Contents Introduction  ........................................ 1 Passive Activity Limits  ...................... 2 Who Must Use These Rules?  ........ 2 Passive Activities  ............................ 2 Activities That Are Not Passive Activities ................................... 4 Passive Activity Income  .................. 5 Passive Activity Deductions ............ 6 Grouping Your Activities  ................. 6 Recharacterization of Passive Income ..................................... 7 Dispositions ..................................... 9 How To Report Your Passive Activity Loss  ............................. 9 Comprehensive Example   .................. 9 At-Risk Limits  ..................................... 19 Who Is Affected?  ............................ 19 Activities Covered by the At-Risk Rules ........................................ 19 At-Risk Amounts  ............................. 20 Amounts Not At Risk  ...................... 21 Reductions of Amounts At Risk ...... 21 Recapture Rule  ............................... 21 How To Get More Information   .......... 21 Index  .................................................... 23 Important Change for 1999 Photographs   of   missing   children. The Internal Revenue Service is a proud partner with the National Center for Missing and Ex- ploited   Children.   Photographs   of   missing children selected by the Center may appear in this publication on pages that would other- wise  be  blank. You  can  help  bring  these children home by looking at the photographs and calling  1–800–THE–LOST (1–800–843– 5678) if you recognize a child. Introduction This publication discusses two sets of rules that may limit the losses you can deduct on your   tax   return   from   any   trade,   business, rental, or other income-producing activity. The first part of the publication contains the pas- sive activity rules. The second part discusses the at-risk rules. However, when you figure your allowable losses from any activity,  you must  apply  the  at-risk  rules  before  the passive activity rules. Useful Items You may want to see: Publication 527 Residential Rental Property (In- cluding Rental of Vacation Homes) 541 Partnerships Department of the Treasury Internal Revenue Service Publication 925 Cat. No. 64265X Passive Activity and At-Risk Rules For use in preparing 1999  Returns