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disposition of assets and the section 179

which the corporation materially

1. You participated in the activity for

expense deduction. However, if you

participated.

more than 500 hours during the tax year.

acquired your partnership interest before

2. Your participation in the activity for

For purposes of this rule, each interest in

1987, the at-risk rules do not apply to losses

the tax year constituted substantially all the

rental real estate is a separate activity,

from an activity of holding real property

participation in the activity of all individuals

unless you elect to treat all interests in rental

placed in service before 1987 by the

(including individuals who are not owners of

real estate as one activity. For details on

partnership. The activity of holding mineral

interests in the activity).

making this election, see the Instructions for

property does not qualify for this exception.

3. You participated in the activity for

Schedule E (Form 1040).

The partnership should identify on an

more than 100 hours during the tax year,

If you are married filing jointly, either you

attachment to Schedule K-1 the amount of

and your participation in the activity for the

or your spouse must separately meet both

any losses that are not subject to the at-risk

tax year was not less than the participation

of the above conditions, without taking into

limitations.

in the activity of any other individual

account services performed by the other

(including individuals who were not owners

Generally, you are not at risk for amounts

spouse.

of interests in the activity) for the tax year.

such as the following:

A real property trade or business is any

•

4. The activity was a significant

Nonrecourse loans used to finance the

real property development, redevelopment,

participation activity for the tax year, and

activity, to acquire property used in the

construction, reconstruction, acquisition,

you participated in all significant

activity, or to acquire your interest in the

conversion, rental, operation, management,

participation activities (including activities

activity, that are not secured by your own

leasing, or brokerage trade or business.

outside the partnership) during the year for

property (other than the property used in the

Services you performed as an employee are

more than 500 hours. A significant

activity). See the instructions for item F on

not treated as performed in a real property

participation activity is any trade or business

page 5 for the exception for qualified

trade or business unless you owned more

activity in which you participated for more

nonrecourse financing secured by real

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

than 100 hours during the year and in which

property.

the capital or profits interest) in the

•

you did not materially participate under any

Cash, property, or borrowed amounts

employer.

of the material participation tests (other than

used in the activity (or contributed to the

3. Working interests in oil or gas wells if

this test 4).

activity, or used to acquire your interest in

you were a general partner.

the activity) that are protected against loss

5. You materially participated in the

4. The rental of a dwelling unit any

by a guarantee, stop-loss agreement, or

activity for any 5 tax years (whether or not

partner used for personal purposes during

other similar arrangement (excluding

consecutive) during the 10 tax years that

the year for more than the greater of 14

casualty insurance and insurance against

immediately precede the tax year.

days or 10% of the number of days that the

tort liability).

6. The activity was a personal service

residence was rented at fair rental value.

•

Amounts borrowed for use in the activity

activity and you materially participated in the

5. Activities of trading personal property

from a person who has an interest in the

activity for any 3 tax years (whether or not

for the account of owners of interests in the

activity, other than as a creditor, or who is

consecutive) preceding the tax year. A

activities.

related, under section 465(b)(3), to a person

personal service activity involves the

(other than you) having such an interest.

performance of personal services in the

If you are an individual, an estate, or a

fields of health, law, engineering,

You should get a separate statement of

trust, and you have a passive activity loss or

architecture, accounting, actuarial science,

income, expenses, etc., for each activity

credit, use Form 8582, Passive Activity Loss

performing arts, consulting, or any other

from the partnership.

Limitations, to figure your allowable passive

trade or business in which capital is not a

losses and Form 8582-CR, Passive Activity

Passive Activity Limitations

material income-producing factor.

Credit Limitations, to figure your allowable

7. Based on all the facts and

passive credits. For a corporation, use Form

Section 469 provides rules that limit the

circumstances, you participated in the

8810, Corporate Passive Activity Loss and

deduction of certain losses and credits.

activity on a regular, continuous, and

Credit Limitations. See the instructions for

These rules apply to partners who:

•

substantial basis during the tax year.

these forms for more information.

Are individuals, estates, trusts, closely

held corporations, or personal service

If the partnership had more than one

Limited partners. If you are a limited

corporations and

activity, it will attach a statement to your

•

partner, you do not materially participate in

Have a passive activity loss or credit for

Schedule K-1 that identifies each activity

an activity unless you meet one of the tests

the tax year.

(trade or business activity, rental real estate

in paragraphs 1, 5, or 6 above.

Generally, passive activities include:

activity, rental activity other than rental real

estate, etc.) and specifies the income (loss),

Work counted toward material

1. Trade or business activities in which

deductions, and credits from each activity.

participation. Generally, any work that you

you did not materially participate and

or your spouse does in connection with an

2. Activities that meet the definition of

Material participation. You must

activity held through a partnership (where

rental activities under Temporary

determine if you materially participated (a) in

you own your partnership interest at the time

Regulations section 1.469-1T(e)(3) and

each trade or business activity held through

the work is done) is counted toward material

Regulations section 1.469-1(e)(3).

the partnership and (b) if you were a real

participation. However, work in connection

estate professional (defined above), in each

Passive activities do not include:

with the activity is not counted toward

rental real estate activity held through the

material participation if either of the following

1. Trade or business activities in which

partnership. All determinations of material

applies.

you materially participated.

participation are made based on your

2. Rental real estate activities in which

1. The work is not the type of work that

participation during the partnership’s tax

you materially participated if you were a

owners of the activity would usually do and

year.

“real estate professional” for the tax year.

one of the principal purposes of the work

Material participation standards for

You were a real estate professional only if

that you or your spouse does is to avoid the

partners who are individuals are listed

you met both of the following conditions:

passive loss or credit limitations.

below. Special rules apply to certain retired

2. You do the work in your capacity as

a. More than half of the personal

or disabled farmers and to the surviving

an investor and you are not directly involved

services you performed in trades or

spouses of farmers. See the Instructions for

in the day-to-day operations of the activity.

businesses were performed in real property

Form 8582 for details.

Examples of work done as an investor that

trades or businesses in which you materially

Corporations should refer to the

would not count toward material

participated and

Instructions for Form 8810 for the material

participation include:

b. You performed more than 750 hours

participation standards that apply to them.

of services in real property trades or

a. Studying and reviewing financial

businesses in which you materially

statements or reports on operations of the

Individuals (other than limited

participated.

activity.

partners). If you are an individual (either a

b. Preparing or compiling summaries or

Note. For a closely held C corporation

general partner or a limited partner who

analyses of the finances or operations of the

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

owned a general partnership interest at all

activity for your own use.

conditions are treated as met if more than

times during the tax year), you materially

50% of the corporation’s gross receipts were

participated in an activity only if one or more

c. Monitoring the finances or operations

from real property trades or businesses in

of the following apply:

of the activity in a nonmanagerial capacity.

-3-

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

Partner'S Instructions For Schedule K-1 (Form 1065) - Partner'S Share Of Income, Deductions, Credits, Etc. (For Partner'S Use Only) - 2004 Page 3

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