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1. The work is not the type of work that

If you have an overall gain from a PTP,

4797 gain of $7,200. Report the $7,200 gain

owners of the activity would usually do and

the net gain is nonpassive income. In

on the appropriate line of Form 4797. On

one of the principal purposes of the work that

addition, the nonpassive income is included

Schedule E (Form 1040), line 28, report

you or your spouse does is to avoid the

in investment income to figure your

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

passive loss or credit limitations.

investment interest expense deduction.

column (f). Carry forward to 2015 the

unallowed loss of $4,800 ($12,000 −

2. You do the work in your capacity as

Do not report passive income, gains, or

$7,200).

an investor and you are not directly involved

losses from a PTP on Form 8582. Instead,

in the day-to-day operations of the activity.

use the following rules to figure and report on

If you have unallowed losses from more

Examples of work done as an investor that

the proper form or schedule your income,

than one activity of the PTP or from the same

would not count toward material participation

gains, and losses from passive activities that

activity of the PTP that must be reported on

include:

you held through each PTP you owned

different forms, you must allocate the

during the tax year.

unallowed losses on a pro rata basis to figure

a. Studying and reviewing financial

the amount allowed from each activity or on

statements or reports on operations of the

1. Combine any current year income,

each form.

activity,

gains and losses, and any prior year

unallowed losses to see if you have an

b. Preparing or compiling summaries or

To allocate and keep a record of the

overall gain or loss from the PTP. Include

analyses of the finances or operations of the

unallowed losses, use Worksheets

TIP

only the same types of income and losses

activity for your own use, and

5, 6, and 7 of Form 8582. List each

you would include in your net income or loss

activity of the PTP in Worksheet 5. Enter the

c. Monitoring the finances or operations

from a non-PTP passive activity. See Pub.

overall loss from each activity in column (a).

of the activity in a non-managerial capacity.

925, Passive Activity and At-Risk Rules, for

Complete column (b) of Worksheet 5

more details.

Effect of determination. Income (loss),

according to its instructions. Multiply the total

deductions, and credits from an activity are

2. If you have an overall gain, the net

unallowed loss from the PTP by each ratio in

nonpassive if you determine that:

gain portion (total gain minus total losses) is

column (b) and enter the result in column (c)

You materially participated in a trade or

nonpassive income. On the form or schedule

of Worksheet 5. Then, complete Worksheet

business activity of the partnership or

you normally use, report the net gain portion

6 if all the loss from the same activity is to be

You were a real estate professional

as nonpassive income and the remaining

reported on one form or schedule. Use

(defined earlier) in a rental real estate activity

income and the total losses as passive

Worksheet 7 instead of Worksheet 6 if you

income and loss. To the left of the entry

have more than one loss to be reported on

of the partnership.

space, enter “From PTP.” It is important to

different forms or schedules for the same

If you determine that you did not

identify the nonpassive income because the

activity. Enter the net loss plus any prior year

materially participate in a trade or business

nonpassive portion is included in modified

unallowed losses in column (a) of Worksheet

activity of the partnership or if you have

adjusted gross income for purposes of

6 (or Worksheet 7 if applicable). The losses

income (loss), deductions, or credits from a

figuring on Form 8582 the “special

in column (c) of Worksheet 6 (column (e) of

rental activity of the partnership (other than a

allowance” for active participation in a

Worksheet 7) are the allowed losses to

rental real estate activity in which you

non-PTP rental real estate activity. In

report on the forms or schedules. Report

materially participated as a real estate

addition, the nonpassive income is included

both these losses and any income from the

professional), the amounts from that activity

in investment income when figuring your

PTP on the forms and schedules you

are passive. Report passive income (losses),

investment interest expense deduction on

normally use.

deductions, and credits as follows.

Form 4952, Investment Interest Expense

1. If you have an overall gain (the

4. If you have an overall loss and you

Deduction.

excess of income over deductions and

disposed of your entire interest in the PTP to

losses, including any prior year unallowed

an unrelated person in a fully taxable

Example. If you have Schedule E (Form

loss) from a passive activity, report the

transaction during the year, your losses

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

income, deductions, and losses from the

(including prior year unallowed losses)

Sales of Business Property, prior year

activity as indicated in these instructions.

allocable to the activity for the year are not

unallowed loss of $3,500 from the passive

limited by the passive loss rules. A fully

2. If you have an overall loss (the

activities of a particular PTP, you have a

taxable transaction is one in which you

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

excess of deductions and losses, including

recognize all your realized gain or loss.

any prior year unallowed loss, over income)

Schedule E (Form 1040), line 28, report the

Report the income and losses on the forms

or credits from a passive activity, report the

$4,500 net gain as nonpassive income in

and schedules you normally use.

column (j). In column (g), report the

income, deductions, losses, and credits from

all passive activities using the Instructions for

remaining Schedule E (Form 1040) gain of

Note. For rules on the disposition of an

Form 8582 or Form 8582-CR (or Form

$3,500 ($8,000 − $4,500). On the

entire interest reported using the installment

appropriate line of Form 4797, report the

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

method, see the Instructions for Form 8582.

credits are limited under the passive activity

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

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

rules.

Special allowance for a rental real estate

space.

activity. If you actively participated in a

Publicly traded partnerships. The

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

rental real estate activity, you may be able to

passive activity limitations are applied

dispose of your entire interest in the PTP to

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

separately for items (other than the

an unrelated person in a fully taxable

activity from nonpassive income. This

low-income housing credit and the

transaction during the year), the losses are

“special allowance” is an exception to the

rehabilitation credit) from each publicly

allowed to the extent of the income, and the

general rule disallowing losses in excess of

traded partnership (PTP). Thus, a net

excess loss is carried forward to use in a

income from passive activities. The special

passive loss from a PTP may not be

future year when you have income to offset

allowance is not available if you were

deducted from other passive income.

it. Report as a passive loss on the schedule

married, file a separate return for the year,

Instead, a passive loss from a PTP is

or form you normally use the portion of the

and did not live apart from your spouse at all

suspended and carried forward to be applied

loss equal to the income. Report the income

times during the year.

against passive income from the same PTP

as passive income on the form or schedule

in later years. If the partner's entire interest in

Only individuals, qualifying estates, and

you normally use.

the PTP is completely disposed of, any

qualifying revocable trusts that made a

unused losses are allowed in full in the year

section 645 election can actively participate

Example. You have a Schedule E (Form

of disposition.

in a rental real estate activity. Estates (other

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

than qualifying estates), trusts (other than

plus prior year unallowed losses) and a Form

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

-4-

Partner'S Instructions For Schedule K-1 (Form 1065) - Partner'S Share Of Income, Deductions, Credits, Etc. (For Partner'S Use Only) - 2014 Page 4

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