For the most part, passive activities include trade or business activities in which
you do not materially participate and rental activities. You materially participate
in an activity if you are involved on a regular, continuous, and substantial basis in
the operation of the activity. Rental real estate activities are not passive activities
if you are a real estate professional and meet certain requirements. Guidelines for
determining material participation and the rules for a real estate professional can be found in
Publication 925,
Passive Activity and At-Risk Rules.
Generally, losses and credits from passive activities that exceed the income and
tax attributable to passive activities are disallowed, but carried forward.
A special rule applies for passive rental real estate activities in which you actively
participate. The rules for active participation are different from those for material
participation and are discussed in Publication 925. Passive losses are first offset
against any passive income; any excess passive losses are disallowed unless they arise
from rental real estate. Up to $25,000 of additional passive losses from rental real
estate activities in which you actively participate may be used to offset income from
non-passive sources. This $25,000 amount is phased out for individuals with a modified
adjusted gross income in excess of $100,000. For those who are married filing separately
and who lived apart from their spouse the entire year, the additional passive loss allowed
is limited to $12,500 and the phase-out begins at a modified adjusted gross income in
excess of $50,000.
Use Form 8582,
Passive Activity Loss Limitations, to summarize income and losses from
passive activities and to compute the deductible losses. Use
Form 8582-CR to
report passive activity credit limitations.
Generally, passive losses that have previously been disallowed are allowed in
full in the year the taxpayer disposes of the activity. Unused passive credits are
not allowed upon disposition, but an election can be made to increase the basis of
the credit property. Publications and forms may be
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or ordered by calling 1-800-829-3676.
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