Instructions for Form 8582 (2006)

Specific Instructions

This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

Part I—2006 Passive Activity Loss

Use Part I to combine the net income and net loss from all passive activities to determine if you have a passive activity loss (PAL) for 2006. Use Worksheets 1, 2, and 3 to determine the entries for lines 1-3 of Part I, as follows.

Worksheet 1 is used for rental real estate activities with active participation.
Worksheet 2 is used for commercial revitalization deductions (CRDs) from rental real estate activities (with or without active participation).
Worksheet 3 is used for all other passive activities.

See Pub. 925 for examples showing how to complete the worksheets.

Worksheet 1

Individuals and qualifying estates who actively participated in rental real estate activities must include the income or loss from those activities in Worksheet 1 to figure the amounts to enter on lines 1a through 1c of Form 8582. Do not include any commercial revitalization deductions (CRDs) from these activities in the net income or loss reported in Worksheet 1.

Do not enter a prior year unallowed loss in column (c) of Worksheet 1 unless you actively participated in the activity in both the year the loss arose and the current tax year. If you did not actively participate in both years, enter the prior year unallowed loss in column (c) of Worksheet 3.

Married individuals who file separate returns and lived with their spouses at any time during the tax year do not qualify under the active participation rule and must use Worksheet 3 instead of Worksheet 1.

Column (a). Enter the current year net income from each activity. Enter the total of column (a) on line 1a of Form 8582.

Example. A Schedule E rental activity has current year profit of $5,000 and a Form 4797 gain of $2,000. You enter $7,000 in column (a).

Column (b). Enter the current year net loss for each activity. Do not enter any prior year unallowed losses in this column. Enter the total of column (b) on line 1b of Form 8582.

If an activity has net income on one form or schedule and a net loss on another form or schedule, report the net amounts separately in columns (a) and (b) of Worksheet 1.

Example. A Schedule E rental activity has current year income of $1,000 on line 22 of Schedule E and a current year Form 4797 loss of $4,500. You enter $1,000 in column (a) and ($4,500) in column (b).

Column (c). Enter the prior year unallowed losses for each activity. You find these amounts on Worksheet 5, column (c), of your 2005 Form 8582. Enter the total of column (c) from your 2006 Worksheet 1 on line 1c of Form 8582.

Columns (d) and (e). Combine income and losses in columns (a) through (c) for each activity, and either enter the overall gain for the activity in column (d) or enter the overall loss for the activity in column (e). Do not enter amounts from columns (d) and (e) on Form 8582. These amounts will be used when Form 8582 is completed to figure the loss allowed for the current year.

Worksheet 2

Use Worksheet 2 to figure the amounts to enter on lines 2a and 2b for commercial revitalization deductions (CRD) from rental real estate activities (see Commercial revitalization deduction (CRD) on page 4). Do not include the following amounts.

Income or other deductions from the same activity. Instead, report any net income or net loss from the activity, except for the CRD, in Worksheet 1 if you actively participated in the activity or in Worksheet 3 if you did not actively participate.
CRDs from passive activities other than rental real estate activities. Instead, report these deductions as part of the net income or loss from the passive activity in Worksheet 3.

Column (a). Enter the current year CRD from each rental real estate activity. Enter the total of column (a) on line 2a of Form 8582.

Column (b). Enter the unallowed CRDs from the prior year for each rental real estate activity. Enter the total of column (b) on line 2b of Form 8582.

Column (c). Combine the amounts in columns (a) and (b) for each activity and enter the overall loss for the activity in column (c). Do not enter amounts from column (c) on Form 8582. These amounts will be used when Form 8582 is completed to figure the loss allowed for the current year.

Worksheet 3

Use Worksheet 3 to figure the amounts to enter on lines 3a through 3c for:

Passive trade or business activities,
Passive rental real estate activities that do not qualify for the special allowance (but do not include CRDs reported in Worksheet 2), and
Rental activities other than rental real estate activities.

Column (a). Enter the current year net income for each activity. Enter the total of column (a) on line 3a of Form 8582. (See the example under Column (a) for Worksheet 1, on page 7.)

Column (b). Enter the current year net loss for each activity. Enter the total of column (b) on line 3b of Form 8582. (See the example under Column (b) of Worksheet 1, on page 7.)

Column (c). Enter the unallowed losses for the prior years for each activity. You find these amounts on Worksheet 5, column (c), of your 2005 Form 8582. Enter the total of column (c) from your 2006 Worksheet 3 on
line 3c of Form 8582.

Part II—Special Allowance for Rental Real Estate Activities With Active Participation

Use Part II to figure the maximum amount of rental loss allowed if you have a net loss from a rental real estate activity with active participation.

Enter all numbers in Part II as positive amounts (that is, greater than zero).

Example. Line 5 has a loss of $42,000 (reported as a positive amount) and line 9 is $25,000. You enter $25,000 on line 10 (the smaller of line 5 or line 9, both treated as positive amounts).

Married persons filing separate returns who lived with their spouses at any time during the year are not eligible for the special allowance. They must enter -0- on line 10 and go to line 15.

Line 5. Enter on line 5 the smaller of the loss on line 1d or the loss on line 4.

Example. Line 1d has a loss of $3,000, line 2c is zero, and line 3d has a gain of $100. The combined loss on line 4 is $2,900. You enter $2,900 as a positive number on line 5 (the smaller of the loss on line 1d or the loss on
line 4).

Line 6. Married persons filing separate returns who lived apart from their spouses at all times during the year must enter $75,000 on line 6 instead of $150,000.

Line 7. To figure modified adjusted gross income, combine all the amounts used to figure adjusted gross income except do not take into account:

Passive income or loss included on Form 8582,
Any rental real estate loss allowed to real estate professionals (defined under Activities That Are Not Passive Activities on page 2),
Any overall loss from a PTP,
The taxable amount of social security and tier 1 railroad retirement benefits,
The deduction allowed under section 219 for contributions to IRAs and certain other qualified retirement plans,
The domestic production activities deduction,
The deduction allowed for one-half of self-employment taxes,
The exclusion from income of interest from series EE and I U.S. savings bonds used to pay higher education expenses,
The exclusion of amounts received under an employer's adoption assistance program, or
The student loan interest deduction.

At the time these instructions went to print, Congress was considering legislation that would extend the deduction for tuition and fees that expired at the end of 2005. To find out if this legislation was enacted, and for details, go to www.irs.gov, click on More Forms and Publications , and then on What's Hot in forms and publications , or see Pub 553.

If the legislation is enacted, include tuition and fees deduction in the above list.

Include in modified adjusted gross income any portfolio income and expenses that are clearly and directly allocable to portfolio income. Also include any income that is treated as nonpassive income, such as overall gain from a PTP and net income from an activity or item of property subject to the recharacterization of passive income rules. When figuring modified adjusted gross income, include any overall loss from the entire disposition of a passive activity (considered a nonpassive loss).

Example. Your adjusted gross income on line 38 of Form 1040 is $92,000, and you have taxable social security benefits of $5,500 on line 20b. Your modified adjusted gross income is $86,500 ($92,000 - $5,500).

Line 9. Do not enter more than $12,500 on line 9 if you are married filing a separate return and you and your spouse lived apart at all times during the year.

Part III—Special Allowance for Commercial Revitalization Deductions From Rental Real Estate Activities

Use Part III to figure the maximum amount of commercial revitalization deductions allowed if you have a commercial revitalization deduction from a rental real estate activity.

Enter all numbers in Part III as positive amounts (that is, greater than zero.)

Married persons filing separate returns who lived with their spouses at any time during the year are not eligible for the special allowance. They must enter -0- on line 14 and go to line 15.

Line 11. Enter $12,500 (reduced by the amount, if any, on line 10) on line 11 if you are married filing a separate return and you and your spouse lived apart at all times during the year.

Part IV—Total Losses Allowed

Use Part IV to figure the amount of the PAL (as determined in Part I) allowed for 2006 from all passive activities.

Line 16. Use the worksheets on Form 8582 and the following instructions for those worksheets to figure the unallowed loss to be carried forward and the allowed loss to report on your forms and schedules for 2006.

Worksheets 1, 2, and 3

Worksheets 1 and 3, columns (d) and (e), show whether an activity had an overall gain or loss. Worksheet 2, column (c), shows the overall loss for CRDs from rental real estate activities. If you have activities that show overall gain in column (d) of Worksheet 1 or 3, report all the income and losses listed in columns (a), (b), and (c) for those activities on the proper forms and schedules.

If you have activities that show an overall loss in column (e) of Worksheet 1 or 3 or column (c) of Worksheet 2, you must allocate your allowed loss on line 16 of Form 8582 to those activities by completing Worksheets 4, 5, and 6 or 7.

Complete Worksheet 4 only if you entered an amount (other than zero) on line 10 or 14 of Form 8582. Otherwise, skip Worksheet 4 and complete Worksheet 5 for all activities in Worksheets 1 or 3 that have overall losses in column (e) and all activities in Worksheet 2.

Worksheet 4

Use Worksheet 4 to allocate the special allowance on line 10 or line 14 of Form 8582 among your rental real estate activities.

In the first column of Worksheet 4, enter the name of each activity. In the second column, enter the form or schedule and line number on which the loss will be reported.

Example.

You receive a Schedule K-1 from partnership P that reports losses from two rental real estate activities, Activity X and Activity Y. The losses from partnership P are reported on line 28A of Schedule E. In the first two columns of Worksheet 4, enter:

Name of Activity		Form or Schedule
Activity X		Sch E, line 28A
Activity Y		Sch E, line 28A

If the loss from an activity is reported in more than one place, identify both locations in the second column (for example, Sch E, line 28A/Form 4797, line 2). If you need additional space, show this information on an attached statement.

Enter all activities with overall losses from Worksheets 1 and 2 as follows.

If you entered an amount on line 10, list on Worksheet 4 all activities with an overall loss in column (e) of
Worksheet 1.
If you entered an amount on line 14, list on Worksheet 4 all activities with an overall loss in column (c) of
Worksheet 2.
If you entered amounts on both lines 10 and 14 of Form 8582, you must complete two separate Worksheets 4. For the second worksheet, you either may attach an extra copy of page 2 of Form 8582 or your own schedule in the same format as Worksheet 4. On the first Worksheet 4, list all activities with an overall loss in column (e) of Worksheet 1. On the second Worksheet 4, list all activities with an overall loss in column (c) of
Worksheet 2.

Column (a). Enter the overall loss from column (e) of Worksheet 1 or column (c) of Worksheet 2 for each activity.

Column (b). Divide each of the individual losses shown in column (a) by the total of all the losses in column (a) and enter this ratio for each activity in column (b). The total of all the ratios in column (b) must equal 1.00.

Column (c). Multiply each ratio in column (b) by the amount on line 10 or line 14 of Form 8582, and enter the results in column (c). The total of column (c) must be the same as line 10 or line 14 of Form 8582.

Column (c) total is the same as column (a) total. If the total losses in column (c) are the same as those in column (a), the losses in Worksheets 1 and 2 are allowed in full and are not carried over to Worksheet 5. Report all amounts in columns (a), (b), and (c) of Worksheet 1 and columns (a) and (b) of Worksheet 2 on the proper forms and schedules.

Column (c) total is less than column (a) total. If the total losses in column (c) are less than the total losses in column (a), complete column (d).

Column (d). Subtract column (c) from column (a) and enter the results in column (d). Also enter the amounts from column (d) of Worksheet 4 in column (a) of Worksheet 5.

Worksheet 5

Complete Worksheet 5 if any activities have an overall loss in column (e) of Worksheet 3 or losses in column (d) of Worksheet 4 (in column (e) of Worksheet 1 or column (c) of Worksheet 2 if you did not have to complete Worksheet 4).

On Worksheet 5, enter the name of each activity and the form or schedule and line number on which the loss will be reported. See the example for Worksheet 4. Identify any deduction from Worksheet 2 on a separate line (even if the amount is from an activity also shown on Worksheet 1 or 3) and add “CRD” after the name of the activity.

Column (a). Enter the amounts, if any, from column (d) of Worksheet 4 (from column (e) of Worksheet 1 or column (c) of Worksheet 2 if you did not have to complete Worksheet 4). Also enter the losses, if any, from column (e) of Worksheet 3.

Column (c). Complete the following computation.

A.	Enter as a positive amount line 4 of Form 8582
B.	Add lines 10 and 14 of Form 8582
C.	Subtract line B from line A

Multiply each ratio in column (b) by the amount on line C above, and enter the result in column (c).

Worksheets 6 and 7

These worksheets allocate your unallowed and allowed losses for each activity.

If you have losses from any activity that are reported on two or more different forms or schedules, use Worksheet 7 instead of Worksheet 6 for that activity.

Also use Worksheet 7 instead of Worksheet 6 for any activity with two or more transactions that are reported on the same form or schedule but must be separately identified for tax purposes. Transactions that must be separately identified include capital losses that are 28% rate losses and those that are not.

28% rate gain or loss includes all collectibles gains and deductible long-term losses and section 1202 gain on the sale of qualified small business stock. See the instructions for Schedule D (Form 1040) for details, including the definitions of “collectibles gains and losses” and “section 1202 gain.”

Worksheet 6

Use Worksheet 6 for any activity listed in Worksheet 5 if all the loss from that activity is reported on one form or schedule and no transactions need to be identified separately (as discussed above).

Example. Use Worksheet 6 if all the loss from an activity is reported on Schedule E, even though part of the loss is a current year Schedule E loss and part of it is from a Schedule E prior year unallowed loss.

On Worksheet 6, enter the name of each activity and the form or schedule and line number on which the loss is reported. See the example for Worksheet 4. Identify each CRD from Worksheet 5 on a separate line and add “CRD” after the name of the activity.

Column (a). For each activity entered in Worksheet 6, enter the net loss plus the prior year unallowed loss for the activity. Figure this amount by adding the losses in columns (b) and (c) of Worksheets 1 and 3 or enter the loss from column (c) of Worksheet 2.

Column (b). For each activity entered in Worksheet 6, enter the amount from column (c) of Worksheet 5 for the activity. These are your unallowed losses for 2006. Keep a record of these amounts so the losses can be used to figure your PAL next year.

Column (c). Subtract column (b) from column (a). These are your allowed losses for 2006. Report the amounts in this column on the forms and schedules normally used.

See the forms and schedules listed under How To Report Allowed Losses on page 11. Also, see Pub. 925 for an extensive example of how to report passive income and losses on the forms and schedules.

Worksheet 7

Use Worksheet 7 for any activity listed in Worksheet 5 that has losses that are reported on two or more different forms and schedules or on different parts of the same form or schedule (for example, 28% rate and non-28%-rate capital losses reported on Schedule D). Worksheet 7 allocates the allowed and unallowed loss for the activity and allocates the allowed loss to the different forms or schedules (or different parts of the same form or schedule) used to report the losses.

Only losses that would cause a difference in tax liability if they were reported on a different form or schedule or on different parts of the same form or schedule are kept separate. Those forms, schedules, and parts are:

Schedules C, E, and F.
Schedule D (Parts I and II (28% rate losses and non-28%-rate losses)).

Note.

You must make a separate entry in Schedule D, Part I or Part II, for each transaction reported. See the Instructions for Schedule D (Form 1040).
Forms 4684 (Section B), 4797
(Parts I and II), and 4835.

Use a separate copy of Worksheet 7 for each activity for which you have losses reported on two or more different forms or schedules or different parts of the same form or schedule.

On Worksheet 7, enter the form or schedule and line number on the dotted line above each line 1a (for example, Schedule D, line 12, to report a 28% rate loss from a partnership).

Line 1a, column (a). Enter the net loss plus any prior year unallowed loss from the activity that is reported on the same form or, in the case of Schedule D and Form 4797, the same part.

If you have a Schedule D 28% rate loss and a Schedule D non-28%-rate loss, see Example of Schedule D (Form 1040) transactions on this page before completing Worksheet 7.

Line 1b, column (a). Enter any net income from the activity that is reported on the same form or schedule (or on the same part of the same form or schedule) as the loss on line 1a, column (a).

Example. You enter a prior year unallowed loss from Form 4797, Part I, on line 1a. If the activity has a current year Form 4797, Part I, gain, enter the gain on line 1b, column (a). If the activity does not have a Form 4797, Part I, gain, enter -0- on line 1b, column (a).

Line 1c, column (b). Subtract line 1b, column (a), from line 1a, column (a), and enter the result in column (b). If line 1b, column (a), is more than line 1a, column (a), enter -0- in column (b).

Column (c). Divide each of the losses entered in column (b) by the total of column (b) and enter the ratio in column (c). The total of this column must be 1.00.

Column (d). Multiply the unallowed loss for this activity, found in Worksheet 5, column (c), by each ratio in column (c) of Worksheet 7. If -0- is entered in column (b) of Worksheet 7, also enter -0- for that form or schedule in column (d).

The amount in column (d) is the unallowed loss for 2006. Keep a record of this worksheet so you can use the losses to figure your PAL next year.

Column (e). Subtract the amount in column (d) from the loss entered on line 1a, column (a). This is the allowed loss for 2006 to enter on the forms or schedules. The forms and schedules you use must show the losses from this column and the income, if any, for that activity from column (a) of Worksheet 1 or Worksheet 3.

Example of Schedule D (Form 1040) transactions. The taxpayer had the following Schedule D (Form 1040) transactions from passive activities in 2006.

Activity I

A passive activity prior year unallowed long-term capital loss (a 28% rate loss) of $1,000 and a current year long-term capital loss (a non-28%-rate loss) of $3,000.

Activity II

A current year collectibles loss (a 28% rate loss) of $230 and net income of $1,100 from Schedule E (Form 1040).

Worksheet 3

Activity I has an overall loss of $4,000 (current year long-term capital loss of $3,000 and a prior year unallowed long-term capital loss of $1,000). Activity II has an overall gain of $870 (current year net income of $1,100 less a current year long-term capital loss of $230). Line 16 of Form 8582 shows an allowed loss of $1,100.

Since Activity II has an overall gain, the amounts shown in columns (a) and (b) of Worksheet 3 for that activity are reported on the proper forms and schedules and are not shown on any other worksheet.

Worksheet 5

Activity I has an unallowed loss of $3,130 (line 4 of Form 8582 ($3,130) less the sum of lines 10 and 14 of Form 8582 (-0-) x 100%).

Worksheet 7

This worksheet is used to figure the portion of the unallowed loss attributable to the 28% rate loss and the portion attributable to the non-28%-rate loss.

The loss attributable to the 28% rate loss ($1,000) and the loss attributable to the non-28%-rate loss ($3,000) are separate entries in Worksheet 7. The ratio of each loss to the total of the two losses is figured as follows. $1,000/$4,000 = .25. $3,000/$4,000 = .75. Each of these ratios is multiplied by the unallowed loss for Activity I, shown in column (c) of Worksheet 5 ($3,130).

Unallowed losses for Activity I:

28% rate loss: .25 x $3,130 = $782.50.
Non-28%-rate loss: .75 x $3,130 = $2,347.50.

Allowed losses for Activity I:

28% rate loss: $1,000 - $782.50 = $217.50.
Non-28%-rate loss: $3,000 - $2,347.50 = $652.50.

The total loss allowed for Activity I ($870) is entered in Part II of Schedule D (Form 1040). The 28% rate loss ($217.50) is entered on the 28% Rate Gain Worksheet (see Schedule D instructions for line 18). Keep a record of the unallowed 28% rate and non-28%-rate losses to figure the PAL for these transactions next year.

See the forms and schedules listed under How To Report Allowed Losses beginning below. Also, see Pub. 925 for an extensive example of how to report passive income and losses on the forms and schedules.

How To Report Allowed Losses

Line 4 is income. If line 4 of Form 8582 shows net income or zero, all the losses in columns (b) and (c) of Worksheets 1 and 3 and all the deductions in columns (a) and (b) of Worksheet 2 are allowed in full. Report the income and losses in columns (a), (b), and (c) of Worksheets 1 and 3 and deductions in columns (a) and (b) of Worksheet 2 on the forms and schedules normally used.

Line 16 is the same as the total of lines 1b, 1c, 2a, 2b, 3b, and 3c. In this case also, all the losses in columns (b) and (c) of Worksheets 1 and 3 and all the deductions in columns (a) and (b) of Worksheet 2 are allowed in full. Report the income and losses in columns (a), (b), and (c) of Worksheets 1 and 3 and deductions in columns (a) and (b) of Worksheet 2 on the forms and schedules normally used.

Columns (a) and (c) of Worksheet 4 are the same amount. In this case, all the losses in columns (b) and (c) of Worksheet 1 and all the deductions in columns (a) and (b) of Worksheet 2 are allowed in full. Report the income and losses in columns (a), (b), and (c) of Worksheet 1 and the deductions in columns (a) and (b) of Worksheet 2 on the forms and schedules normally used.

Losses allowed in column (c) of Worksheet 6. The amounts in column (c) of Worksheet 6 are the losses or deductions allowed for 2006 for the activities listed in that worksheet. Report the loss allowed from column (c) of Worksheet 6 and the income, if any, for that activity from column (a) of Worksheet 1 or 3, on the form or schedule normally used.

Losses allowed in column (e) of Worksheet 7. The amounts in column (e) of Worksheet 7 are the losses or deductions allowed for 2006 for the activity listed on that worksheet. Report the losses allowed from column (e) of Worksheet 7 and the income, if any, for that activity from column (a) of Worksheet 1 or 3, on the forms or schedules normally used.

Schedules C and F, and Form 4835. Enter on the net profit or loss line of your schedule or form the allowed passive loss from the worksheet. To the left of the entry space enter “PAL.”

If the net profit or loss line on your form or schedule shows net profit for the year, reduce the net profit by the allowed loss from Worksheet 6 or 7, and enter the result on the net profit or loss line.

Example.

Schedule C shows net profit for the year of $5,000 from a passive activity. The activity also has a Form 4797 gain of $2,500 and a prior year unallowed Schedule C loss of $6,000. The loss allowed for 2006 is $6,000. You enter a net loss of $1,000 on line 31 of Schedule C (the $5,000 net profit for the year less the $6,000 loss allowed for the year). To the left of the entry space, you enter “PAL.”

See Schedule D and Form 4797 instructions on this page if you also had passive gains and losses from the sale of assets or of an interest in a passive activity.

Schedule E, Part I. Enter the allowed loss from the worksheet on line 23 of Schedule E. An activity that has net profit for the year and prior year unallowed losses will have net profit on line 22 and the allowed loss on line 23. The allowed loss on line 23 will include the loss allowed to the extent of the net profit. Line 24 of Schedule E will show total net profit and line 25 will show total losses allowed (both passive and nonpassive). Line 26 will show the total net profit or loss.

Schedule E, Parts II and III. Any net income shown on your Schedule K-1 that is passive income must be entered as passive income in the appropriate column of Schedule E, Part II or III. Enter the passive loss allowed from Worksheet 6 or 7 in the appropriate column for passive losses. The passive losses allowed include the loss allowed to the extent of any net income from the activity. Passive net income or loss reportable on Schedule E, Part II, includes any self-charged interest income and deductions treated as passive activity income and deductions.

See Schedule D and Form 4797 instructions on this page if you also had passive gains or losses from the sale of assets or of an interest in a passive activity.

Form 4684, Section B. Any passive activity gain from Form 4684 is unchanged. It was used on Form 8582 to determine allowable PALs. If you do not have passive losses on Form 4684, complete Form 4684 and follow the instructions for that form for where to report the gain.

If you have passive losses on Form 4684, cross through the amount you first entered on line 34, 35, 41a, 41b, or 42 of that form, and enter the allowed loss from the worksheet. To the left of the entry space, enter “PAL.”

Schedule D and Form 4797. If you sold assets from a passive activity or you sold an interest in your passive activity, all gains from the activity must be entered on the appropriate line of Schedule D or Form 4797. Identify the gain as “FPA.” Enter any allowed losses for Schedule D or Form 4797 on the appropriate line, and to the left of the entry space, enter “PAL.”

Entire disposition with an overall loss. If you made an entire disposition of your interest in a passive activity and that activity had an overall loss, none of the gains, if any, or losses were entered on Form 8582 or the worksheets. However, all the gains and losses must be reported on the forms or schedules normally used. To the left of the entry space, enter “EDPA.”

Entire disposition with an overall gain. Gains and losses from this activity were included on Form 8582 so that the gains might offset other PALs. Report all the gains and losses on the forms and schedules normally used, and to the left of the entry space, enter “EDPA.”

Publicly Traded Partnerships (PTPs)

A PTP is a partnership whose interests are traded on an established securities market or are readily tradable on a secondary market (or its substantial equivalent).

An established securities market includes any national securities exchange and any local exchange registered under the Securities Exchange Act of 1934 or exempted from registration because of the limited volume of transactions. It also includes any over-the-counter market.

A secondary market generally exists if a person stands ready to make a market in the interest. An interest is treated as readily tradable if the interest is regularly quoted by persons, such as brokers or dealers, who are making a market in the interest.

The substantial equivalent of a secondary market exists if there is no identifiable market maker, but holders of interests have a readily available, regular, and ongoing opportunity to sell or exchange interests through a public means of obtaining or providing information on offers to buy, sell, or exchange interests. Similarly, the substantial equivalent of a secondary market exists if prospective buyers and sellers have the opportunity to buy, sell, or exchange interests in a timeframe and with the regularity and continuity that the existence of a market maker would provide.

Special Instructions for PTPs

Section 469(k) provides that the passive activity limitations must be applied separately to items from each PTP. PALs from a PTP generally may be used only to offset income or gain from passive activities of the same PTP. The special allowance (including CRDs) for rental real estate activities does not apply to PALs from a PTP.

Passive activity loss rules for partners in PTPs. Do not report passive income, gains, or losses from a PTP on Form 8582. Instead, use the following rules to figure and report your income, gains, and losses from passive activities you held through each PTP you owned during the tax year.

Combine any current year income, gains and losses, and any prior year unallowed losses to see if you have an overall loss from the PTP. Include only the same types of income and losses you would include to figure your net income or loss from a non-PTP passive activity. See Passive Activity Income and Deductions on page 5.
If you have an overall gain, the net gain portion (total gain minus total losses) is nonpassive income.

It is important to figure the nonpassive income because it must be included in modified adjusted gross income to figure the special allowance for active participation in a non-PTP rental real estate activity on Form 8582. Also, you may be able to include the nonpassive income in investment income when figuring your investment interest expense deduction. See Form 4952, Investment Interest Expense Deduction.

Report all gains and allowed losses from the activity on the forms or schedules normally used, and to the left of each entry space, enter “From PTP.”

Example.

You have Schedule E income of $8,000 and a Form 4797 prior year unallowed loss of $3,500 from the passive activities of a PTP. You have a $4,500 overall gain ($8,000 - $3,500) that is nonpassive income. On Schedule E, Part II, you report the $4,500 net gain as nonpassive income in column (j). In column (g), you report the remaining Schedule E gain of $3,500 ($8,000 - $4,500) as passive income. On the appropriate line of Form 4797, you report the prior year unallowed loss of $3,500. You enter “From PTP” to the left of each entry space.
If you have an overall loss (but did not dispose of your entire interest in the PTP to an unrelated person in a fully taxable transaction during the year), the losses are allowed only to the extent of the income, and the excess loss is carried forward to use in a future year if you have income to offset it. Report as a passive loss on the schedule or form you normally use the portion of the loss equal to the income. Report the income as passive income on the form or schedule you normally use.

Example.

You have a Schedule E loss of $12,000 (current year losses plus prior year unallowed losses) and Form 4797 gain of $7,200 from the passive activities of a PTP. You report the $7,200 gain on the appropriate line of Form 4797. On Schedule E, Part II, you report $7,200 of the losses as a passive loss in column (f). You carry forward the unallowed loss of $4,800 ($12,000 - $7,200).

If you have unallowed losses from more than one activity of the PTP or from the same activity of the PTP that must be reported on different forms or schedules, allocate the unallowed losses on a pro rata basis to figure the amount allowed for each activity or on each form or schedule.

To allocate and keep a record of the unallowed losses, use Worksheets 5, 6, and 7 of Form 8582.

List each activity of the PTP in Worksheet 5. Enter the overall loss from each activity in column (a). Complete column (b) of Worksheet 5 according to its instructions. Multiply the total unallowed loss from the PTP by each ratio in column (b) and enter the result in column (c) of Worksheet 5.

Next, complete Worksheet 6 for each activity listed in Worksheet 5 if all the loss from that activity is reported on one form or schedule. Use Worksheet 7 instead of Worksheet 6 for each activity with losses reported on two or more different forms or schedules (or on different parts of the same form or schedule). Enter the net loss plus any prior year unallowed losses in column (a) of Worksheet 6 (or Worksheet 7 if applicable). The losses in column (c) of Worksheet 6 (column (e) of Worksheet 7) are the allowed losses to report on your forms or schedules. Report these losses and any income from the PTP on the forms and schedules normally used.

4.If you have an overall loss and you disposed of your entire interest in the PTP to an unrelated person in a fully taxable transaction during the year, your losses (including prior year unallowed losses) allocable to the activity for the year are not limited by the passive loss rules. A fully taxable transaction is one in which you recognize all your realized gain or loss. Report the income and losses on the forms and schedules normally used.

For rules on the disposition of an entire interest reported using the installment method, see Disposition of an Entire Interest on page 6.