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are limited under the passive activity

PTP to an unrelated person in a fully

nonpassive income. This “special

rules.

taxable transaction during the year), the

allowance” is an exception to the general

losses are allowed to the extent of the

rule disallowing losses in excess of

Publicly traded partnerships. The

income, and the excess loss is carried

income from passive activities. The

passive activity limitations are applied

forward to use in a future year when you

special allowance is not available if you

separately for items (other than the

have income to offset it. Report as a

were married, file a separate return for

low-income housing credit and the

passive loss on the schedule or form you

the year, and did not live apart from your

rehabilitation credit) from each publicly

normally use the portion of the loss equal

spouse at all times during the year.

traded partnership (PTP). Thus, a net

to the income. Report the income as

Only individuals and qualifying estates

passive loss from a PTP may not be

passive income on the form or schedule

can actively participate in a rental real

deducted from other passive income.

you normally use.

estate activity. Estates (other than

Instead, a passive loss from a PTP is

Example. You have a Schedule E loss

qualifying estates), trusts, and

suspended and carried forward to be

of $12,000 (current year losses plus prior

corporations cannot actively participate.

applied against passive income from the

year unallowed losses) and a Form 4797

Limited partners cannot actively

same PTP in later years. If the partner’s

gain of $7,200. Report the $7,200 gain on

participate unless future regulations

entire interest in the PTP is completely

the appropriate line of Form 4797. On

provide an exception.

disposed of, any unused losses are

Schedule E, Part II, report $7,200 of the

allowed in full in the year of disposition.

You are not considered to actively

losses as a passive loss in column (g).

participate in a rental real estate activity if

If you have an overall gain from a PTP,

Carry forward to 2003 the unallowed loss

of $4,800 ($12,000 − $7,200).

at any time during the tax year your

the net gain is nonpassive income. In

interest (including your spouse’s interest)

addition, the nonpassive income is

If you have unallowed losses from

in the activity was less than 10% (by

included in investment income to figure

more than one activity of the PTP or from

value) of all interests in the activity.

your investment interest expense

the same activity of the PTP that must be

deduction.

reported on different forms, you must

Active participation is a less stringent

allocate the unallowed losses on a pro

requirement than material participation.

Do not report passive income, gains,

rata basis to figure the amount allowed

You may be treated as actively

or losses from a PTP on Form 8582.

from each activity or on each form.

participating if you participated, for

Instead, use the following rules to figure

example, in making management

and report on the proper form or schedule

Tax tip. To allocate and keep a record

decisions or arranging for others to

your income, gains, and losses from

of the unallowed losses, use Worksheets

provide services (such as repairs) in a

passive activities that you held through

5, 6, and 7 of Form 8582. List each

significant and bona fide sense.

each PTP you owned during the tax year:

activity of the PTP in Worksheet 5. Enter

Management decisions that can count as

the overall loss from each activity in

1. Combine any current year income,

active participation include approving new

column (a). Complete column (b) of

gains and losses, and any prior year

tenants, deciding rental terms, approving

Worksheet 5 according to its instructions.

unallowed losses to see if you have an

capital or repair expenditures, and other

Multiply the total unallowed loss from the

overall gain or loss from the PTP. Include

similar decisions.

PTP by each ratio in column (b) and enter

only the same types of income and losses

the result in column (c) of Worksheet 5.

you would include in your net income or

An estate is a qualifying estate if the

Then complete Worksheet 6 if all the loss

loss from a non-PTP passive activity. See

decedent would have satisfied the active

from the same activity is to be reported on

Pub. 925, Passive Activity and At-Risk

participation requirement for the activity

one form or schedule. Use Worksheet 7

Rules, for more details.

for the tax year the decedent died. A

instead of Worksheet 6 if you have more

2. If you have an overall gain, the net

qualifying estate is treated as actively

than one loss to be reported on different

gain portion (total gain minus total losses)

participating for tax years ending less

forms or schedules for the same activity.

is nonpassive income. On the form or

than 2 years after the date of the

Enter the net loss plus any prior year

schedule you normally use, report the net

decedent’s death.

unallowed losses in column (a) of

gain portion as nonpassive income and

Modified adjusted gross income

Worksheet 6 (or Worksheet 7 if

the remaining income and the total losses

limitation. The maximum special

applicable). The losses in column (c) of

as passive income and loss. To the left of

allowance that single individuals and

Worksheet 6 (column (e) of Worksheet 7)

the entry space, write “From PTP.” It is

married individuals filing a joint return can

are the allowed losses to report on the

important to identify the nonpassive

qualify for is $25,000. The maximum is

forms or schedules. Report both these

income because the nonpassive portion is

$12,500 for married individuals who file

losses and any income from the PTP on

included in modified adjusted gross

separate returns and who lived apart all

the forms and schedules you normally

income for purposes of figuring on Form

times during the year. The maximum

use.

8582 the “special allowance” for active

special allowance for which an estate can

4. If you have an overall loss and you

participation in a non-PTP rental real

qualify is $25,000 reduced by the special

disposed of your entire interest in the PTP

estate activity. In addition, the nonpassive

allowance for which the surviving spouse

to an unrelated person in a fully taxable

income is included in investment income

qualifies.

transaction during the year, your losses

when figuring your investment interest

(including prior year unallowed losses)

expense deduction on Form 4952.

If your modified adjusted gross income

allocable to the activity for the year are

Example. If you have Schedule E

(defined on page 5) is $100,000 or less

not limited by the passive loss rules. A

income of $8,000, and a Form 4797 prior

($50,000 or less if married filing

fully taxable transaction is one in which

year unallowed loss of $3,500 from the

separately), your loss is deductible up to

you recognize all your realized gain or

passive activities of a particular PTP, you

the amount of the maximum special

loss. Report the income and losses on the

have a $4,500 overall gain ($8,000 −

allowance referred to in the preceding

forms and schedules you normally use.

$3,500). On Schedule E, Part II, report

paragraph. If your modified adjusted

the $4,500 net gain as nonpassive

gross income is more than $100,000

Note: For rules on the disposition of an

income in column (k). In column (h),

(more than $50,000 if married filing

entire interest reported using the

report the remaining Schedule E gain of

separately), the special allowance is

$3,500 ($8,000 − $4,500). On the

installment method, see the Instructions

limited to 50% of the difference between

for Form 8582.

appropriate line of Form 4797, report the

$150,000 ($75,000 if married filing

prior year unallowed loss of $3,500. Be

Special allowance for a rental real

separately) and your modified adjusted

sure to write “From PTP” to the left of

estate activity. If you actively

gross income. When modified adjusted

each entry space.

participated in a rental real estate

gross income is $150,000 or more

3. If you have an overall loss (but did

activity, you may be able to deduct up to

($75,000 or more if married filing

not dispose of your entire interest in the

$25,000 of the loss from the activity from

separately), there is no special allowance.

-4-

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 4

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