Convert any current year qualified expenditures into credits before beginning Worksheet 1, 2, 3, or 4. If the credits are from more than one activity or are of more than one type, separate the credits by activity or type before making entries in the worksheets.

To figure this year's PAC, you must take into account any credits from passive activities disallowed for prior years and carried forward to this year.

If you had only one type of prior year unallowed credit from a single passive activity, figure your prior year unallowed credit by subtracting line 37 of your 2005 Form 8582-CR from line 5 of your 2005 Form 8582-CR.

Otherwise, your prior year unallowed credits are the amounts shown in column (b) of Worksheet 9 in the 2005 Instructions for Form 8582-CR. Enter the prior year unallowed credits in column (b) of Worksheet 1, 2, 3, or 4, whichever applies.

Use Part I to combine your credits from passive activities to determine if you have a PAC for 2006.

If your credits from all passive activities exceed the tax attributable to net passive income, you have a PAC for 2006. Generally, you have net passive income if line 4 of Form 8582 shows income. For more information, see the instructions for Form 8582-CR, line 6, on this page.

Married persons filing separate returns who lived with their spouses at any time during the year are not eligible to complete Part II.

Use Part II to figure the credit allowed if you have any credits from rental real estate activities in which you actively participated (other than rehabilitation credits and low-income housing credits). See Rental Activities on page 2 for details.

Line 9.   Married persons filing separate returns who lived apart from their spouses at all times during the year must enter $75,000 on line 9 instead of $150,000. 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 16 and go to line 17.

Line 10.   To figure modified adjusted gross income, combine all the amounts used to figure adjusted gross income except do not take into account:

  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. For information on recharacterization of income, see Pub. 925 or Temporary Regulations section 1.469-2T(f).

  When figuring modified adjusted gross income, any overall loss from an entire disposition of an interest in a passive activity is taken into account as a nonpassive loss if you do not have any net passive income after combining net income and losses from all other passive activities (that is, Form 8582, line 4 is a loss or zero). If you do have net passive income when you combine the net losses and net income from all other passive activities, the overall loss from the disposition is taken into account as a nonpassive loss only to the extent that it exceeds that net passive income.

Line 12.   Do not enter more than $12,500 on line 12 if you are married filing a separate return and you and your spouse lived apart at all times during the year. 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 16 and go to line 17.

Line 15.   Figure the tax attributable to the amount on line 14 as follows.

Married persons filing separate returns who lived with their spouses at any time during the year are not eligible to complete Part III.

Use Part III to figure the credit allowed if you have any rehabilitation credits or low-income housing credits for property placed in service before 1990. Also use this part if your low-income housing credit is from a partnership, S corporation, or other pass-through entity in which you acquired your interest before 1990, regardless of the date the property was placed in service.

Line 21.   Married persons filing separate returns who lived apart from their spouses at all times during the year must enter $125,000 on line 21, instead of $250,000.

  Skip lines 21 through 26 if you completed Part II of this form and your modified adjusted gross income on line 10 was $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse for the entire year). Instead, enter the amount from line 15 on line 27.

Line 24.   Do not enter more than $12,500 on line 24 if you are married filing a separate return and lived apart from your spouse for the entire year.

Line 27.   Figure the tax attributable to the amount on line 26 as follows.

Married persons filing separate returns who lived with their spouses at any time during the year are not eligible to complete Part IV.

Use Part IV to figure the credit allowed if you have any low-income housing credits for property placed in service after 1989. If you held an indirect interest in the property through a partnership, S corporation, or other pass-through entity, use Part IV only if your interest in the pass-through entity was also acquired after 1989.

Use Part V to figure the PAC (as determined in Part I) that is allowed for 2006 for all passive activities.

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 their 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.

Complete Part VI if you disposed of your entire interest in a passive activity and elect to increase the basis of the credit property used in the activity by the unallowed credit that reduced the basis of the property.