Shareholder'S Instructions For Schedule K-1 (Form 1120s)

usually do and one of the principal

losses, and credits are limited under

qualify is $25,000 reduced by the

purposes of the work that you or your

the passive activity rules.

special allowance for which the

spouse does is to avoid the passive

surviving spouse qualifies.

Special allowance for a rental real

loss or credit limitations.

If your modified adjusted gross

estate activity. If you actively

2. You do the work in your

income (defined below) is $100,000

participated in a rental real estate

capacity as an investor and you aren't

or less ($50,000 or less if married

activity, you may be able to deduct up

directly involved in the day-to-day

filing separately), your loss is

to $25,000 of the loss (or credit

operations of the activity. Examples of

deductible up to the maximum special

equivalent to a $25,000 deduction)

work done as an investor that wouldn't

allowance referred to in the preceding

from the activity from nonpassive

count toward material participation

paragraph. If your modified adjusted

income. This “special allowance” is an

include:

gross income is more than $100,000

exception to the general rule

(more than $50,000 if married filing

a. Studying and reviewing

disallowing losses in excess of

separately), the special allowance is

financial statements or reports on

income from passive activities. The

limited to 50% of the difference

operations of the activity,

special allowance isn't available if you

between $150,000 ($75,000 if married

b. Preparing or compiling

were married, file a separate return for

filing separately) and your modified

summaries or analyses of the

the year, and didn't live apart from

adjusted gross income. When

finances or operations of the activity

your spouse at all times during the

modified adjusted gross income is

for your own use, and

year.

$150,000 or more ($75,000 or more if

c. Monitoring the finances or

Only individuals can actively

married filing separately), there is no

operations of the activity in a

participate in a rental real estate

special allowance.

nonmanagerial capacity.

activity. However, a decedent's estate

Modified adjusted gross income is

(including a qualified revocable trust

your adjusted gross income figured

Effect of determination. Income

for which a section 645 election has

without taking into account the

(loss), deductions, and credits from

been made) is treated as actively

following amounts, if applicable.

an activity are nonpassive if you

participating for its tax years ending

Any passive activity loss.

determine that:

less than 2 years after the decedent's

Any rental real estate loss allowed

You materially participated in a

death, if the decedent would have

under section 469(c)(7) to real estate

trade or business activity of the

satisfied the active participation

professionals (defined earlier).

corporation, or

requirement for the activity for the tax

Any overall loss from a publicly

You were a real estate professional

year the decedent died.

traded partnership.

(defined earlier) in a rental real estate

You aren't considered to actively

Any taxable social security or

activity of the corporation.

participate in a rental real estate

equivalent railroad retirement

If you determine that you didn't

activity if, at any time during the tax

benefits.

materially participate in a trade or

year, your interest (including your

Any deductible contributions to an

business activity of the corporation or

spouse's interest) in the activity was

IRA or certain other qualified

if you have income (loss), deductions,

less than 10% (by value) of all

retirement plans under section 219.

or credits from a rental activity of the

interests in the activity.

The domestic production activities

corporation (other than a rental real

deduction.

Active participation is a less

estate activity in which you materially

The student loan interest deduction.

stringent requirement than material

participated as a real estate

The tuition and fees deduction.

participation. You may be treated as

professional), the amounts from that

The deductible part of

actively participating if you

activity are passive. Report passive

self-employment taxes.

participated, for example, in making

income (losses), deductions, and

The exclusion from income of

management decisions or arranging

credits as follows.

interest from Series EE or I U.S.

for others to provide services (such as

1. If you have an overall gain (the

Savings Bonds used to pay higher

repairs) in a significant and bona fide

excess of income over deductions

education expenses.

sense. Management decisions that

and losses, including any prior year

The exclusion of amounts received

can count as active participation

unallowed loss) from a passive

under an employer's adoption

include approving new tenants,

activity, report the income,

assistance program.

deciding rental terms, approving

deductions, and losses from the

capital or repair expenditures, and

Commercial revitalization

activity as indicated in these

other similar decisions.

deduction. The special $25,000

instructions.

allowance for the commercial

Modified adjusted gross income

2. If you have an overall loss (the

revitalization deduction from rental

limitation. The maximum special

excess of deductions and losses,

real estate activities isn't subject to the

allowance that single individuals and

including any prior year unallowed

active participation rules or modified

married individuals filing a joint return

loss, over income) or credits from a

adjusted gross income limits

can qualify for is $25,000. The

passive activity, report the income,

discussed above. See the instructions

maximum is $12,500 for married

deductions, losses, and credits from

for box 12, code N for more

individuals who file separate returns

all passive activities using the

information.

and who lived apart at all times during

Instructions for Form 8582 or Form

the year. The maximum special

8582-CR, to see if your deductions,

Special rules for certain other ac-

allowance for which an estate can

tivities. If you have net income

Instructions for Schedule K-1 (Form 1120S) (2016)

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Shareholder'S Instructions For Schedule K-1 (Form 1120s) - 2016 Page 5

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