General Instructions
Changes To Note
- Form 8582 has been revised to reflect the new passive activity loss limitation rules for the commercial revitalization deduction from rental real estate activities. See Commercial revitalization deduction on page 4.
- Certain self-charged interest income or deductions may be treated as passive activity income or deductions. See Self-Charged Interest on page 5.
- You now must file the worksheets on pages 2 and 3 of Form 8582 with your tax return.
Purpose of Form
Form 8582 is used by noncorporate taxpayers to figure the amount of any passive activity loss (PAL) for the current tax year and the total losses allowed from passive activities.
A PAL occurs when total losses (including prior year unallowed losses) from all your passive activities exceed the total income from all your passive activities.
Generally, passive activities include:
- Trade or business activities in which you did not materially participate for the tax year.
- Rental activities, regardless of your participation.
PALs cannot be used to offset income from nonpassive activities. However, a special allowance for rental real estate activities may allow some losses even if the losses exceed passive income.
PALs that are not allowed in the current year are carried forward until they are allowed either against passive activity income, against the special allowance, if applicable, or when you sell or exchange your entire interest in the activity in a fully taxable transaction to an unrelated party.
For more information, see Pub. 925, Passive Activity and At-Risk Rules, which contains a filled-in example of Form 8582 with step-by-step instructions for reporting losses from passive activities.
Note: Corporations subject to the passive activity rules must use Form 8810, Corporate Passive Activity Loss and Credit Limitations.
Who Must File
Form 8582 is filed by individuals, estates, and trusts who have losses (including prior year unallowed losses) from passive activities. You do not have to file Form 8582 if you meet Exception 1 or 2 below.
Exception 1
You do not have an overall loss when you combine all your net income and net losses (including any prior year unallowed losses) from business or rental passive activities. Overall loss is defined under Definitions on page 2.
In figuring your overall gain or loss from all passive activities for the year, do not include the following:
- Net income that is not passive activity income. See Passive Activity Income on page 5.
- Net losses that are not passive activity net losses. See Activities That Are Not Passive Activities on page 2.
- Net income or net loss from your interest in any publicly traded partnership (PTP). See Publicly Traded Partnerships (PTPs) on page 11.
- Any overall loss from an entire disposition of a passive activity. See Dispositions on page 7 for more information.
Exception 2
You actively participated in rental real estate activities (see Special Allowance for Rental Real Estate Activities on page 3), and you meet all of the following conditions:
- Rental real estate activities with active participation were your only passive activities.
- You have no prior year unallowed losses from these activities.
- Your total loss from the rental real estate activities was not more than $25,000 ($12,500 if married filing separately and you lived apart from your spouse all year).
- If you are married filing separately, you lived apart from your spouse all year.
- You have no current or prior year unallowed credits from a passive activity.
- Your modified adjusted gross income was not more than $100,000 (not more than $50,000 if married filing separately and you lived apart from your spouse all year).
- You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust.
For the definition of modified adjusted gross income, see the instructions for line 7 on page 8.
If all the above conditions are met, your rental real estate losses are not limited, and you do not need to complete Form 8582. For losses reported on line 22, Part I, of Schedule E (Form 1040), enter the amount of the loss from line 22 on line 23 of Schedule E. For losses from a partnership or an S corporation, enter the amount of the allowable loss from Schedule K-1 in Part II, column (g), of Schedule E. For losses reported on line 32 of Form 4835, Farm Rental Income and Expenses, enter the amount of the allowable loss from line 32 on line 33c of Form 4835.
If you do not qualify for Exception 1 or 2, you must complete Form 8582.
Coordination With Other Limitations
Generally, PALs are subject to other limitations (for example, basis and at-risk limitations) before they are subject to the passive loss limitations. Once a loss becomes allowable under these other limitations, you must determine whether the loss is limited under the passive loss rules. See Form 6198, At-Risk Limitations, for details on the at-risk rules. Also, capital losses that are allowable under the passive loss rules may be limited under the capital loss limitations of section 1211. Percentage depletion deductions that are allowable under the passive loss rules may be limited under section 613A(d).
Before Completing Form 8582
To find out if your activity is treated as a passive activity, read:
To find out how to enter income and losses on Form 8582, read the instructions for Worksheets 1, 2, and 3 (beginning on page 7).
Definitions
Except as otherwise indicated, the following terms in these instructions are defined as shown below.
Net income means the excess of current year income over current year deductions from the activity. This includes any current year gains or losses from the disposition of assets or an interest in the activity.
Net loss means the excess of current year deductions over current year income from the activity. This includes any current year gains or losses from the disposition of assets or an interest in the activity.
Overall gain means the excess of the net income from the activity over the prior year unallowed losses from the activity.
Overall loss means the excess of the prior year unallowed losses from the activity over the net income from the activity or the prior year unallowed losses from the activity plus the net loss from the activity.
Prior year unallowed losses means the losses from an activity that were disallowed under the PAL limitations in a prior year and carried forward to the tax year under section 469(b). See Regulations section 1.469-1(f)(4) and Pub. 925.
Activities That Are Not Passive Activities
The following are not passive activities:
- Trade or business activities in which you materially participated for the tax year.
- Any rental real estate activity in which you materially participated if you were a real estate professional for the tax year. You were a real estate professional only if:
- More than half of the personal services you performed in trades or businesses were performed in real property trades or businesses in which you materially participated and
- You performed more than 750 hours of services in real property trades or businesses in which you materially participated.
For purposes of this rule, each interest in rental real estate is a separate activity, unless you elect to treat all interests in rental real estate as one activity. For details on making this election, see page E-1 of the instructions for Schedule E (Form 1040).
If you are married filing jointly, one spouse must separately meet both of the above conditions, without taking into account services performed by the other spouse.
A real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Services you performed as an employee are not treated as performed in a real property trade or business unless you owned more than 5% of the stock (or more than 5% of the capital or profits interest) in the employer.
Note: If an activity qualifies for the exception described above in 2002, but has a prior year unallowed passive loss, the prior year unallowed loss is treated as a loss from a former passive activity. See Former Passive Activities on page 6.
- A working interest in an oil or gas well. Your working interest must be held directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). In this case, it does not matter whether you materially participated in the activity for the tax year.
If, however, your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year), some of your income and losses from the working interest may be treated as passive activity gross income and passive activity deductions. See Temporary Regulations section 1.469-1T(e)(4)(ii).
- The rental of a dwelling unit you used as a residence if section 280A(c)(5) applies. This section applies if you rented out a dwelling unit that you also used as a home during the year for a number of days that exceeds the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental.
- An activity of trading personal property for the account of owners of interests in the activity. For purposes of this rule, personal property means property that is actively traded, such as stocks, bonds, and other securities. See Temporary Regulations section 1.469-1T(e)(6) for more details.
Generally, income and losses from these activities are not entered on Form 8582. However, losses from these activities may be subject to limitations other than the passive loss rules.
Rental Activities
A rental activity is a passive activity even if you materially participated in the activity (unless it is a rental real estate activity in which you materially participated and you were a real estate professional).
However, if you meet any of the five exceptions beginning below, the rental of the property is not treated as a rental activity. See Reporting Income and Losses From the Activities on page 3 if you meet any of the exceptions.
An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. It does not matter whether the use is under a lease, a service contract, or some other arrangement.
Exceptions
An activity is not a rental activity if:
- The average period of customer use is:
- 7 days or less or
- 30 days or less and significant personal services (see page 3) were provided in making the rental property available for customer use.
Figure the average period of customer use for a class of property by dividing the total number of days in all rental periods by the number of rentals during the tax year. If the activity involves renting more than one class of property, multiply the average period of customer use of each class by the ratio of the gross rental income from that class to the activity's total gross rental income. The activity's average period of customer use equals the sum of these class-by-class average periods weighted by gross income. See Regulations section 1.469-1(e)(3)(iii).
Significant personal services include only services performed by individuals. To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property.
- Extraordinary personal services were provided in making the rental property available for customer use.
Extraordinary personal services are services provided in making rental property available for customer use only if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services.
- Rental of the property is incidental to a nonrental activity.
The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income is less than 2% of the smaller of the unadjusted basis or the fair market value (FMV) of the property.
Unadjusted basis is the cost of the property without regard to depreciation deductions or any other basis adjustment described in section 1016.
The rental of property is incidental to a trade or business activity if:
- You owned an interest in the trade or business activity during the tax year;
- The rental property was mainly used in the trade or business activity during the tax year or during at least 2 of the 5 preceding tax years; and
- The gross rental income from the property is less than 2% of the smaller of the unadjusted basis or the FMV of the property.
Lodging provided for the employer's convenience to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services.
- You customarily make the rental property available during defined business hours for nonexclusive use by various customers.
- You provide property for use in a nonrental activity of a partnership, S corporation, or a joint venture in your capacity as an owner of an interest in the partnership, S corporation, or joint venture.
Example. If a partner contributes the use of property to a partnership, none of the partner's distributive share of partnership income is income from a rental activity unless the partnership is engaged in a rental activity.
Also, a partner's gross income from a guaranteed payment under section 707(c) is not income from a rental activity. The determination of whether the property used in the activity is provided in the partner's capacity as an owner of an interest in the partnership is made on the basis of all the facts and circumstances.
Reporting Income and Losses From the Activities
If an activity meets any of the five exceptions listed above, it is not a rental activity. You must then determine:
- Whether your rental of the property is a trade or business activity (see Trade or Business Activities below) and, if so,
- Whether you materially participated in the activity for the tax year.
- If the activity is a trade or business activity in which you did not materially participate, enter the income and losses from the activity on Worksheet 3.
- If the activity meets any of the five exceptions listed above and is a trade or business activity in which you did materially participate, report any income or loss from the activity on the forms or schedules normally used.
If the rental activity did not meet any of the five exceptions, it is generally a passive activity. Special rules apply if you conduct the rental activity through a PTP or if any of the rules described under Recharacterization of Passive Income on page 6 apply. See the PTP rules beginning on page 11.
If none of the special rules apply, enter the income and losses from the passive rental activity on Worksheet 1, 2, or 3.
Worksheet 1 is for passive rental real estate activities in which you actively participated. See Special Allowance for Rental Real Estate Activities on this page.
Worksheet 2 is for commercial revitalization deductions (CRDs) from rental real estate activities. CRDs from rental real estate activities are entered on Worksheet 2 (and not on Worksheet 1 or 3). See Commercial revitalization deduction (CRD) on page 4.
Worksheet 3 is for passive rental real estate activities in which you did not actively participate, activities of renting personal property, and other passive trade or business activities.
See the instructions for Worksheets 1, 2, and 3 beginning on page 7.
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