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Instructions for Form 8582 Passive Activity Loss Limitations

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					2009                                                                                                 Department of the Treasury
                                                                                                     Internal Revenue Service



Instructions for Form 8582
Passive Activity Loss Limitations
Section references are to the Internal       rental passive activities. Overall loss is   limited, and you do not need to
Revenue Code unless otherwise noted.         defined under Definitions on page 2.         complete Form 8582. Enter losses
                                                                                          reported on Schedule E (Form 1040),
General Instructions                            In figuring your overall gain or loss
                                             from all passive activities for the year,
                                                                                          Part I, line 22, on Schedule E, Part l,
                                                                                          line 23. For losses from a partnership
                                             do not include the following income or
Purpose of Form                              losses.
                                                                                          or an S corporation, enter the amount
Form 8582 is used by noncorporate                                                         of the allowable loss from Schedule K-1
                                                 1. Net income that is not passive        in Schedule E (Form 1040), Part II,
taxpayers to figure the amount of any        activity income. See Passive Activity
passive activity loss (PAL) for the                                                       column (f). Enter losses reported on
                                             Income beginning on page 5.                  line 32 of Form 4835, Farm Rental
current tax year.                                2. Net losses that are not passive       Income and Expenses, on Form 4835,
    A PAL occurs when total losses           activity net losses. See Activities That     line 33c.
(including prior year unallowed losses)      Are Not Passive Activities on page 2.
from all your passive activities exceed          3. Net income or net loss from your
the total income from all your passive       interest in any publicly traded              Coordination With Other
activities.                                  partnership (PTP). See Publicly Traded
    Generally, passive activities include:   Partnerships (PTPs) beginning on             Limitations
• Trade or business activities in which      page 11.                                     Generally, PALs are subject to other
you did not materially participate for the       4. Any overall loss from an entire       limitations (for example, basis and
tax year.                                    disposition of a passive activity. See       at-risk limitations) before they are
• Rental activities, regardless of your      Dispositions beginning on page 6 for         subject to the passive loss limitations.
participation.                               more information.                            Once a loss becomes allowable under
    PALs cannot be used to offset                                                         these other limitations, you must
income from nonpassive activities.           Exception 2                                  determine whether the loss is limited
However, a special allowance for rental                                                   under the passive loss rules. See Form
real estate activities may allow some        You actively participated in rental real     6198, At-Risk Limitations, for details on
losses even if the losses exceed             estate activities (see Special Allowance
                                                                                          the at-risk rules. Also, capital losses
passive income.                              for Rental Real Estate Activities
                                             beginning on page 3), and you meet all       that are allowable under the passive
    PALs not allowed in the current year     of the following conditions.                 loss rules may be limited under the
are carried forward until they are           • Rental real estate activities with         capital loss limitations of section 1211.
allowed either against passive activity      active participation were your only          Percentage depletion deductions that
income, against the special allowance,       passive activities.                          are allowable under the passive loss
if applicable, or when you sell or           • You have no prior year unallowed           rules may be limited under section
exchange your entire interest in the         losses from these activities.                613A(d).
activity in a fully taxable transaction to   • Your total loss from the rental real
an unrelated party.                          estate activities was not more than
    For more information, see Pub. 925,      $25,000 ($12,500 if married filing
                                                                                          Before Completing Form
Passive Activity and At-Risk Rules,          separately and you lived apart from          8582
which contains a filled-in example of        your spouse all year).                       To find out if your activity is treated as a
Form 8582 with step-by-step                  • If you are married filing separately,      passive activity, read the following
instructions for reporting losses from       you lived apart from your spouse all
passive activities.                                                                       sections of these instructions.
                                             year.
Note. Corporations subject to the            • You have no current or prior year          • Trade or Business Activities if your
passive activity rules must use Form         unallowed credits from a passive             activity is a trade or business activity
8810, Corporate Passive Activity Loss        activity.                                    (page 3).
and Credit Limitations.                      • Your modified adjusted gross income        • Rental Activities if your activity is the
                                             was not more than $100,000 (not more         renting of tangible property (beginning
Who Must File                                than $50,000 if married filing separately    on page 2).
Form 8582 is filed by individuals,           and you lived apart from your spouse         • Material Participation (on page 4).
estates, and trusts who have losses          all year).                                   • Grouping of Activities (page 5).
(including prior year unallowed losses)      • You do not hold any interest in a             To find out how to treat income and
from passive activities. You do not have     rental real estate activity as a limited     deductions from your activity, read
to file Form 8582 if you meet Exception      partner or as a beneficiary of an estate     Passive Activity Income and
1 or 2 below.                                or a trust.                                  Deductions, Former Passive Activities,
                                                For the definition of modified            and Dispositions (pages 5 through 7).
Exception 1                                  adjusted gross income, see the
You do not have an overall loss when         instructions for line 7 on page 8.              To find out how to enter income and
you combine all your net income and                                                       losses on Form 8582, read the
net losses (including any prior year           If all the above conditions are met,       instructions for Worksheets 1, 2, and 3
unallowed losses) from business or           your rental real estate losses are not       (beginning on page 7).

                                                           Cat. No. 64294A
                                                   A real property trade or business is      Losses From the Activities on page 3 if
Definitions                                    any real property development,                you meet any of the exceptions.
Except as otherwise indicated, the             redevelopment, construction,
following terms in these instructions are      reconstruction, acquisition, conversion,         An activity is a rental activity if
defined as shown below.                        rental, operation, management, leasing,       tangible property (real or personal) is
                                               or brokerage trade or business.               used by customers or held for use by
Net income. This is the excess of                                                            customers and the gross income (or
current year income over current year              Services you performed as an              expected gross income) from the
deductions from the activity. This             employee are not treated as performed         activity represents amounts paid (or to
includes any current year gains or             in a real property trade or business          be paid) mainly for the use of the
losses from the disposition of assets or       unless you owned more than 5% of the          property. It does not matter whether the
an interest in the activity.                   stock (or more than 5% of the capital or      use is under a lease, a service contract,
Net loss. This is the excess of current        profits interest) in the employer.            or some other arrangement.
year deductions over current year              Note. If a rental real estate activity is
income from the activity. This includes        not a passive activity for the current        Exceptions
any current year gains or losses from          year, any prior year unallowed loss is        An activity is not a rental activity if:
the disposition of assets or an interest       treated as a loss from a former passive
in the activity.                               activity. See Former Passive Activities           1. The average period of customer
                                               on page 6.                                    use is:
Overall gain. This is the excess of the                                                          a. 7 days or less, or
“net income” from the activity over the            3. A working interest in an oil or gas
prior year unallowed losses from the           well. Your working interest must be held          b. 30 days or less and significant
activity.                                      directly or through an entity that does       personal services were provided in
                                               not limit your liability (such as a general   making the rental property available for
Overall loss. This is (a) the excess of        partner interest in a partnership). In this   customer use.
the prior year unallowed losses from           case, it does not matter whether you              Figure the average period of
the activity over the “net income” from        materially participated in the activity for   customer use for a class of property by
the activity or (b) the prior year             the tax year.                                 dividing the total number of days in all
unallowed losses from the activity plus            If, however, your liability was limited   rental periods by the number of rentals
the “net loss” from the activity.              for part of the year (for example, you        during the tax year. If the activity
Prior year unallowed losses. These             converted your general partner interest       involves renting more than one class of
are the losses from an activity that were      to a limited partner interest during the      property, multiply the average period of
disallowed under the PAL limitations in        year), some of your income and losses         customer use of each class by the ratio
a prior year and carried forward to the        from the working interest may be              of the gross rental income from that
tax year under section 469(b). See             treated as passive activity gross income      class to the activity’s total gross rental
Regulations section 1.469-1(f)(4) and          and passive activity deductions. See          income. The activity’s average period of
Pub. 925.                                      Temporary Regulations section                 customer use equals the sum of these
                                               1.469-1T(e)(4)(ii).                           class-by-class average periods
Activities That Are Not                            4. The rental of a dwelling unit you      weighted by gross income. See
                                               used as a residence if section                Regulations section 1.469-1(e)(3)(iii).
Passive Activities                             280A(c)(5) applies. This section applies          Significant personal services include
The following are not passive activities.      if you rented out a dwelling unit that you    only services performed by individuals.
    1. Trade or business activities in         also used as a home during the year for       To determine if personal services are
which you materially participated for the      a number of days that exceeds the             significant, all relevant facts and
tax year.                                      greater of 14 days or 10% of the              circumstances are taken into
    2. Any rental real estate activity in      number of days during the year that the       consideration, including the frequency
which you materially participated if you       home was rented at a fair rental.             of the services, the type and amount of
were a “real estate professional” for the          5. An activity of trading personal        labor required to perform the services,
tax year. You were a real estate               property for the account of owners of         and the value of the services relative to
professional only if:                          interests in the activity. For purposes of    the amount charged for use of the
                                               this rule, personal property means            property.
    a. More than half of the personal          property that is actively traded, such as
services you performed in trades or                                                              2. Extraordinary personal services
                                               stocks, bonds, and other securities.          were provided in making the rental
businesses during the tax year were            See Temporary Regulations section
performed in real property trades or                                                         property available for customer use.
                                               1.469-1T(e)(6) for more details.              This applies only if the services are
businesses in which you materially
participated, and                                                                            performed by individuals and the
                                                  Generally, income and losses from          customers’ use of the property is
    b. You performed more than 750             these activities are not entered on Form
hours of services during the tax year in                                                     incidental to their receipt of the
                                               8582. However, losses from these              services.
real property trades or businesses in          activities may be subject to limitations
which you materially participated.                                                               3. Rental of the property is
                                               other than the passive loss rules.            incidental to a nonrental activity.
   For purposes of item (2), each
interest in rental real estate is a                                                              The rental of property is incidental to
separate activity, unless you elect to         Rental Activities                             an activity of holding property for
treat all interests in rental real estate as   A rental activity is a passive activity       investment if the main purpose of
one activity. For details on making this       even if you materially participated in the    holding the property is to realize a gain
election, see page E-2 of the                  activity (unless it is a rental real estate   from its appreciation and the gross
instructions for Schedule E (Form              activity in which you materially              rental income is less than 2% of the
1040).                                         participated and you were a real estate       smaller of the unadjusted basis or the
   If you are married filing jointly, one      professional).                                fair market value (FMV) of the property.
spouse must separately meet both                   However, if you meet any of the five          Unadjusted basis is the cost of the
(2)(a) and (2)(b), without taking into         exceptions beginning below, the rental        property without regard to depreciation
account services performed by the              of the property is not treated as a rental    deductions or any other basis
other spouse.                                  activity. See Reporting Income and            adjustment described in section 1016.
                                                                   -2-                             Instructions for Form 8582 (2009)
    The rental of property is incidental to   through a PTP or if any of the rules            The special allowance is not
a trade or business activity if:              described under Recharacterization of       available if you were married, are filing
    a. You own an interest in the trade       Passive Income on page 6 apply. See         a separate return for the year, and lived
or business activity during the tax year,     the PTP rules beginning on page 11.         with your spouse at any time during the
    b. The rental property was mainly            If none of the special rules apply,      year.
used in the trade or business activity        enter the income and losses from the            Only an individual, a qualifying
during the tax year or during at least 2      passive rental activity on Worksheet 1,     estate, or a qualified revocable trust
of the 5 preceding tax years, and             2, or 3.                                    that made an election to treat the trust
    c. The gross rental income from the          Worksheet 1 is for passive rental        as part of the decedent’s estate may
property is less than 2% of the smaller       real estate activities in which you         actively participate in a rental real
of the unadjusted basis or the FMV of         actively participated. See Special          estate activity. Unless future regulations
the property.                                 Allowance for Rental Real Estate            provide an exception, limited partners
    Lodging provided for the employer’s       Activities beginning on this page.          are not treated as actively participating
convenience to an employee or the                                                         in a partnership’s rental real estate
employee’s spouse or dependents is               Worksheet 2 is for commercial            activity.
incidental to the activity or activities in   revitalization deductions (CRDs) from
                                                                                              A qualifying estate is the estate of a
which the employee performs services.         rental real estate activities. CRDs from
                                                                                          decedent for tax years ending less than
    4. You customarily make the rental        rental real estate activities are not
                                                                                          2 years after the date of the decedent’s
property available during defined             entered on Worksheet 1 or 3. See
                                                                                          death if the decedent would have
business hours for nonexclusive use by        Commercial revitalization deduction
                                                                                          satisfied the active participation
various customers.                            (CRD) on page 4.
                                                                                          requirements for the rental real estate
    5. You provide property for use in a         Worksheet 3 is for passive rental        activity for the tax year the decedent
nonrental activity of a partnership,          real estate activities in which you did     died.
S corporation, or a joint venture in your     not actively participate, activities of
capacity as an owner of an interest in                                                         A qualified revocable trust may elect
                                              renting personal property, and other        to be treated as part of a decedent’s
the partnership, S corporation, or joint      passive trade or business activities.
venture.                                                                                  estate for purposes of the special
                                                 See the instructions for Worksheets      allowance for active participation in
    Example. If a partner contributes         1, 2, and 3 beginning on page 7.            rental real estate activities. The election
the use of property to a partnership,                                                     must be made by both the executor (if
none of the partner’s distributive share      Trade or Business                           any) of the decedent’s estate and the
of partnership income is income from a                                                    trustee of the revocable trust. For
rental activity unless the partnership is     Activities                                  details, see Regulations section
engaged in a rental activity.                 A trade or business activity is an          1.645-1.
                                              activity (other than a rental activity or       You are not considered to actively
   Also, a partner’s gross income from        an activity treated as incidental to an
a guaranteed payment under section                                                        participate in a rental real estate activity
                                              activity of holding property for            if at any time during the tax year your
707(c) is not income from a rental            investment) that:
activity. The determination of whether                                                    interest (including your spouse’s
the property used in the activity is             1. Involves the conduct of a trade or    interest) in the activity was less than
provided in the partner’s capacity as an      business (within the meaning of section     10% (by value) of all interests in the
owner of an interest in the partnership       162),                                       activity.
is made on the basis of all the facts and        2. Is conducted in anticipation of           Active participation is a less stringent
circumstances.                                starting a trade or business, or            requirement than material participation
                                                 3. Involves research or experimental     (see Material Participation on page 4).
Reporting Income and                          expenditures deductible under section       You may be treated as actively
Losses From the Activities                    174 (or that would be if you chose to       participating if, for example, you
                                              deduct rather than capitalize them).        participated in making management
If an activity meets any of the five
exceptions listed above, it is not a                                                      decisions or arranged for others to
                                                 Trade or business activities are
rental activity. You must then                                                            provide services (such as repairs) in a
                                              generally reported on Schedule C,
determine:                                                                                significant and bona fide sense.
                                              C-EZ, or F, or in Part II or III of
                                                                                          Management decisions that may count
    1. Whether your rental of the             Schedule E. See Publicly Traded
                                                                                          as active participation include:
                                              Partnerships (PTPs) beginning on page
property is a trade or business activity
                                              11. For trade or business activities that
                                                                                          • Approving new tenants,
(see Trade or Business Activities on
                                              are significant participation passive
                                                                                          • Deciding on rental terms,
this page) and, if so,
                                              activities (defined on page 4), see Pub.
                                                                                          • Approving capital or repair
    2. Whether you materially                                                             expenditures, and
                                              925 for how to report their income or
participated in the activity for the tax
                                              losses.
                                                                                          • Other similar decisions.
year (see Material Participation on
page 4).                                                                                      The maximum special allowance is:
                                              Special Allowance for                       • $25,000 for single individuals and
• If the activity is a trade or business                                                  married individuals filing a joint return
activity in which you did not materially      Rental Real Estate                          for the tax year.
participate, enter the income and losses                                                  • $12,500 for married individuals who
from the activity on Worksheet 3.             Activities                                  file separate returns for the tax year
• If the activity is a trade or business      Active participation. If you actively       and lived apart from their spouses at all
activity in which you did materially          participated in a passive rental real       times during the tax year.
participate, report any income or loss        estate activity, you may be able to         • $25,000 for a qualifying estate
from the activity on the forms or             deduct up to $25,000 of loss from the       reduced by the special allowance for
schedules normally used.                      activity from your nonpassive income.       which the surviving spouse qualified.
    If the rental activity did not meet any   This special allowance is an exception      Modified adjusted gross income
of the five exceptions, it is generally a     to the general rule disallowing losses in   limitation. If your modified adjusted
passive activity. However, special rules      excess of income from passive               gross income (see the instructions for
apply if you conduct the rental activity      activities.                                 line 7 on page 8) is $100,000 or less
Instructions for Form 8582 (2009)                                -3-
($50,000 or less if married filing            appointment books, calendars, or              Test for a spouse. Participation by
separately), your loss is deductible up       narrative summaries.                          your spouse during the tax year in an
to the amount of the maximum special          Tests for individuals. You materially         activity you own may be counted as
allowance referred to in the preceding        participated for the tax year in an           your participation in the activity even if
paragraph.                                    activity if you satisfy at least one of the   your spouse did not own an interest in
     If your modified adjusted gross          following tests.                              the activity and whether or not you and
income is more than $100,000 ($50,000                                                       your spouse file a joint return for the tax
                                                  1. You participated in the activity for   year.
if married filing separately) but less than   more than 500 hours.
$150,000 ($75,000 if married filing               2. Your participation in the activity     Tests for investors. Work done as an
separately), your special allowance is        for the tax year was substantially all of     investor in an activity is not treated as
limited to 50% of the difference              the participation in the activity of all      participation unless you were directly
between $150,000 ($75,000 if married          individuals (including individuals who        involved in the day-to-day management
filing separately) and your modified          did not own any interest in the activity)     or operations of the activity. For
adjusted gross income.                        for the year.                                 purposes of this test, work done as an
                                                  3. You participated in the activity for   investor includes:
    Generally, if your modified adjusted
gross income is $150,000 or more              more than 100 hours during the tax               1. Studying and reviewing financial
($75,000 or more if married filing            year, and you participated at least as        statements or reports on operations of
separately), there is no special              much as any other individual (including       the activity.
allowance.                                    individuals who did not own any interest         2. Preparing or compiling
                                              in the activity) for the year.                summaries or analyses of the finances
   If you qualify under the active                4. The activity is a significant          or operations of the activity for your
participation rules, use Worksheet 1          participation activity for the tax year,      own use.
(see page 7).                                 and you participated in all significant          3. Monitoring the finances or
Commercial revitalization deduction           participation activities during the year      operations of the activity in a
(CRD). The special $25,000 allowance          for more than 500 hours.                      nonmanagerial capacity.
for the CRD from rental real estate               A significant participation activity is
activities is not subject to the active       any trade or business activity in which       Special rules for limited partners. If
participation rules or modified adjusted      you participated for more than 100            you were a limited partner in an activity,
gross income limits discussed earlier.        hours during the year and in which you        you generally did not materially
The $25,000 allowance must first be           did not materially participate under any      participate in the activity. You did
applied to losses from rental real estate     of the material participation tests (other    materially participate in the activity,
activities with active participation,         than this fourth test).                       however, if you met material
figured without regard to the CRD (see            5. You materially participated in the     participation test 1, 5, or 6 (see Tests
Part II). Any remaining portion of the        activity for any 5 (whether or not            for individuals on this page) for the tax
$25,000 allowance is available for the        consecutive) of the 10 immediately            year.
CRD from rental real estate activities        preceding tax years.                             However, for purposes of the
(see Part III). See the instructions for          6. The activity is a personal service     material participation tests, you are not
Worksheet 2 on page 8. For general            activity in which you materially              treated as a limited partner if you also
information about the CRD, see Pub.           participated for any 3 (whether or not        were a general partner in the
954, Tax Incentives for Distressed            consecutive) preceding tax years.             partnership at all times during the
Communities, and section 1400I.                   An activity is a personal service         partnership’s tax year ending with or
                                              activity if it involves the performance of    within your tax year (or, if shorter,
Material Participation                        personal services in the fields of health,    during the portion of the partnership’s
                                              law, engineering, architecture,               tax year in which you directly or
For the material participation tests listed                                                 indirectly owned your limited partner
below, participation generally includes       accounting, actuarial science,
                                              performing arts, consulting, or in any        interest).
any work done in connection with an
activity if you owned an interest in the      other trade or business in which capital         A limited partner’s share of an
activity at the time you did the work.        is not a material income-producing            electing large partnership’s taxable
The capacity in which you did the work        factor.                                       income or loss from all trade or
does not matter. However, work is not             7. Based on all the facts and             business and rental activities is treated
participation if:                             circumstances, you participated in the        as income or loss from the conduct of a
• It is not work that an owner would          activity on a regular, continuous, and        single passive trade or business
customarily do in the same type of            substantial basis during the tax year.        activity.
activity, and                                     You did not materially participate in     Special rules for certain retired or
• One of your main reasons for doing          the activity under this seventh test,         disabled farmers and surviving
the work was to avoid the disallowance        however, if you participated in the           spouses of farmers. Certain retired
of losses or credits from the activity        activity for 100 hours or less during the     or disabled farmers and surviving
under the passive activity rules.             tax year.                                     spouses of farmers are treated as
Proof of participation. You may                   Your participation in managing the        materially participating in a farming
prove your participation in an activity by    activity does not count in determining        activity if the real property used in the
any reasonable means. You do not              whether you materially participated           activity would meet the estate tax rules
have to maintain contemporaneous              under this test if:                           for special valuation of farm property
daily time reports, logs, or similar              a. Any person (except you) received       passed from a qualifying decedent. See
documents if you can establish your           compensation for performing services          Temporary Regulations section
participation by other reasonable             in the management of the activity, or         1.469-5T(h)(2).
means. For this purpose, reasonable               b. Any individual spent more hours        Estates and trusts. The PAL
means include, but are not limited to,        during the tax year performing services       limitations apply in figuring the
identifying services performed over a         in the management of the activity than        distributable net income and taxable
period of time and the approximate            you did (regardless of whether the            income of an estate or trust. The rules
number of hours spent performing the          individual was compensated for the            for determining material participation for
services during that period, based on         management services).                         this purpose have not yet been issued.
                                                                 -4-                              Instructions for Form 8582 (2009)
                                                  2. An activity involving the rental of            The partnership or S corporation
Grouping of Activities                        real property with an activity involving       !      does not have a record of any
Generally, one or more trade or               the rental of personal property (except       CAUTION prior year unallowed losses from

business activities or rental activities      personal property provided in                the passive activities of the partnership
may be treated as a single activity if the    connection with the real property or vice    or S corporation. If you had prior year
activities make up an appropriate             versa).                                      unallowed losses from these activities,
economic unit for the measurement of              3. Any activity with another activity    they can be found in column (c) of your
gain or loss under the passive activity       in a different type of business and in       2008 Worksheet 5.
rules.                                        which you hold an interest as a limited
    Whether activities make up an             partner or as a limited entrepreneur (as     Self-Charged Interest
appropriate economic unit depends on          defined in section 464(e)(2)) if that        Certain self-charged interest income or
all the relevant facts and                    other activity engages in holding,           deductions may be treated as passive
circumstances. The factors given the          producing, or distributing motion picture    activity gross income or passive activity
greatest weight in determining whether        films or videotapes; farming; leasing        deductions if the loan proceeds are
activities make up an appropriate             section 1245 property; or exploring for      used in a passive activity. Generally,
economic unit are:                            or exploiting oil and gas resources or       self-charged interest income and
    1. Similarities and differences in        geothermal deposits.                         deductions result from loans between
types of trades or businesses,                                                             you and a partnership or S corporation
    2. The extent of common control,          Activities conducted through                 in which you had a direct or indirect
    3. The extent of common                   partnerships, S corporations, and C          ownership interest. This includes both
ownership,                                    corporations subject to section 469.         loans you made to the partnership or
    4. Geographical location, and             Once a partnership or corporation            S corporation and loans the partnership
    5. Interdependencies between or           determines its activities under these        or S corporation made to you. It also
among the activities.                         rules, a partner or shareholder may use      includes loans from one partnership or
                                              these rules to group those activities        S corporation to another partnership or
    Example. You have a significant           with:                                        S corporation if each owner in the
ownership interest in a bakery and a          • Each other,                                borrowing entity has the same
movie theater in Baltimore and in a           • Activities conducted directly by the       proportional ownership interest in the
bakery and a movie theater in                 partner or shareholder, or                   lending entity. The self-charged interest
                                                                                           rules do not apply to your interest in a
Philadelphia. Depending on all the            • Activities conducted through other         partnership or S corporation if the entity
relevant facts and circumstances, there       partnerships and corporations.
may be more than one reasonable                                                            made an election under Regulations
method for grouping your activities. For          A partner or shareholder may not         section 1.469-7(g) to avoid the
instance, the following groupings may         treat as separate activities those           application of these rules. For more
or may not be permissible:                    activities grouped together by the           details on the self-charged interest
• A single activity,                          partnership or corporation.                  rules, see Regulations section 1.469-7.
• A movie theater activity and a bakery
activity,                                                                                  Passive Activity Income
• A Baltimore activity and a                  Passive Activity Income                      To figure your overall gain or loss from
Philadelphia activity, or                                                                  all passive activities or any passive
• Four separate activities.                   and Deductions                               activity, take into account only passive
                                              Take into account only passive activity      activity income. Do not enter income
    Once you choose a grouping under          income and passive activity deductions       that is not passive activity income on
these rules, you must continue using          to figure your net income or net loss        Form 8582 or the worksheets.
that grouping in later tax years unless a     from all passive activities or any
material change in the facts and                                                               Passive activity income includes all
                                              passive activity.                            income from passive activities,
circumstances makes it clearly
inappropriate.                                                                             including (with certain exceptions
                                                 If your passive activity is reported on
                                                                                           described in Temporary Regulations
    The IRS may regroup your activities       Schedule C, C-EZ, E, or F, and the
                                                                                           section 1.469-2T(c)(2) and Regulations
if your grouping fails to reflect one or      activity has no prior year unallowed
                                                                                           section 1.469-2(c)(2)) gain from the
more appropriate economic units and           losses or any gain or loss from the
                                                                                           disposition of an interest in a passive
one of the primary purposes of your           disposition of assets or an interest in
                                                                                           activity or of property used in a passive
grouping is to avoid the passive activity     the activity, take into account only the
                                                                                           activity at the time of the disposition.
limitations.                                  passive activity income and passive
                                              activity deductions from the activity to         Passive activity income does not
Limitation on grouping certain
                                              figure the amount to enter on Form           include the following.
activities. The following activities may
not be grouped together.                      8582 and the worksheets.                     • Income from an activity that is not a
                                                                                           passive activity.
    1. A rental activity with a trade or         If you own an interest in a passive       • Portfolio income, including interest
business activity unless the activities       activity through a partnership or an         (other than self-charged interest treated
being grouped together make up an             S corporation, the partnership or            as passive activity income), dividends,
appropriate economic unit and:                S corporation will generally provide you     annuities, and royalties not derived in
    a. The rental activity is insubstantial   with the net income or net loss from the     the ordinary course of a trade or
relative to the trade or business activity    passive activity. If, however, the           business, and gain or loss from the
or vice versa, or                             partnership or S corporation must state      disposition of property that produces
    b. Each owner of the trade or             an item of gross income or deduction         portfolio income or is held for
business activity has the same                separately to you, and the gross             investment (see section 163(d)(5)). See
proportionate ownership interest in the       income or deduction is passive activity      Temporary Regulations section
rental activity. If so, the portion of the    gross income or a passive activity           1.469-2T(c)(3).
rental activity involving the rental of       deduction (respectively), include that       • Alaska Permanent Fund dividends.
property used in the trade or business        amount in the net income or net loss         • Personal service income, including
activity may be grouped with the trade        entered on Form 8582 and the                 salaries, wages, commissions,
or business activity.                         worksheets.                                  self-employment income from trade or
Instructions for Form 8582 (2009)                                -5-
business activities in which you               Income from the following sources        than passive activities. See Temporary
materially participated for the tax year,   may be subject to the net income            Regulations section 1.469-2T(d)(7).
deferred compensation, taxable social       recharacterization rules.                   • Deductions for losses from fire,
security and other retirement benefits,     • Significant participation passive         storm, shipwreck, or other casualty or
and payments from partnerships to           activities defined on page 4.               from theft if losses similar in cause and
partners for personal services. See         • Rental of property if less than 30% of    severity do not recur regularly in the
Temporary Regulations section               the unadjusted basis of the property is     activity.
1.469-2T(c)(4).                             subject to depreciation.                    • The deduction allowed for one-half of
• Income from positive section 481          • Passive equity-financed lending           self-employment taxes.
adjustments allocated to activities other   activities.
than passive activities. See Temporary      • Rental of property incidental to a        Former Passive
Regulations section 1.469-2T(c)(5).         development activity.
• Income or gain from investments of        • Rental of property to a nonpassive        Activities
working capital.                            activity.                                   A former passive activity is any activity
• Income from an oil or gas property if     • Acquisition of an interest in a           that was a passive activity in a prior tax
                                            pass-through entity that licenses           year but is not a passive activity in the
you treated any loss from a working         intangible property.
interest in the property for any tax year                                               current tax year. A prior year unallowed
beginning after 1986 as a nonpassive                                                    loss from a former passive activity is
loss under the rule excluding working
                                            Passive Activity Deductions                 allowed to the extent of current year
interests in oil and gas wells from         To figure your overall gain or overall      income from the activity.
passive activities (see item 3 under        loss from all passive activities or any
                                            passive activity, take into account only       If current year net income from the
Activities That Are Not Passive                                                         activity is less than the prior year
Activities on page 2). See Regulations      passive activity deductions.
                                                                                        unallowed loss, enter the prior year
section 1.469-2(c)(6).                          Passive activity deductions include     unallowed loss and any current year
• Any income from intangible property       all deductions from activities that are     net income from the activity on Form
if your personal efforts significantly      passive activities for the current tax      8582 and the applicable worksheets.
contributed to the creation of the          year and all deductions from passive
                                            activities that were disallowed under the      If current year net income from the
property.                                                                               activity is more than or equal to the
• Any income treated as not from a          PAL rules in prior tax years and carried
                                                                                        prior year unallowed loss from the
passive activity under Temporary            forward to the current tax year. See
                                            Regulations section 1.469-1(f)(4).          activity, report the income and loss on
Regulations section 1.469-2T(f) and                                                     the forms and schedules normally used;
Regulations section 1.469-2(f). See            Passive activity deductions include      do not enter the amounts on Form
Recharacterization of Passive Income        losses from a disposition of property       8582.
below.                                      used in a passive activity at the time of
• Overall gain from any interest in a       the disposition and losses from a
                                                                                           If the activity has a net loss for the
PTP (see item 2 under Special                                                           current year, enter the prior year
                                            disposition of less than your entire
Instructions for PTPs beginning on                                                      unallowed loss (but not the current year
                                            interest in a passive activity. See
page 11).                                                                               loss) on Form 8582 and the applicable
                                            Dispositions on this page for the
                                                                                        worksheets.
• State, local, and foreign income tax      treatment of losses upon disposition of
refunds.                                    your entire interest in an activity.          To report a disposition of a former
• Income from a covenant not to                Passive activity deductions do not
                                                                                        passive activity, follow the rules below
compete.                                                                                under Dispositions.
                                            include the following.
• Any reimbursement of a casualty or        • Deductions for expenses (other than
theft loss included in income as            interest expense) that are clearly and      Dispositions
recovery of all or part of a prior year     directly allocable to portfolio income.
loss deduction if the deduction for the     • Qualified home mortgage interest,         Disposition of an Entire
loss was not treated as a passive           capitalized interest expenses, and other    Interest
activity deduction.                         interest expenses (except self-charged
• Cancellation of debt income to the        interest treated as a passive activity      If you disposed of your entire interest in
extent that at the time the debt was        deduction (discussed on page 5) and         a passive activity or a former passive
discharged, the debt was not properly       interest expenses properly allocable to     activity to an unrelated person in a fully
allocable under Temporary Regulations       passive activities).                        taxable transaction during the tax year,
section 1.163-8T to passive activities.     • Losses from dispositions of property      your losses allocable to the activity for
                                            that produce portfolio income or            the year are not limited by the PAL
                                            property held for investment.               rules.
Recharacterization of
                                            • State, local, and foreign income             A fully taxable transaction is a
Passive Income                              taxes.                                      transaction in which you recognize all
Certain income from passive activities      • Miscellaneous itemized deductions         realized gain or loss.
must be recharacterized and excluded        that may be disallowed under
from passive activity income. The           section 67.                                    If you are using the installment
amount of income recharacterized            • Charitable contribution deductions.       method to report this kind of
equals the net income from the sources      • Net operating loss deductions,            disposition, figure the loss for the
given below. If during the tax year you     percentage depletion carryovers under       current year that is not limited by the
received net income from any of these       section 613A(d), and capital loss           PAL rules by multiplying your overall
sources (either directly or through a       carryovers.                                 loss (which does not include losses
partnership or an S corporation), see       • Deductions and losses that would          allowed in prior years) by the following
Pub. 925 to find out how to report net      have been allowed for tax years             fraction:
income or loss from these sources. For      beginning before 1987, but for basis or
more information, see Temporary                                                            Gain recognized in the current year
                                            at-risk limitations.
Regulations section 1.469-2T(f) and         • Net negative section 481                        Unrecognized gain as of the
Regulations section 1.469-2(f).             adjustments allocated to activities other         beginning of the current year

                                                               -6-                            Instructions for Form 8582 (2009)
   A partner in a PTP is not treated as      the current year loss of $2,800 in          • Worksheet 3 is used for all other
having disposed of an entire interest in     column (b), and the prior year              passive activities.
an activity of a PTP until there is an       unallowed loss of $12,650 in column           See Pub. 925 for examples showing
entire disposition of the partner’s          (c).                                        how to complete the worksheets.
interest in the PTP.                            Example 2. Activity with overall
                                             loss. You sell your entire interest in      Worksheet 1
Reporting an Entire                          an oil and gas limited partnership that     Individuals and qualifying estates who
Disposition on Schedule D or                 was your only passive activity for a gain   actively participated in rental real estate
Form 4797                                    of $2,000. You have a current year          activities must include the income or
If you completely dispose of your entire     Schedule E loss of $3,330 and a             loss from those activities in Worksheet
interest in a passive activity or a former   Schedule E prior year unallowed loss of     1 to figure the amounts to enter on lines
passive activity, you may have to report     $1,115.                                     1a through 1c of Form 8582. Do not
net income or loss and prior year               Because you have an overall loss of      include any commercial revitalization
unallowed losses from the activity. All      $2,445 after combining the gain and         deductions (CRDs) from these activities
the net income and losses are reported       losses, none of the amounts are             in the net income or loss reported in
on the forms and schedules normally          entered on Worksheet 3 or on Form           Worksheet 1.
used.                                        8582.                                           Do not enter a prior year unallowed
    Combine all income and losses               You enter the net loss plus the prior    loss in column (c) of Worksheet 1
(including any prior year unallowed          year unallowed loss ($3,330 + $1,115 =      unless you actively participated in the
losses) from the activity for the tax year   $4,445) on Schedule E, Part II, column      activity in both the year the loss arose
to see if you have an overall gain or        (h), and the $2,000 gain on the sale on     and the current tax year. If you did not
loss.                                        Schedule D, in either Part I or Part II,    actively participate in both years, enter
                                             depending on how long you held the          the prior year unallowed loss in column
    If you have an overall gain and you                                                  (c) of Worksheet 3.
have other passive activities to report      partnership interest.
on Form 8582, include the income,                                                                 Married individuals who file
                                             Disposition of Less Than an
losses, and prior year unallowed losses
                                             Entire Interest
                                                                                           !      separate returns and lived with
                                                                                          CAUTION their spouses at any time during
on Worksheet 1, 2, or 3.
    If you have an overall gain and this     Gains and losses from the disposition       the tax year do not qualify under the
is your only passive activity or a former    of less than an entire interest in an       active participation rule and must use
passive activity, report all income and      activity are treated as part of the net     Worksheet 3 instead of Worksheet 1.
losses (including any prior year             income or net loss from the activity for    Column (a). Enter the current year net
unallowed losses) on the forms and           the current year.                           income from each activity. Enter the
schedules normally used and do not                    A disposition of less than         total of column (a) on line 1a of Form
                                                                                         8582.
use Form 8582.                                 !      substantially all of an entire
                                              CAUTION interest does not trigger the          Example. A Schedule E rental
    If you have an overall loss when you
combine the income and losses, do not        allowance of prior year unallowed           activity has current year profit of $5,000
use the worksheets or Form 8582 for          losses.                                     and a Form 4797 gain of $2,000. You
the activity. All losses (including prior    Disposition of substantially all of an      enter $7,000 in column (a).
year unallowed losses) are allowed in        activity. You may treat the disposition     Column (b). Enter the current year net
full. Report the income and losses on        of substantially all of an activity as a    loss for each activity. Do not enter any
the forms and schedules normally used.       separate activity if you can prove with     prior year unallowed losses in this
    An overall loss from an entire           reasonable certainty:                       column. Enter the total of column (b) on
disposition of a passive activity is a           1. The prior year unallowed losses,     line 1b of Form 8582.
nonpassive loss if you have an               if any, allocable to the part of the            If an activity has net income on one
aggregate loss from all other passive        activity disposed of, and                   form or schedule and a net loss on
activities. When figuring your modified          2. The net income or loss for the       another form or schedule, report the net
adjusted gross income for line 7 of          year of disposition allocable to the part   amounts separately in columns (a) and
Form 8582, be sure to take into              of the activity disposed of.                (b) of Worksheet 1.
account the overall loss from the                                                            Example. A Schedule E rental
disposition of the activity.                                                             activity has current year income of
    Example 1. Activity with overall                                                     $1,000 on line 22 of Schedule E and a
gain. You sell your entire interest in a     Specific Instructions                       current year Form 4797 loss of $4,500.
rental real estate activity in which you                                                 You enter $1,000 in column (a) and
actively participated for a gain of                                                      ($4,500) in column (b).
$15,525. $7,300 of the gain is section
                                             Part I—2009 Passive                         Column (c). Enter the prior year
1231 gain reported on Form 4797,             Activity Loss                               unallowed losses for each activity. You
Part I, and $8,225 is ordinary recapture     Use Part I to combine the net income        find these amounts on Worksheet 5,
income reported on Form 4797, Part II.       and net loss from all passive activities    column (c), of your 2008 Form 8582.
On line 23 of Schedule E (Form 1040),        to determine if you have a passive          Enter the total of column (c) from your
you report a total loss of $15,450,          activity loss (PAL) for 2009. Use           2009 Worksheet 1 on line 1c of Form
which includes a current year $2,800         Worksheets 1, 2, and 3 to determine         8582.
net loss and a $12,650 prior year            the entries for lines 1 – 3 of Part I, as   Columns (d) and (e). Combine
unallowed loss. You have an overall          follows.                                    income and losses in columns (a)
gain from the disposition ($15,525 –         • Worksheet 1 is used for rental real       through (c) for each activity, and either
$15,450 = $75).                              estate activities with active               enter the overall gain for the activity in
    Because you had other passive            participation.                              column (d) or enter the overall loss for
activities reportable on Form 8582, you      • Worksheet 2 is used for commercial        the activity in column (e). Do not enter
make the following entries on                revitalization deductions (CRDs) from       amounts from columns (d) and (e) on
Worksheet 1. You enter the $15,525           rental real estate activities (with or      Form 8582. These amounts will be
gain on the disposition in column (a),       without active participation).              used when Form 8582 is completed to
Instructions for Form 8582 (2009)                               -7-
figure the loss allowed for the current        column (d) or enter the overall loss for     bonds used to pay higher education
year.                                          the activity in column (e). Do not enter     expenses,
                                               amounts from columns (d) and (e) on          • The exclusion of amounts received
Worksheet 2                                    Form 8582. These amounts will be             under an employer’s adoption
Use Worksheet 2 to figure the amounts          used when Form 8582 is completed to          assistance program,
to enter on lines 2a and 2b for                figure the loss allowed for the current      • The student loan interest deduction,
commercial revitalization deductions           year.                                        or
(CRD) from rental real estate activities                                                    • The tuition and fees deduction.
(see Commercial revitalization
deduction (CRD) on page 4). Do not
                                               Part II—Special                                   Include in modified adjusted gross
                                                                                            income any portfolio income and
include the following amounts.                 Allowance for Rental                         expenses that are clearly and directly
• Income or other deductions from the
same activity. Instead, report any net         Real Estate Activities                       allocable to portfolio income. Also
                                                                                            include any income that is treated as
income or net loss from the activity,          With Active Participation                    nonpassive income, such as overall
except for the CRD, in Worksheet 1 if          Use Part II to figure the maximum            gain from a PTP and net income from
you actively participated in the activity      amount of rental loss allowed if you         an activity or item of property subject to
or in Worksheet 3 if you did not actively      have a net loss from a rental real estate    the recharacterization of passive
participate.                                   activity with active participation.          income rules. When figuring modified
• CRDs from passive activities other                                                        adjusted gross income, include any
than rental real estate activities.               Enter all numbers in Part II as           overall loss from the entire disposition
Instead, report these deductions as part       positive amounts (that is, greater than      of a passive activity (considered a
of the net income or loss from the             zero).                                       nonpassive loss).
passive activity in Worksheet 3.                  Example. Line 5 has a loss of
Column (a). Enter the current year                                                               Example. Your adjusted gross
                                               $42,000 (reported as a positive              income on line 37 of Form 1040 is
CRD from each rental real estate               amount) and line 9 is $25,000. You
activity. Enter the total of column (a) on                                                  $92,000, and you have taxable social
                                               enter $25,000 on line 10 (the smaller of     security benefits of $5,500 on line 20b.
line 2a of Form 8582.                          line 5 or line 9, both treated as positive   Your modified adjusted gross income is
Column (b). Enter the unallowed                amounts).                                    $86,500 ($92,000 – $5,500).
CRDs from the prior year for each
rental real estate activity. Enter the total            Married persons filing separate     Line 9. Do not enter more than
of column (b) on line 2b of Form 8582.           !      returns who lived with their
                                                CAUTION spouses at any time during the
                                                                                            $12,500 on line 9 if you are married
                                                                                            filing a separate return and you and
Column (c). Combine the amounts in             year are not eligible for the special        your spouse lived apart at all times
columns (a) and (b) for each activity          allowance. They must enter -0- on line       during the year.
and enter the overall loss for the activity    10 and go to line 15.
in column (c). Do not enter amounts
from column (c) on Form 8582. These            Line 5. Enter on line 5 the smaller of       Part III—Special
amounts will be used when Form 8582            the loss on line 1d or the loss on line 4.
is completed to figure the loss allowed
                                                                                            Allowance for
                                                   Example. Line 1d has a loss of
for the current year.                          $3,000, line 2c is zero, and line 3d has     Commercial
                                               a gain of $100. The combined loss on
Worksheet 3                                    line 4 is $2,900. You enter $2,900 as a      Revitalization
Use Worksheet 3 to figure the amounts          positive number on line 5 (the smaller       Deductions From Rental
to enter on lines 3a through 3c for:           of the loss on line 1d or the loss on
• Passive trade or business activities,        line 4).                                     Real Estate Activities
• Passive rental real estate activities                                                     Use Part III to figure the maximum
that do not qualify for the special            Line 6. Married persons filing separate
                                               returns who lived apart from their           amount of commercial revitalization
allowance (but do not include CRDs                                                          deductions allowed if you have a
reported in Worksheet 2), and                  spouses at all times during the year
                                                                                            commercial revitalization deduction
• Rental activities other than rental real     must enter $75,000 on line 6 instead of
                                                                                            from a rental real estate activity.
estate activities.                             $150,000.
                                               Line 7. To figure modified adjusted             Enter all numbers in Part III as
Column (a). Enter the current year                                                          positive amounts (that is, greater than
net income for each activity. Enter the        gross income, combine all the amounts
                                               used to figure adjusted gross income         zero.)
total of column (a) on line 3a of Form
8582. (See the example under Column            except do not take into account:                      Married persons filing separate
                                               • Passive income or loss included on
(a) for Worksheet 1, on page 7.)
                                               Form 8582,                                     !      returns who lived with their
                                                                                             CAUTION spouses at any time during the
Column (b). Enter the current year net
loss for each activity. Enter the total of
                                               • Any rental real estate loss allowed to     year are not eligible for the special
                                               real estate professionals (defined under     allowance. They must enter -0- on line
column (b) on line 3b of Form 8582.
                                               Activities That Are Not Passive              14 and go to line 15.
(See the example under Column (b) for
                                               Activities on page 2),
Worksheet 1, on page 7.)
                                               • Any overall loss from a PTP,               Line 11. Enter $12,500 (reduced by
Column (c). Enter the unallowed                • The taxable amount of social security      the amount, if any, on line 10) on line
losses for the prior years for each            and tier 1 railroad retirement benefits,     11 if you are married filing a separate
activity. You find these amounts on            • The deduction allowed under section        return and you and your spouse lived
Worksheet 5, column (c), of your 2008          219 for contributions to IRAs and            apart at all times during the year.
Form 8582. Enter the total of column           certain other qualified retirement plans,
(c) from your 2009 Worksheet 3 on              • The domestic production activities         Part IV—Total Losses
line 3c of Form 8582.                          deduction,
Columns (d) and (e). Combine                   • The deduction allowed for one-half of      Allowed
income and losses in columns (a)               self-employment taxes,                       Use Part IV to figure the amount of the
through (c) for each activity, and either      • The exclusion from income of interest      PAL (as determined in Part I) allowed
enter the overall gain for the activity in     from series EE and I U.S. savings            for 2009 from all passive activities.
                                                                  -8-                             Instructions for Form 8582 (2009)
Line 16. Use the worksheets on Form            • If you entered an amount on line 14,        Column (a). Enter the amounts, if any,
8582 and the following instructions for        list on Worksheet 4 all activities with an    from column (d) of Worksheet 4 (from
those worksheets to figure the                 overall loss in column (c) of                 column (e) of Worksheet 1 or column
unallowed loss to be carried forward           Worksheet 2.                                  (c) of Worksheet 2 if you did not have
and the allowed loss to report on your         • If you entered amounts on both lines        to complete Worksheet 4). Also enter
forms and schedules for 2009.                  10 and 14 of Form 8582, you must              the losses, if any, from column (e) of
                                               complete two separate Worksheets 4.           Worksheet 3.
Worksheets 1, 2, and 3                         For the second worksheet, you either          Column (b). Divide each of the
Worksheets 1 and 3, columns (d) and            may attach an extra copy of page 2 of         individual losses shown in column (a)
(e), show whether an activity had an           Form 8582 or your own schedule in the         by the total of all the losses in column
overall gain or loss. Worksheet 2,             same format as Worksheet 4. On the            (a) and enter this ratio for each activity
column (c), shows the overall loss for         first Worksheet 4, list all activities with   in column (b). The total of all the ratios
CRDs from rental real estate activities.       an overall loss in column (e) of              must equal 1.00.
If you have activities that show overall       Worksheet 1. On the second                    Column (c). Complete the following
gain in column (d) of Worksheet 1 or 3,        Worksheet 4, list all activities with an      computation.
report all the income and losses listed        overall loss in column (c) of
in columns (a), (b), and (c) for those         Worksheet 2.
activities on the proper forms and                                                           A. Enter as a positive amount
                                               Column (a). Enter the overall loss               line 4 of Form 8582 . . . . . . .
schedules.                                     from column (e) of Worksheet 1 or
    If you have activities that show an        column (c) of Worksheet 2 for each            B. Add lines 10 and 14 of
                                               activity.                                        Form 8582 . . . . . . . . . . . . .
overall loss in column (e) of Worksheet
1 or 3 or column (c) of Worksheet 2,           Column (b). Divide each of the                C. Subtract line B from line A . .
you must allocate your allowed loss on         individual losses shown in column (a)
line 16 of Form 8582 to those activities       by the total of all the losses in column         Multiply each ratio in column (b) by
by completing Worksheets 4, 5, and 6           (a) and enter this ratio for each activity    the amount on line C above, and enter
or 7.                                          in column (b). The total of all the ratios    the result in column (c).
    Complete Worksheet 4 only if you           in column (b) must equal 1.00.
entered an amount (other than zero) on         Column (c). Multiply each ratio in            Worksheets 6 and 7
line 10 or 14 of Form 8582. Otherwise,         column (b) by the amount on line 10 or        These worksheets allocate your
skip Worksheet 4 and complete                  line 14 of Form 8582, and enter the           unallowed and allowed losses for each
Worksheet 5 for all activities in              results in column (c). The total of           activity.
Worksheets 1 or 3 that have overall            column (c) must be the same as line 10            If you have losses from any activity
losses in column (e) and all activities in     or line 14 of Form 8582.                      that are reported on two or more
Worksheet 2.                                       Column (c) total is the same as           different forms or schedules, use
                                               column (a) total. If the total losses in      Worksheet 7 instead of Worksheet 6 for
Worksheet 4                                    column (c) are the same as those in           that activity.
Use Worksheet 4 to allocate the special        column (a), the losses in Worksheets 1            Also use Worksheet 7 instead of
allowance on line 10 or line 14 of Form        and 2 are allowed in full and are not         Worksheet 6 for any activity with two or
8582 among your rental real estate             carried over to Worksheet 5. Report all       more transactions that are reported on
activities.                                    amounts in columns (a), (b), and (c) of       the same form or schedule but must be
   In the first column of Worksheet 4,         Worksheet 1 and columns (a) and (b) of        separately identified for tax purposes.
enter the name of each activity. In the        Worksheet 2 on the proper forms and           Transactions that must be separately
second column, enter the form or               schedules.                                    identified include capital losses that are
schedule and line number on which the              Column (c) total is less than             28% rate losses and those that are not.
loss will be reported.                         column (a) total. If the total losses in      Note. 28% rate gain or loss includes
   Example. You receive a Schedule             column (c) are less than the total losses     all collectibles gains and deductible
K-1 from partnership P that reports            in column (a), complete column (d).           long-term losses and section 1202 gain
losses from two rental real estate             Column (d). Subtract column (c) from          on the sale of qualified small business
activities, Activity X and Activity Y. The     column (a) and enter the results in           stock. See the instructions for Schedule
losses from partnership P are reported         column (d). Also enter the amounts            D (Form 1040) for details, including the
on line 28A of Schedule E. In the first        from column (d) of Worksheet 4 in             definitions of “collectibles gains and
two columns of Worksheet 4, enter:             column (a) of Worksheet 5.                    losses” and “section 1202 gain.”
 Name of Activity     Form or Schedule         Worksheet 5                                   Worksheet 6
                                               Complete Worksheet 5 if any activities        Use Worksheet 6 for any activity listed
 Activity X           Sch E, line 28A
                                               have an overall loss in column (e) of         in Worksheet 5 if all the loss from that
 Activity Y           Sch E, line 28A          Worksheet 3 or losses in column (d) of        activity is reported on one form or
                                               Worksheet 4 (in column (e) of                 schedule and no transactions need to
If the loss from an activity is reported in    Worksheet 1 or column (c) of                  be identified separately (as discussed
more than one place, identify both             Worksheet 2 if you did not have to            above).
locations in the second column (for            complete Worksheet 4).                           Example. Use Worksheet 6 if all
example, Sch E, line 28A/Form 4797,               On Worksheet 5, enter the name of          the loss from an activity is reported on
line 2). If you need additional space,         each activity and the form or schedule        Schedule E, even though part of the
show this information on an attached           and line number on which the loss will        loss is a current year Schedule E loss
statement.                                     be reported. See the example for              and part of it is from a Schedule E prior
    Enter all activities with overall losses   Worksheet 4. Identify any deduction           year unallowed loss.
from Worksheets 1 and 2 as follows.            from Worksheet 2 on a separate line              On Worksheet 6, enter the name of
• If you entered an amount on line 10,         (even if the amount is from an activity       each activity and the form or schedule
list on Worksheet 4 all activities with an     also shown on Worksheet 1 or 3) and           and line number on which the loss is
overall loss in column (e) of                  add “CRD” after the name of the               reported. See the example for
Worksheet 1.                                   activity.                                     Worksheet 4. Identify each CRD from
Instructions for Form 8582 (2009)                                 -9-
Worksheet 5 on a separate line and            from the activity that is reported on the        Worksheet 3
add “CRD” after the name of the               same form or, in the case of Schedule
activity.                                     D and Form 4797, the same part.                  Activity I has an overall loss of
Column (a). For each activity entered                                                       $4,000 (current year long-term capital
                                                  If you have a Schedule D 28% rate
in Worksheet 6, enter the net loss plus                                                     loss of $3,000 and a prior year
                                              loss and a Schedule D non-28%-rate
the prior year unallowed loss for the                                                       unallowed long-term capital loss of
                                              loss, see Example of Schedule D (Form
activity. Figure this amount by adding        1040) transactions on this page before        $1,000). Activity II has an overall gain
the losses in columns (b) and (c) of          completing Worksheet 7.                       of $870 (current year net income of
Worksheets 1 and 3 or enter the loss                                                        $1,100 less a current year long-term
from column (c) of Worksheet 2.               Line 1b, column (a). Enter any net            capital loss of $230). Line 16 of Form
                                              income from the activity that is reported     8582 shows an allowed loss of $1,100.
Column (b). For each activity entered         on the same form or schedule (or on
in Worksheet 6, enter the amount from         the same part of the same form or                Since Activity II has an overall gain,
column (c) of Worksheet 5 for the             schedule) as the loss on line 1a,             the amounts shown in columns (a) and
activity. These are your unallowed            column (a).                                   (b) of Worksheet 3 for that activity are
losses for 2009. Keep a record of these
amounts so the losses can be used to              Example. You enter a prior year           reported on the proper forms and
figure your PAL next year.                    unallowed loss from Form 4797, Part I,        schedules and are not shown on any
                                              on line 1a. If the activity has a current     other worksheet.
Column (c). Subtract column (b) from
                                              year Form 4797, Part I, gain, enter the
column (a). These are your allowed                                                             Worksheet 5
                                              gain on line 1b, column (a). If the
losses for 2009. Report the amounts in
                                              activity does not have a Form 4797,
this column on the forms and schedules                                                         Activity I has an unallowed loss of
                                              Part I, gain, enter -0- on line 1b, column
normally used.                                                                              $3,130 (line 4 of Form 8582 ($3,130)
                                              (a).
   See the forms and schedules listed                                                       less the sum of lines 10 and 14 of Form
under How To Report Allowed Losses            Line 1c, column (b). Subtract line 1b,        8582 (-0-) x 100%).
on page 11. Also, see Pub. 925 for an         column (a), from line 1a, column (a),
extensive example of how to report            and enter the result in column (b). If line      Worksheet 7
passive income and losses on the              1b, column (a), is more than line 1a,
forms and schedules.                          column (a), enter -0- in column (b).             This worksheet is used to figure the
                                              Column (c). Divide each of the losses         portion of the unallowed loss
Worksheet 7                                   entered in column (b) by the total of         attributable to the 28% rate loss and
Use Worksheet 7 for any activity listed       column (b) and enter the ratio in             the portion attributable to the
in Worksheet 5 that has losses that are       column (c). The total of this column          non-28%-rate loss.
reported on two or more different forms       must be 1.00.
and schedules or on different parts of                                                          The loss attributable to the 28% rate
the same form or schedule (for                Column (d). Multiply the unallowed            loss ($1,000) and the loss attributable
example, 28% rate and non-28%-rate            loss for this activity, found in Worksheet    to the non-28%-rate loss ($3,000) are
capital losses reported on Schedule D).       5, column (c), by each ratio in column        separate entries in Worksheet 7. The
Worksheet 7 allocates the allowed and         (c) of Worksheet 7. If -0- is entered in      ratio of each loss to the total of the two
unallowed loss for the activity and           column (b) of Worksheet 7, also enter         losses is figured as follows. $1,000/
allocates the allowed loss to the             -0- for that form or schedule in column       $4,000 = .25. $3,000/$4,000 = .75.
different forms or schedules (or              (d).                                          Each of these ratios is multiplied by the
different parts of the same form or               The amount in column (d) is the           unallowed loss for Activity I, shown in
schedule) used to report the losses.          unallowed loss for 2009. Keep a record        column (c) of Worksheet 5 ($3,130).
    Only losses that would cause a            of this worksheet so you can use the
                                              losses to figure your PAL next year.             Unallowed losses for Activity I:
difference in tax liability if they were
reported on a different form or schedule      Column (e). Subtract the amount in            • 28% rate loss: .25 x $3,130 =
or on different parts of the same form or     column (d) from the loss entered on line      $782.50.
schedule are kept separate. Those             1a, column (a). This is the allowed loss      • Non-28%-rate loss: .75 x $3,130 =
forms, schedules, and parts are:              for 2009 to enter on the forms or             $2,347.50.
• Schedules C, E, and F.                      schedules. The forms and schedules
• Schedule D (Parts I and II (28% rate        you use must show the losses from this           Allowed losses for Activity I:
losses and non-28%-rate losses)).             column and the income, if any, for that       • 28% rate loss: $1,000 − $782.50 =
Note. You must make a separate                activity from column (a) of Worksheet 1       $217.50.
entry in Schedule D, Part I or Part II, for   or Worksheet 3.                               • Non-28%-rate loss: $3,000 −
each transaction reported. See the                Example of Schedule D (Form               $2,347.50 = $652.50.
Instructions for Schedule D (Form             1040) transactions. The taxpayer had
1040).                                                                                          The total loss allowed for Activity I
                                              the following Schedule D (Form 1040)
• Forms 4684 (Section B), 4797                transactions from passive activities in
                                                                                            ($870) is entered in Part II of Schedule
(Parts I and II), and 4835.                                                                 D (Form 1040). The 28% rate loss
                                              2009.
                                                                                            ($217.50) is entered on the 28% Rate
    Use a separate copy of Worksheet 7            Activity I                                Gain Worksheet (see Schedule D
for each activity for which you have                                                        instructions for line 18). Keep a record
losses reported on two or more different          A passive activity prior year
                                              unallowed long-term capital loss (a 28%       of the unallowed 28% rate and
forms or schedules or different parts of                                                    non-28%-rate losses to figure the PAL
the same form or schedule.                    rate loss) of $1,000 and a current year
                                              long-term capital loss (a non-28%-rate        for these transactions next year.
    On Worksheet 7, enter the form or         loss) of $3,000.
schedule and line number on the dotted                                                         See the forms and schedules listed
line above each line 1a (for example,             Activity II                               under How To Report Allowed Losses
Schedule D, line 12, to report a 28%              A current year collectibles loss (a       on page 11. Also, see Pub. 925 for an
rate loss from a partnership).                28% rate loss) of $230 and net income         extensive example of how to report
Line 1a, column (a). Enter the net            of $1,100 from Schedule E (Form               passive income and losses on the
loss plus any prior year unallowed loss       1040).                                        forms and schedules.

                                                                 -10-                             Instructions for Form 8582 (2009)
                                             year unallowed Schedule C loss of            Entire disposition with an overall
How To Report                                $6,000. The loss allowed for 2009 is         loss. If you made an entire disposition
Allowed Losses                               $6,000. You enter a net loss of $1,000       of your interest in a passive activity and
                                             on line 31 of Schedule C (the $5,000         that activity had an overall loss, none of
Line 4 is income. If line 4 of Form          net profit for the year less the $6,000      the gains, if any, or losses were
8582 shows net income or zero, all the       loss allowed for the year). To the left of   entered on Form 8582 or the
losses in columns (b) and (c) of             the entry space, you enter “PAL.”            worksheets. However, all the gains and
Worksheets 1 and 3 and all the                                                            losses must be reported on the forms
deductions in columns (a) and (b) of             See Schedule D and Form 4797
                                             instructions on this page if you also had    or schedules normally used. To the left
Worksheet 2 are allowed in full. Report                                                   of the entry space, enter “EDPA.”
the income and losses in columns (a),        passive gains and losses from the sale
(b), and (c) of Worksheets 1 and 3 and       of assets or of an interest in a passive     Entire disposition with an overall
deductions in columns (a) and (b) of         activity.                                    gain. Gains and losses from this
Worksheet 2 on the forms and                 Schedule E, Part I. Enter the allowed        activity were included on Form 8582 so
schedules normally used.                     loss from the worksheet on line 23 of        that the gains might offset other PALs.
Line 16 is the same as the total of          Schedule E. An activity that has net         Report all the gains and losses on the
lines 1b, 1c, 2a, 2b, 3b, and 3c. In         profit for the year and prior year           forms and schedules normally used,
this case also, all the losses in columns    unallowed losses will have net profit on     and to the left of the entry space, enter
(b) and (c) of Worksheets 1 and 3 and        line 22 and the allowed loss on line 23.     “EDPA.”
all the deductions in columns (a) and        The allowed loss on line 23 will include
                                             the loss allowed to the extent of the net
(b) of Worksheet 2 are allowed in full.
Report the income and losses in              profit. Line 24 of Schedule E will show      Publicly Traded
columns (a), (b), and (c) of Worksheets      total profit and line 25 will show total     Partnerships (PTPs)
1 and 3 and deductions in columns (a)        losses allowed (both passive and             A PTP is a partnership whose interests
and (b) of Worksheet 2 on the forms          nonpassive). Line 26 will show the total     are traded on an established securities
and schedules normally used.                 net profit or loss.                          market or are readily tradable on a
Columns (a) and (c) of Worksheet 4           Schedule E, Parts II and III. Any net        secondary market (or its substantial
are the same amount. In this case, all       income shown on your Schedule K-1            equivalent).
the losses in columns (b) and (c) of         that is passive income must be entered
Worksheet 1 and all the deductions in        as passive income in the appropriate            An established securities market
columns (a) and (b) of Worksheet 2 are       column of Schedule E, Part II or III.        includes any national securities
allowed in full. Report the income and       Enter the passive loss allowed from          exchange and any local exchange
losses in columns (a), (b), and (c) of       Worksheet 6 or 7 in the appropriate          registered under the Securities
Worksheet 1 and the deductions in            column for passive losses. The passive       Exchange Act of 1934 or exempted
columns (a) and (b) of Worksheet 2 on        losses allowed include the loss allowed      from registration because of the limited
the forms and schedules normally used.       to the extent of any net income from the     volume of transactions. It also includes
                                             activity. Passive net income or loss         any over-the-counter market.
Losses allowed in column (c) of
Worksheet 6. The amounts in column           reportable on Schedule E, Part II,               A secondary market generally exists
(c) of Worksheet 6 are the losses or         includes any self-charged interest
                                                                                          if a person stands ready to make a
deductions allowed for 2009 for the          income and deductions treated as
                                                                                          market in the interest. An interest is
activities listed in that worksheet.         passive activity income and deductions.
                                                                                          treated as readily tradable if the interest
Report the loss allowed from column (c)      See Self-Charged Interest on page 5.
                                                                                          is regularly quoted by persons, such as
of Worksheet 6 and the income, if any,           See Schedule D and Form 4797             brokers or dealers, who are making a
for that activity from column (a) of         instructions below if you also had           market in the interest.
Worksheet 1 or 3, on the form or             passive gains or losses from the sale of
schedule normally used.                      assets or of an interest in a passive            The substantial equivalent of a
                                             activity.                                    secondary market exists if there is no
Losses allowed in column (e) of                                                           identifiable market maker, but holders
Worksheet 7. The amounts in column           Form 4684, Section B. Any passive            of interests have a readily available,
(e) of Worksheet 7 are the losses or         activity gain from Form 4684 is              regular, and ongoing opportunity to sell
deductions allowed for 2009 for the          unchanged. It was used on Form 8582          or exchange interests through a public
activity listed on that worksheet. Report    to determine allowable PALs. If you do       means of obtaining or providing
the losses allowed from column (e) of        not have passive losses on Form 4684,        information on offers to buy, sell, or
Worksheet 7 and the income, if any, for      complete Form 4684 and follow the            exchange interests. Similarly, the
that activity from column (a) of             instructions for that form for where to      substantial equivalent of a secondary
Worksheet 1 or 3, on the forms or            report the gain.                             market exists if prospective buyers and
schedules normally used.                                                                  sellers have the opportunity to buy, sell,
                                                 If you have passive losses on Form
Schedules C and F, and Form 4835.            4684, cross through the amount you           or exchange interests in a timeframe
Enter on the net profit or loss line of      first entered on line 37, 38, 44a, 44b, or   and with the regularity and continuity
your schedule or form the allowed            45 of that form, and enter the allowed       that the existence of a market maker
passive loss from the worksheet. To the      loss from the worksheet. To the left of      would provide.
left of the entry space, enter “PAL.”        the entry space, enter “PAL.”
    If the net profit or loss line on your   Schedule D and Form 4797. If you             Special Instructions for PTPs
form or schedule shows net profit for        sold assets from a passive activity or       Section 469(k) provides that the
the year, reduce the net profit by the       you sold an interest in your passive         passive activity limitations must be
allowed loss from Worksheet 6 or 7,          activity, all gains from the activity must   applied separately to items from each
and enter the result on the net profit or    be entered on the appropriate line of        PTP. PALs from a PTP generally may
loss line.                                   Schedule D or Form 4797. Identify the        be used only to offset income or gain
    Example. Schedule C shows net            gain as “FPA.” Enter any allowed             from passive activities of the same
profit for the year of $5,000 from a         losses for Schedule D or Form 4797 on        PTP. The special allowance (including
passive activity. The activity also has a    the appropriate line, and to the left of     CRDs) for rental real estate activities
Form 4797 gain of $2,500 and a prior         the entry space, enter “PAL.”                does not apply to PALs from a PTP.
Instructions for Form 8582 (2009)                              -11-
Passive activity loss rules for              schedule or form you normally use the         unallowed losses) allocable to the
partners in PTPs. Do not report              portion of the loss equal to the income.      activity for the year are not limited by
passive income, gains, or losses from a      Report the income as passive income           the passive loss rules. A fully taxable
PTP on Form 8582. Instead, use the           on the form or schedule you normally          transaction is one in which you
following rules to figure and report your    use.                                          recognize all your realized gain or loss.
income, gains, and losses from passive          Example. You have a Schedule E             Report the income and losses on the
activities you held through each PTP         loss of $12,000 (current year losses          forms and schedules normally used.
you owned during the tax year.               plus prior year unallowed losses) and            For rules on the disposition of an
    1. Combine any current year              Form 4797 gain of $7,200 from the             entire interest reported using the
income, gains and losses, and any prior      passive activities of a PTP. You report       installment method, see Disposition of
year unallowed losses to see if you          the $7,200 gain on the appropriate line       an Entire Interest beginning on page 6.
have an overall loss from the PTP.           of Form 4797. On Schedule E, Part II,
Include only the same types of income        you report $7,200 of the losses as a          Paperwork Reduction Act Notice.
and losses you would include to figure       passive loss in column (f). You carry         We ask for the information on this form
your net income or loss from a               forward the unallowed loss of $4,800          to carry out the Internal Revenue laws
non-PTP passive activity. See Passive        ($12,000 − $7,200).                           of the United States. You are required
Activity Income and Deductions on                                                          to give us the information. We need it to
                                                If you have unallowed losses from
page 5.                                                                                    ensure that you are complying with
                                             more than one activity of the PTP or
    2. If you have an overall gain, the                                                    these laws and to allow us to figure and
                                             from the same activity of the PTP that
net gain portion (total gain minus total                                                   collect the right amount of tax.
                                             must be reported on different forms or
losses) is nonpassive income.                schedules, allocate the unallowed                 You are not required to provide the
     It is important to figure the           losses on a pro rata basis to figure the      information requested on a form that is
nonpassive income because it must be         amount allowed for each activity or on        subject to the Paperwork Reduction Act
included in modified adjusted gross          each form or schedule.                        unless the form displays a valid OMB
income to figure the special allowance                                                     control number. Books or records
for active participation in a non-PTP               To allocate and keep a record of       relating to a form or its instructions
rental real estate activity on Form 8582.     TIP the unallowed losses, use                must be retained as long as their
Also, you may be able to include the                  Worksheets 5, 6, and 7 of Form       contents may become material in the
nonpassive income in investment              8582.                                         administration of any Internal Revenue
income when figuring your investment                                                       law. Generally, tax returns and return
                                                 List each activity of the PTP in
interest expense deduction. See Form                                                       information are confidential, as required
                                             Worksheet 5. Enter the overall loss
4952, Investment Interest Expense                                                          by section 6103.
                                             from each activity in column (a).
Deduction.                                   Complete column (b) of Worksheet 5                The time needed to complete and
    Report all gains and allowed losses      according to its instructions. Multiply the   file this form will vary depending on
from the activity on the forms or            total unallowed loss from the PTP by          individual circumstances. The
schedules normally used, and to the left     each ratio in column (b) and enter the        estimated burden for individual
of each entry space, enter “From PTP.”       result in column (c) of Worksheet 5.          taxpayers filing this form is approved
                                                                                           under OMB control number 1545-0074
    Example. You have Schedule E                 Next, complete Worksheet 6 for
                                                                                           and is included in the estimates shown
income of $8,000 and a Form 4797             each activity listed in Worksheet 5 if all
                                                                                           in the instructions for their individual
prior year unallowed loss of $3,500          the loss from that activity is reported on
                                                                                           income tax return. The estimated
from the passive activities of a PTP.        one form or schedule. Use Worksheet 7
                                                                                           burden for all other taxpayers who file
You have a $4,500 overall gain ($8,000       instead of Worksheet 6 for each activity
                                                                                           this form is shown below.
− $3,500) that is nonpassive income.         with losses reported on two or more
On Schedule E, Part II, you report the       different forms or schedules (or on
                                                                                           Recordkeeping . . . . . . . .           26 min.
$4,500 net gain as nonpassive income         different parts of the same form or
in column (j). In column (g), you report     schedule). Enter the net loss plus any        Learning about the law or
the remaining Schedule E gain of             prior year unallowed losses in column         the form . . . . . . . . . . . . . 1 hr., 43 min.
$3,500 ($8,000 − $4,500) as passive          (a) of Worksheet 6 (or Worksheet 7 if
                                                                                           Preparing the form . . . . . 1 hr., 43 min.
income. On the appropriate line of Form      applicable). The losses in column (c) of
4797, you report the prior year              Worksheet 6 (column (e) of Worksheet          Copying, assembling,
unallowed loss of $3,500. You enter          7) are the allowed losses to report on        and sending the form to
“From PTP” to the left of each entry         your forms or schedules. Report these         the IRS . . . . . . . . . . . . . .     48 min.
space.                                       losses and any income from the PTP
    3. If you have an overall loss (but      on the forms and schedules normally              If you have comments concerning
did not dispose of your entire interest in   used.                                         the accuracy of these time estimates or
the PTP to an unrelated person in a                                                        suggestions for making this form
                                                  4. If you have an overall loss and
fully taxable transaction during the                                                       simpler, we would be happy to hear
                                             you disposed of your entire interest in
year), the losses are allowed only to the                                                  from you. See the instructions for the
                                             the PTP to an unrelated person in a
extent of the income, and the excess                                                       tax return with which this form is filed.
                                             fully taxable transaction during the year,
loss is carried forward to use in a future   your losses (including prior year
year if you have income to offset it.
Report as a passive loss on the




                                                                -12-                               Instructions for Form 8582 (2009)