Instructions For Form 8582 - Passive Activity Loss Limitations

•

A partner in a PTP is not treated as

the current year loss of $2,800 in

Worksheet 3 is used for all other

having disposed of an entire interest in

column (b), and the prior year

passive activities.

an activity of a PTP until there is an

unallowed loss of $12,650 in column

See Pub. 925 for examples showing

entire disposition of the partner’s

(c).

how to complete the worksheets.

interest in the PTP.

Example 2. Activity with overall

Worksheet 1

loss. You sell your entire interest in an

Reporting an Entire

oil and gas limited partnership that was

Individuals and qualifying estates who

Disposition on Schedule D or

your only passive activity for a gain of

actively participated in rental real estate

Form 4797

$2,000. You have a current year

activities must include the income or

Schedule E loss of $3,330 and a

loss from those activities in Worksheet

If you completely dispose of your entire

Schedule E prior year unallowed loss of

1 to figure the amounts to enter on lines

interest in a passive activity or a former

$1,115.

1a through 1c of Form 8582. Do not

passive activity, you may have to report

include any commercial revitalization

Because you have an overall loss of

net income or loss and prior year

deductions (CRDs) from these activities

$2,445 after combining the gain and

unallowed losses from the activity. All

in the net income or loss reported in

losses, none of the amounts are

the net income and losses are reported

Worksheet 1.

entered on Worksheet 3 or on Form

on the forms and schedules normally

8582.

used.

Do not enter a prior year unallowed

You enter the net loss plus the prior

loss in column (c) of Worksheet 1

Combine all income and losses

year unallowed loss ($3,330 + $1,115 =

unless you actively participated in the

(including any prior year unallowed

activity in both the year the loss arose

$4,445) on Schedule E, Part II, column

losses) from the activity for the tax year

and the current tax year. If you did not

(h), and the $2,000 gain on the sale on

to see if you have an overall gain or

actively participate in both years, enter

Schedule D, in either Part I or Part II,

loss.

the prior year unallowed loss in column

depending on how long you held the

If you have an overall gain and you

partnership interest.

have other passive activities to report

on Form 8582, include the income,

Disposition of Less Than an

Married individuals who file

losses, and prior year unallowed losses

separate returns and lived with

Entire Interest

on Worksheet 1, 2, or 3.

their spouses at any time during

CAUTION

Gains and losses from the disposition

the tax year do not qualify under the

If you have an overall gain and this

of less than an entire interest in an

active participation rule and must use

is your only passive activity or a former

activity are treated as part of the net

Worksheet 3 instead of Worksheet 1.

passive activity, report all income and

income or net loss from the activity for

losses (including any prior year

Column (a). Enter the current year net

the current year.

unallowed losses) on the forms and

income from each activity. Enter the

schedules normally used and do not

A disposition of less than

total of column (a) on line 1a of Form

use Form 8582.

substantially all of an entire

8582.

interest does not trigger the

If you have an overall loss when you

CAUTION

Example. A Schedule E rental

allowance of prior year unallowed

combine the income and losses, do not

activity has current year profit of $5,000

losses.

use the worksheets or Form 8582 for

and a Form 4797 gain of $2,000. You

the activity. All losses (including prior

Disposition of substantially all of an

enter $7,000 in column (a).

year unallowed losses) are allowed in

activity. You may treat the disposition

Column (b). Enter the current year net

full. Report the income and losses on

of substantially all of an activity as a

loss for each activity. Do not enter any

the forms and schedules normally used.

separate activity if you can prove with

prior year unallowed losses in this

reasonable certainty:

An overall loss from an entire

column. Enter the total of column (b) on

disposition of a passive activity is a

1. The prior year unallowed losses,

line 1b of Form 8582.

nonpassive loss if you have an

if any, allocable to the part of the

If an activity has net income on one

aggregate loss from all other passive

activity disposed of, and

form or schedule and a net loss on

activities. When figuring your modified

2. The net income or loss for the

another form or schedule, report the net

adjusted gross income for line 7 of

year of disposition allocable to the part

amounts separately in columns (a) and

Form 8582, be sure to take into

of the activity disposed of.

(b) of Worksheet 1.

account the overall loss from the

Example. A Schedule E rental

disposition of the activity.

activity has current year income of

Example 1. Activity with overall

Specific Instructions

$1,000 on line 22 of Schedule E and a

gain. You sell your entire interest in a

current year Form 4797 loss of $4,500.

rental real estate activity in which you

You enter $1,000 in column (a) and

actively participated for a gain of

Part I—2006 Passive

($4,500) in column (b).

$15,525. $7,300 of the gain is section

Activity Loss

1231 gain reported on Form 4797,

Column (c). Enter the prior year

Part I, and $8,225 is ordinary recapture

unallowed losses for each activity. You

Use Part I to combine the net income

income reported on Form 4797, Part II.

find these amounts on Worksheet 5,

and net loss from all passive activities

column (c), of your 2005 Form 8582.

On line 23 of Schedule E (Form 1040),

to determine if you have a passive

you report a total loss of $15,450,

Enter the total of column (c) from your

activity loss (PAL) for 2006. Use

which includes a current year $2,800

2006 Worksheet 1 on line 1c of Form

Worksheets 1, 2, and 3 to determine

net loss and a $12,650 prior year

8582.

the entries for lines 1 – 3 of Part I, as

unallowed loss. You have an overall

follows.

Columns (d) and (e). Combine income

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gain from the disposition ($15,525 –

Worksheet 1 is used for rental real

and losses in columns (a) through (c)

$15,450 = $75).

estate activities with active

for each activity, and either enter the

Because you had other passive

participation.

overall gain for the activity in column (d)

•

activities reportable on Form 8582, you

Worksheet 2 is used for commercial

or enter the overall loss for the activity

make the following entries on

revitalization deductions (CRDs) from

in column (e). Do not enter amounts

Worksheet 1. You enter the $15,525

rental real estate activities (with or

from columns (d) and (e) on Form

gain on the disposition in column (a),

without active participation).

8582. These amounts will be used

-7-

Instructions For Form 8582 - Passive Activity Loss Limitations - 2006 Page 7

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