Instructions For Form 8582 Passive Activity Loss Limitations

determining material participation for

activity may be grouped with the trade

The partnership or S corporation

this purpose have not yet been issued.

or business activity.

does not have a record of any

2. An activity involving the rental of

prior year unallowed losses from

CAUTION

Grouping of Activities

real property with an activity involving

the passive activities of the partnership

the rental of personal property (except

or S corporation. If you had prior year

Generally, one or more trade or

personal property provided in

unallowed losses from these activities,

business activities or rental activities

connection with the real property or vice

they can be found in column (c) of your

may be treated as a single activity if the

versa).

2005 Worksheet 5.

activities make up an appropriate

3. Any activity with another activity

economic unit for the measurement of

Self-Charged Interest

in a different type of business and in

gain or loss under the passive activity

which you hold an interest as a limited

Certain self-charged interest income or

rules.

partner or as a limited entrepreneur (as

deductions may be treated as passive

Whether activities make up an

defined in section 464(e)(2)) if that

activity gross income or passive activity

appropriate economic unit depends on

other activity engages in holding,

deductions if the loan proceeds are

all the relevant facts and

producing, or distributing motion picture

used in a passive activity. Generally,

circumstances. The factors given the

films or videotapes; farming; leasing

self-charged interest income and

greatest weight in determining whether

section 1245 property; or exploring for

deductions result from loans between

activities make up an appropriate

or exploiting oil and gas resources or

you and a partnership or S corporation

economic unit are:

geothermal deposits.

in which you had a direct or indirect

1. Similarities and differences in

ownership interest. This includes both

types of trades or businesses,

Activities conducted through

loans you made to the partnership or

2. The extent of common control,

partnerships, S corporations, and C

S corporation and loans the partnership

3. The extent of common

corporations subject to section 469.

or S corporation made to you. It also

ownership,

Once a partnership or corporation

includes loans from one partnership or

4. Geographical location, and

determines its activities under these

S corporation to another partnership or

5. Interdependencies between or

rules, a partner or shareholder may use

S corporation if each owner in the

among the activities.

these rules to group those activities

borrowing entity has the same

with:

proportional ownership interest in the

•

Example. You have a significant

Each other,

lending entity. The self-charged interest

•

ownership interest in a bakery and a

Activities conducted directly by the

rules do not apply to your interest in a

movie theater in Baltimore and in a

partner or shareholder, or

partnership or S corporation if the entity

•

bakery and a movie theater in

Activities conducted through other

made an election under Regulations

Philadelphia. Depending on all the

partnerships and corporations.

section 1.469-7(g) to avoid the

relevant facts and circumstances, there

application of these rules. For more

A partner or shareholder may not

may be more than one reasonable

details on the self-charged interest

treat as separate activities those

method for grouping your activities. For

rules, see Regulations section 1.469-7.

activities grouped together by the

instance, the following groupings may

partnership or corporation.

or may not be permissible:

Passive Activity Income

•

A single activity,

•

To figure your overall gain or loss from

Passive Activity Income

A movie theater activity and a bakery

all passive activities or any passive

activity,

•

activity, take into account only passive

and Deductions

A Baltimore activity and a

activity income. Do not enter income

Philadelphia activity, or

Take into account only passive activity

•

that is not passive activity income on

Four separate activities.

income and passive activity deductions

Form 8582 or the worksheets.

to figure your net income or net loss

Once you choose a grouping under

Passive activity income includes all

from all passive activities or any

these rules, you must continue using

income from passive activities,

passive activity.

that grouping in later tax years unless a

including (with certain exceptions

material change in the facts and

If your passive activity is reported on

described in Temporary Regulations

circumstances makes it clearly

Schedule C, C-EZ, E, or F, and the

section 1.469-2T(c)(2) and Regulations

inappropriate.

activity has no prior year unallowed

section 1.469-2(c)(2)) gain from the

The IRS may regroup your activities

losses or any gain or loss from the

disposition of an interest in a passive

if your grouping fails to reflect one or

disposition of assets or an interest in

activity or of property used in a passive

more appropriate economic units and

the activity, take into account only the

activity at the time of the disposition.

one of the primary purposes of your

passive activity income and passive

Passive activity income does not

grouping is to avoid the passive activity

activity deductions from the activity to

include the following.

limitations.

figure the amount to enter on Form

•

Income from an activity that is not a

8582 and the worksheets.

Limitation on grouping certain

passive activity.

activities. The following activities may

•

If you own an interest in a passive

Portfolio income, including interest

not be grouped together.

activity through a partnership or an

(other than self-charged interest treated

1. A rental activity with a trade or

S corporation, the partnership or

as passive activity income), dividends,

business activity unless the activities

S corporation will generally provide you

annuities, and royalties not derived in

being grouped together make up an

with the net income or net loss from the

the ordinary course of a trade or

appropriate economic unit and:

passive activity. If, however, the

business, and gain or loss from the

a. The rental activity is insubstantial

partnership or S corporation must state

disposition of property that produces

relative to the trade or business activity

an item of gross income or deduction

portfolio income or is held for

or vice versa, or

separately to you, and the gross

investment (see section 163(d)(5)). See

b. Each owner of the trade or

income or deduction is passive activity

Temporary Regulations section

business activity has the same

gross income or a passive activity

1.469-2T(c)(3).

•

proportionate ownership interest in the

deduction (respectively), include that

Alaska Permanent Fund dividends.

•

rental activity. If so, the portion of the

amount in the net income or net loss

Personal service income, including

rental activity involving the rental of

entered on Form 8582 and the

salaries, wages, commissions,

property used in the trade or business

worksheets.

self-employment income from trade or

-5-

Instructions For Form 8582 Passive Activity Loss Limitations - 2006 Page 5

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