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You were a real estate professional only

Material participation. You must

Limited partners. If you are a limited

if you met both of the following conditions:

determine if you materially participated (a)

partner, you do not materially participate

in each trade or business activity held

in an activity unless you meet one of the

a. More than half of the personal

through the partnership and (b) if you

tests in paragraphs 1, 5, or 6 above.

services you performed in trades or

were a real estate professional (defined

businesses were performed in real

Work counted toward material

above), in each rental real estate activity

property trades or businesses in which

participation. Generally, any work that

held through the partnership. All

you materially participated and

you or your spouse does in connection

determinations of material

b. You performed more than 750

with an activity held through a partnership

participation are made based on your

hours of services in real property trades

(where you own your partnership interest

participation during the partnership’s

or businesses in which you materially

at the time the work is done) is counted

tax year.

participated.

toward material participation. However,

Material participation standards for

work in connection with the activity is not

Note: For a closely held C corporation

partners who are individuals are listed

counted toward material participation if

(defined in section 465(a)(1)(B)), the

below. Special rules apply to certain

either of the following applies.

above conditions are treated as met if

retired or disabled farmers and to the

1. The work is not the type of work

more than 50% of the corporation’s gross

surviving spouses of farmers. See the

that owners of the activity would usually

receipts were from real property trades or

Instructions for Form 8582 for details.

do and one of the principal purposes of

businesses in which the corporation

Corporations should refer to the

the work that you or your spouse does is

materially participated.

Instructions for Form 8810 for the material

to avoid the passive loss or credit

participation standards that apply to them.

For purposes of this rule, each interest

limitations.

in rental real estate is a separate activity,

Individuals (other than limited

2. You do the work in your capacity as

unless you elect to treat all interests in

partners). If you are an individual (either

an investor and you are not directly

rental real estate as one activity. For

a general partner or a limited partner who

involved in the day-to-day operations of

details on making this election, see the

owned a general partnership interest at all

the activity. Examples of work done as an

Instructions for Schedule E (Form 1040).

investor that would not count toward

times during the tax year), you materially

material participation include:

participated in an activity only if one or

If you are married filing jointly, either

more of the following apply:

you or your spouse must separately meet

a. Studying and reviewing financial

both of the above conditions, without

1. You participated in the activity for

statements or reports on operations of the

taking into account services performed by

activity.

more than 500 hours during the tax year.

the other spouse.

b. Preparing or compiling summaries

2. Your participation in the activity for

or analyses of the finances or operations

the tax year constituted substantially all

A real property trade or business is

of the activity for your own use.

the participation in the activity of all

any real property development,

c. Monitoring the finances or

individuals (including individuals who are

redevelopment, construction,

operations of the activity in a

not owners of interests in the activity).

reconstruction, acquisition, conversion,

nonmanagerial capacity.

3. You participated in the activity for

rental, operation, management, leasing,

more than 100 hours during the tax year,

or brokerage trade or business. Services

and your participation in the activity for

you performed as an employee are not

Effect of determination. If you

the tax year was not less than the

treated as performed in a real property

determine that you materially participated

participation in the activity of any other

trade or business unless you owned more

in (a) a trade or business activity of the

individual (including individuals who were

than 5% of the stock (or more than 5% of

partnership or (b) if you were a real estate

not owners of interests in the activity) for

the capital or profits interest) in the

professional (defined above) in a rental

the tax year.

employer.

real estate activity of the partnership,

4. The activity was a significant

report the income (loss), deductions, and

3. Working interests in oil or gas wells

participation activity for the tax year, and

credits from that activity as indicated in

if you were a general partner.

you participated in all significant

either column (c) of Schedule K-1 or the

4. The rental of a dwelling unit any

participation activities (including activities

instructions for each line.

partner used for personal purposes during

outside the partnership) during the year

the year for more than the greater of 14

If you determine that you did not

for more than 500 hours. A significant

days or 10% of the number of days that

materially participate in a trade or

participation activity is any trade or

the residence was rented at fair rental

business activity of the partnership or if

business activity in which you participated

value.

you have income (loss), deductions, or

for more than 100 hours during the year

5. Activities of trading personal

credits from a rental activity of the

and in which you did not materially

property for the account of owners of

partnership (other than a rental real

participate under any of the material

interests in the activities.

estate activity in which you materially

participation tests (other than this test 4).

participated as a real estate professional),

5. You materially participated in the

If you are an individual, an estate, or a

the amounts from that activity are

activity for any 5 tax years (whether or not

trust, and you have a passive activity loss

passive. Report passive income (losses),

consecutive) during the 10 tax years that

or credit, use Form 8582, Passive Activity

deductions, and credits as follows:

immediately precede the tax year.

Loss Limitations, to figure your allowable

6. The activity was a personal service

1. If you have an overall gain (the

passive losses and Form 8582-CR,

activity and you materially participated in

excess of income over deductions and

Passive Activity Credit Limitations, to

the activity for any 3 tax years (whether or

losses, including any prior year unallowed

figure your allowable passive credits. For

not consecutive) preceding the tax year.

loss) from a passive activity, report the

a corporation, use Form 8810, Corporate

A personal service activity involves the

income, deductions, and losses from the

Passive Activity Loss and Credit

performance of personal services in the

activity as indicated on Schedule K-1 or in

Limitations. See the instructions for these

fields of health, law, engineering,

these instructions.

forms for more information.

architecture, accounting, actuarial

2. If you have an overall loss (the

If the partnership had more than one

science, performing arts, consulting, or

excess of deductions and losses,

activity, it will attach a statement to your

any other trade or business in which

including any prior year unallowed loss,

Schedule K-1 that identifies each activity

capital is not a material income-producing

over income) or credits from a passive

(trade or business activity, rental real

factor.

activity, report the income, deductions,

estate activity, rental activity other than

7. Based on all the facts and

losses, and credits from all passive

rental real estate, etc.) and specifies the

circumstances, you participated in the

activities using the Instructions for Form

income (loss), deductions, and credits

activity on a regular, continuous, and

8582 or Form 8582-CR (or Form 8810), to

from each activity.

substantial basis during the tax year.

see if your deductions, losses, and credits

-3-

Partner’s Instructions for Schedule K-1 (Form 1065)

Partner'S Instructions For Schedule K-1 (Form 1065) - Partner'S Share Of Income, Credits, Deductions, Etc. (For Partner'S Use Only) - 2002 Page 3

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