from the activity.

during the tax year. If the activity

for part of the year (for example, you

Prior year unallowed losses. These

involves renting more than one class of

converted your general partner interest

property, multiply the average period of

are the losses from an activity that were

to a limited partner interest during the

disallowed under the PAL limitations in

customer use of each class by the ratio

year), some of your income and losses

of the gross rental income from that

a prior year and carried forward to the

from the working interest may be

class to the activity’s total gross rental

tax year under section 469(b). See

treated as passive activity gross income

income. The activity’s average period of

Regulations section 1.469-1(f)(4) and

and passive activity deductions. See

customer use equals the sum of these

Pub. 925.

Temporary Regulations section

class-by-class average periods

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

weighted by gross income. See

Activities That Are Not

4. The rental of a dwelling unit you

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

used as a residence if section

Passive Activities

280A(c)(5) applies. This section applies

Significant personal services include

if you rented out a dwelling unit that you

only services performed by individuals.

The following are not passive activities.

also used as a home during the year for

To determine if personal services are

1. Trade or business activities in

a number of days that exceeds the

significant, all relevant facts and

which you materially participated for the

greater of 14 days or 10% of the

circumstances are taken into

tax year.

number of days during the year that the

consideration, including the frequency

2. Any rental real estate activity in

home was rented at a fair rental.

of the services, the type and amount of

which you materially participated if you

5. An activity of trading personal

labor required to perform the services,

were a “real estate professional” for the

property for the account of owners of

and the value of the services relative to

tax year. You were a real estate

interests in the activity. For purposes of

the amount charged for use of the

professional only if:

this rule, personal property means

property.

a. More than half of the personal

property that is actively traded, such as

2. Extraordinary personal services

services you performed in trades or

stocks, bonds, and other securities.

were provided in making the rental

businesses during the tax year were

See Temporary Regulations section

property available for customer use.

performed in real property trades or

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

This applies only if the services are

businesses in which you materially

performed by individuals and the

participated, and

Generally, income and losses from

customers’ use of the property is

b. You performed more than 750

these activities are not entered on Form

incidental to their receipt of the

hours of services during the tax year in

8582. However, losses from these

services.

real property trades or businesses in

activities may be subject to limitations

3. Rental of the property is

which you materially participated.

other than the passive loss rules.

incidental to a nonrental activity.

For purposes of item (2), each

interest in rental real estate is a

The rental of property is incidental to

Rental Activities

an activity of holding property for

separate activity, unless you elect to

A rental activity is a passive activity

treat all interests in rental real estate as

investment if the main purpose of

even if you materially participated in the

one activity. For details on making this

holding the property is to realize a gain

activity (unless it is a rental real estate

election, see page E-1 of the

from its appreciation and the gross

activity in which you materially

instructions for Schedule E (Form

rental income is less than 2% of the

participated and you were a real estate

1040).

smaller of the unadjusted basis or the

professional).

fair market value (FMV) of the property.

If you are married filing jointly, one

Unadjusted basis is the cost of the

spouse must separately meet both

However, if you meet any of the five

(2)(a) and (2)(b), without taking into

exceptions beginning below, the rental

property without regard to depreciation

deductions or any other basis

account services performed by the

of the property is not treated as a rental

other spouse.

activity. See Reporting Income and

adjustment described in section 1016.

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Instructions For Form 8582 Passive Activity Loss Limitations - 2006 Page 2

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