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b. Preparing or compiling summaries or

nonpassive income. On the form or

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

analyses of the finances or operations of the

schedule you normally use, report the net

losses to report on the forms or schedules.

activity for your own use.

gain portion as nonpassive income and the

Report both these losses and any income

c. Monitoring the finances or operations

remaining income and the total losses as

from the PTP on the forms and schedules

of the activity in a nonmanagerial capacity.

passive income and loss. To the left of the

you normally use.

entry space, write “From PTP.” It is

4. If you have an overall loss and you

Effect of determination. Income (loss),

important to identify the nonpassive income

disposed of your entire interest in the PTP to

deductions, and credits from an activity are

because the nonpassive portion is included

an unrelated person in a fully taxable

nonpassive if you determine that:

in modified adjusted gross income for

transaction during the year, your losses

•

You materially participated in a trade or

purposes of figuring on Form 8582 the

(including prior year unallowed losses)

business activity of the partnership or

“special allowance” for active participation in

allocable to the activity for the year are not

•

You were a real estate professional

a non-PTP rental real estate activity. In

limited by the passive loss rules. A fully

(defined on page 3) in a rental real estate

addition, the nonpassive income is included

taxable transaction is one in which you

activity of the partnership.

in investment income when figuring your

recognize all your realized gain or loss.

investment interest expense deduction on

Report the income and losses on the forms

If you determine that you did not

Form 4952.

and schedules you normally use.

materially participate in a trade or business

activity of the partnership or if you have

Example. If you have Schedule E (Form

Note. For rules on the disposition of an

income (loss), deductions, or credits from a

1040) income of $8,000, and a Form 4797

entire interest reported using the installment

rental activity of the partnership (other than

prior year unallowed loss of $3,500 from the

method, see the Instructions for Form 8582.

a rental real estate activity in which you

passive activities of a particular PTP, you

have a $4,500 overall gain ($8,000 −

materially participated as a real estate

Special allowance for a rental real estate

professional), the amounts from that activity

$3,500). On Schedule E (Form 1040), line

activity. If you actively participated in a

are passive. Report passive income

28, report the $4,500 net gain as

rental real estate activity, you may be able

(losses), deductions, and credits as follows:

nonpassive income in column (j). In column

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

(g), report the remaining Schedule E (Form

activity from nonpassive income. This

1. If you have an overall gain (the

1040) gain of $3,500 ($8,000 − $4,500). On

“special allowance” is an exception to the

excess of income over deductions and

the appropriate line of Form 4797, report the

general rule disallowing losses in excess of

losses, including any prior year unallowed

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

income from passive activities. The special

loss) from a passive activity, report the

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

allowance is not available if you were

income, deductions, and losses from the

space.

married, file a separate return for the year,

activity as indicated in these instructions.

and did not live apart from your spouse at all

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

2. If you have an overall loss (the

times during the year.

dispose of your entire interest in the PTP to

excess of deductions and losses, including

an unrelated person in a fully taxable

any prior year unallowed loss, over income)

Only individuals and qualifying estates

transaction during the year), the losses are

or credits from a passive activity, report the

can actively participate in a rental real estate

allowed to the extent of the income, and the

income, deductions, losses, and credits from

activity. Estates (other than qualifying

excess loss is carried forward to use in a

all passive activities using the Instructions

estates), trusts, and corporations cannot

future year when you have income to offset

for Form 8582 or Form 8582-CR (or Form

actively participate. Limited partners cannot

it. Report as a passive loss on the schedule

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

actively participate unless future regulations

or form you normally use the portion of the

credits are limited under the passive activity

provide an exception.

loss equal to the income. Report the income

rules.

You are not considered to actively

as passive income on the form or schedule

participate in a rental real estate activity if at

Publicly traded partnerships. The passive

you normally use.

any time during the tax year your interest

activity limitations are applied separately for

Example. You have a Schedule E (Form

(including your spouse’s interest) in the

items (other than the low-income housing

1040) loss of $12,000 (current year losses

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

credit and the rehabilitation credit) from

plus prior year unallowed losses) and a

interests in the activity.

each publicly traded partnership (PTP).

Form 4797 gain of $7,200. Report the

Thus, a net passive loss from a PTP may

Active participation is a less stringent

$7,200 gain on the appropriate line of Form

not be deducted from other passive income.

requirement than material participation. You

4797. On Schedule E (Form 1040), line 28,

Instead, a passive loss from a PTP is

may be treated as actively participating if

report $7,200 of the losses as a passive loss

suspended and carried forward to be

you participated, for example, in making

in column (f). Carry forward to 2007 the

applied against passive income from the

unallowed loss of $4,800 ($12,000 −

management decisions or arranging for

same PTP in later years. If the partner’s

others to provide services (such as repairs)

$7,200).

entire interest in the PTP is completely

in a significant and bona fide sense.

If you have unallowed losses from more

disposed of, any unused losses are allowed

Management decisions that can count as

than one activity of the PTP or from the

in full in the year of disposition.

active participation include approving new

same activity of the PTP that must be

tenants, deciding rental terms, approving

If you have an overall gain from a PTP,

reported on different forms, you must

capital or repair expenditures, and other

the net gain is nonpassive income. In

allocate the unallowed losses on a pro rata

similar decisions.

addition, the nonpassive income is included

basis to figure the amount allowed from

in investment income to figure your

An estate is a qualifying estate if the

each activity or on each form.

investment interest expense deduction.

decedent would have satisfied the active

Tax tip. To allocate and keep a record of

participation requirement for the activity for

Do not report passive income, gains, or

the unallowed losses, use Worksheets 5, 6,

the tax year the decedent died. A qualifying

losses from a PTP on Form 8582. Instead,

and 7 of Form 8582. List each activity of the

estate is treated as actively participating for

use the following rules to figure and report

PTP in Worksheet 5. Enter the overall loss

tax years ending less than 2 years after the

on the proper form or schedule your income,

from each activity in column (a). Complete

date of the decedent’s death.

gains, and losses from passive activities that

column (b) of Worksheet 5 according to its

Modified adjusted gross income

you held through each PTP you owned

instructions. Multiply the total unallowed loss

limitation. The maximum special allowance

during the tax year.

from the PTP by each ratio in column (b)

that single individuals and married

1. Combine any current year income,

and enter the result in column (c) of

individuals filing a joint return can qualify for

gains and losses, and any prior year

Worksheet 5. Then, complete Worksheet 6 if

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

unallowed losses to see if you have an

all the loss from the same activity is to be

married individuals who file separate returns

overall gain or loss from the PTP. Include

reported on one form or schedule. Use

and who lived apart all times during the

only the same types of income and losses

Worksheet 7 instead of Worksheet 6 if you

year. The maximum special allowance for

you would include in your net income or loss

have more than one loss to be reported on

which an estate can qualify is $25,000

from a non-PTP passive activity. See Pub.

different forms or schedules for the same

reduced by the special allowance for which

925, Passive Activity and At-Risk Rules, for

activity. Enter the net loss plus any prior

the surviving spouse qualifies.

more details.

year unallowed losses in column (a) of

2. If you have an overall gain, the net

Worksheet 6 (or Worksheet 7 if applicable).

If your modified adjusted gross income

gain portion (total gain minus total losses) is

The losses in column (c) of Worksheet 6

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

-4-

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

Instructions For Schedule K-1 (Form 1065) - Partner'S Share Of Income, Deductions, Credits, Etc. - 2006 Page 4

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