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 downloaded from this site
or ordered by calling 1-800-829-3676.
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