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

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

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

Line 9.   Married persons filing separate returns who lived apart from their spouses at all times during the year must enter $75,000 on line 9 instead of $150,000. Married persons filing separate returns who lived with their spouses at any time during the year are not eligible for the special allowance. They must enter zero on line 16 and go to line 17.

Line 10.   To figure modified adjusted gross income, combine all the amounts used to figure adjusted gross income except:

• Any passive activity loss as defined in section 469(d)(1);
• Any rental real estate loss allowed under section 469(c)(7) to real estate professionals (defined under Activities That Are Not Passive Activities on page 1);
• Any overall loss from a PTP;
• The taxable amount of social security and tier 1 railroad retirement benefits;
• The deduction allowed under section 219 for contributions to IRAs and certain other qualified retirement plans;
• The deduction allowed under section 164(f) for one-half of self-employment taxes;
• The exclusion from income of interest from series EE and I U.S. savings bonds used to pay higher education expenses;
• The exclusion of amounts received under an employer's adoption assistance program;
• The student loan interest deduction; or
• The tuition and fees deduction.

Worksheet 3

Include in modified adjusted gross income any portfolio income and expenses that are clearly and directly allocable to portfolio income. Also include any income that is treated as nonpassive income, such as overall gain from a PTP and net income from an activity or item of property subject to the recharacterization of passive income rules. For information on recharacterization of income, see Pub. 925 or Temporary Regulations section 1.469-2T(f) and Regulations section 1.469-2(f).

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

Line 12.   Do not enter more than $12,500 on line 12 if you are married filing a separate return and you and your spouse lived apart at all times during the year. Married persons filing separate returns who lived with their spouses at any time during the year are not eligible for the special allowance. They must enter zero on line 16 and go to line 17.

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

A.	Taxable income
B.	Tax on line A. Use the Tax Table, Tax Rate Schedules, the Capital Gain Tax Worksheet, or Schedule D (Form 1040) (or Schedule D (Form 1041)), whichever applies
C.	Enter amount from line A above
D.	Enter amount from line 14 of Form 8582-CR
E.	Subtract line D from line C
F.	Tax on line E. Use the Tax Table, Tax Rate Schedules, the Capital Gain Tax Worksheet, or Schedule D (Form 1040) (or Schedule D (Form 1041)), whichever applies
G.	Subtract line F from line B and enter the result on line 15 of Form 8582-CR

Note:   When using taxable income in the above computation, it is not necessary to refigure items that are based on a percentage of adjusted gross income.

Part III - Special Allowance for Rehabilitation Credits From Rental Real Estate Activities and Low-Income Housing Credits for Property Placed in Service Before 1990 (or From Pass-Through Interests Acquired Before 1990)

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

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

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

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

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

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

A.	Taxable income
B.	Tax on line A. Use the Tax Table, Tax Rate Schedules, the Capital Gain Tax Worksheet, or Schedule D (Form 1040) (or Schedule D (Form 1041)), whichever applies
C.	Enter amount from line A above
D.	Enter amount from line 26 of Form 8582-CR
E.	Subtract line D from line C
F.	Tax on line E. Use the Tax Table, Tax Rate Schedules, the Capital Gain Tax Worksheet, or Schedule D (Form 1040) (or Schedule D (Form 1041)), whichever applies
G.	Subtract line F from line B and enter the result on line 27 of Form 8582-CR

Note:   When using taxable income in the above computation, it is not necessary to refigure items that are based on a percentage of adjusted gross income.

Part IV - Special Allowance for Low-Income Housing Credits for Property Placed in Service After 1989

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

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

Line 35.   Figure the tax attributable to the remaining special allowance as follows.

A.	Taxable income
B.	Tax on line A. Use the Tax Table, Tax Rate Schedules, the Capital Gain Tax Worksheet, or Schedule D (Form 1040) (or Schedule D (Form 1041)), whichever applies
C.	Enter $25,000 ($12,500 if married filing separate return and you and your spouse lived apart at all times during the year)
D.	Enter amount, if any, from line 10 of Form 8582
E.	Enter the amount, if any, from line 14 of Form 8582
F.	Subtract lines D and E from line C
G.	Subtract line F from line A
H.	Tax on line G. Use the Tax Table, Tax Rate Schedules, the Capital Gain Tax Worksheet, or Schedule D (Form 1040) (or Schedule D (Form 1041)), whichever applies
I.	Subtract line H from line B
J.	Add lines 16 and 30 of Form 8582-CR and enter the total
K.	Tax attributable to the remaining special allowance. Subtract line J from line I. Enter the result on line 35 of Form 8582-CR

Note:   When using taxable income in the above computation, it is not necessary to refigure items that are based on a percentage of adjusted gross income.

Part V - Passive Activity Credit Allowed

Use Part V to figure the PAC (as determined in Part I) that is allowed for 2002 for all passive activities.

Line 37.   If you have only one type of credit, the amount on line 37 is the credit allowed for the year. Enter this amount on the form where it is normally reported. See Reporting Allowed Credits on Your Tax Return below. Your unallowed credit is line 5 minus line 37.

Use Worksheets 5 through 9, whichever apply, on pages 13 and 14, to allocate the allowed and unallowed credits if you have credits from more than one activity. Also use the worksheets if you must allocate the credits because they are reported on different forms.

Keep a record of each unallowed credit and the activity to which it belongs so you may claim the credit if it becomes allowable in a future year.

Reporting Allowed Credits on Your Tax Return

Form 3800.   Enter on line 5 of Form 3800 the total passive activity general business credit allowed.

Form 8586.   If you are not required to file Form 3800, enter on line 7 of Form 8586 any allowed low-income housing credit.

Form 8834.   Enter on line 13 of Form 8834 the passive activity qualified electric vehicle credit allowed.

Form 8844.   Enter on line 7 of Form 8844 the passive activity empowerment zone and renewal community employment credit allowed.

Form 8884.   Enter on line 7 of Form 8884 the passive activity New York Liberty Zone business employee credit allowed.

Nonconventional Source Fuel Credit.   If you have an allowed passive activity credit for fuel produced from a nonconventional source, see section 29 for limitations and adjustments to the credit. Attach a separate schedule to your tax return showing how you figured the credit. If you have both passive and nonpassive credits, combine the credits before applying the limitations and adjustments. Report the credit on the line specified by the instructions for the tax return you file.

Worksheets 5 and 6

Worksheets 7, 8, and 9

Publicly Traded Partnerships (PTPs)

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

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

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

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

Credits From PTPs

A credit from a passive activity held through a PTP is allowed to the extent of the tax attributable to net passive income from that partnership. In addition, rehabilitation credits and low-income housing credits from rental real estate activities held through PTPs are allowed to the extent of any special allowance that remains after taking into account losses and credits from rental real estate activities not owned through PTPs. See Special Allowance for Rental Real Estate Activities on page 3.

Do not enter credits from PTPs on the worksheets or on Form 8582-CR. Instead, use the following steps to figure the allowed and unallowed credits from passive activities held through PTPs.

Computation of Allowed Passive Activity Credits From PTPs

Complete Steps 1 and 2 only if you have net passive income from a PTP with passive activity credits (including prior year unallowed credits).

Step 1.   Figure the tax attributable to net passive income from each PTP with passive activity credits (including prior year unallowed credits) by following the steps shown in the worksheet in the line 6 instructions beginning on page 9. Complete a separate tax computation for each PTP with net passive income.

Step 2.   Passive activity credits from each PTP are allowed to the extent of the tax attributable to net passive income from the same PTP. Credits in excess of the tax attributable to net passive income may be allowed under one or more steps below.

Complete Steps 3 through 5 only if your passive activity credits (including prior year unallowed credits) include rehabilitation credits from rental real estate activities from PTPs, low-income housing credits for property placed in service before 1990 from PTPs, or low-income housing credits from PTPs in which you acquired your interest before 1990 (regardless of the date placed in service).

Step 3.   Reduce rehabilitation credits from rental real estate activities from each PTP, low-income housing credits for property placed in service before 1990 from each PTP, and any low-income housing credits (including prior year unallowed credits) from each PTP in which you acquired your interest before 1990 (regardless of the date placed in service) to the extent of the tax, which was figured in Step 1, attributable to net passive income from that PTP.

Step 4.   Before beginning this step, complete Form 8582-CR if you have any passive credits that are not from PTPs. Subtract the total of lines 16, 30, and 36, if any, of Form 8582-CR, from the amount on line 27 of Form 8582-CR, to figure the tax attributable to the special allowance available for the credits in Step 3.

If your only passive credits are from PTPs, complete lines 21 through 27 of Form 8582-CR as a worksheet. The amount on line 27 is the tax attributable to the special allowance available for the credits in Step 3.

Step 5.   Rehabilitation credits from rental real estate activities of PTPs, low-income housing credits for property placed in service before 1990 by PTPs, and low-income housing credits from PTPs in which you acquired your interest before 1990 (regardless of the date placed in service) allowed under the special allowance are the smaller of the total credits from Step 3 or the amount figured in Step 4. If Step 4 is smaller than Step 3, allocate the amount in Step 4 pro rata to the credits from each PTP in Step 3.

Note:   Complete Steps 6 through 8 only if you have low-income housing credits (including prior year unallowed credits) for property placed in service after 1989 from a PTP in which you acquired your interest after 1989.

Step 6.   Reduce low-income housing credits (including prior year unallowed credits) for property placed in service after 1989 from each PTP in which you also acquired your interest after 1989 to the extent of the tax attributable to net passive income from that PTP, which was figured in Step 1.

Step 7.   Before beginning this step, complete Form 8582-CR if you have any passive credits that are not from PTPs. Subtract the sum of the credits allowed in Step 5 above and line 36 of Form 8582-CR from the amount on line 35 of Form 8582-CR to figure the tax attributable to the special allowance available for the credits in Step 6.

If your only passive credits are from PTPs, complete the steps shown in the worksheet in the line 35 instructions on page 12. Subtract the credits allowed in Step 5 above from the tax figured on line K of that worksheet. The result is the tax attributable to the special allowance available for the credits in Step 6.

Step 8.   Low-income housing credits allowed under the special allowance for property placed in service after 1989 from a PTP in which you also acquired your interest after 1989 are the smaller of the total credits from Step 6 or the amount figured in Step 7. If Step 7 is smaller than Step 6, allocate the amount in Step 7 pro rata to the credits from each PTP in Step 6.

Step 9.   Add the credits from Steps 2, 5, and 8. These are the total credits allowed from passive activities of PTPs.

Step 10.   Figure the allowed and unallowed credits from each PTP. Report the allowed credits on the forms normally used. Keep a record of the unallowed credits to be carried forward to 2003.

Part VI - Election To Increase Basis of Credit Property

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

Line 38.   Check the box if you elect to increase the basis of credit property used in a passive activity by the unallowed credit that reduced the property's basis. The election is available for a fully taxable disposition of an entire interest in an activity for which a basis adjustment was made as a result of placing in service property for which a credit was taken. You may elect to increase the basis of the credit property immediately before the disposition (by an amount no greater than the amount of the original basis reduction) to the extent that the credit had not been allowed previously because of the passive credit limitations. The amount of the unallowed credit that may be applied against tax is reduced by the amount of the basis adjustment.

No basis adjustment may be elected on a partial disposition of your interest in a passive activity or if the disposition is not fully taxable. The amount of any unallowed credit, however, remains available to offset the tax attributable to net passive income.

Paperwork Reduction Act Notice.

We ask for the information on this form to carry out the Internal Revenue laws of the United States. You are required to give us the information. We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax.

You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103.

The time needed to complete and file this form will vary depending on individual circumstances. The estimated average time is:

Recordkeeping	2 hr., 4 min.
Learning about the law or the form	10 hr., 7 min.
Preparing the form	4 hr., 42 min.
Copying, assembling, and sending the form to the IRS	2 hr., 11 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. See the instructions for the tax return with which this form is filed.

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