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Effect of determination. If you

loss from a non-PTP passive activity. See

Then, complete Worksheet 6 if all the loss

determine that you materially participated

Pub. 925, Passive Activity and At-Risk

from the same activity is to be reported on

in (a) a trade or business activity of the

Rules, for more details.

one form or schedule. Use Worksheet 7

partnership or (b) if you were a real estate

instead of Worksheet 6 if you have more

2. If you have an overall gain, the net

professional (defined above) in a rental

than one loss to be reported on different

gain portion (total gain minus total losses)

real estate activity of the partnership,

forms or schedules for the same activity.

is nonpassive income. On the form or

report the income (loss), deductions, and

Enter the net loss plus any prior year

schedule you normally use, report the net

credits from that activity as indicated in

unallowed losses in column (a) of

gain portion as nonpassive income and

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

Worksheet 6 (or Worksheet 7 if

the remaining income and the total losses

instructions for each line.

applicable). The losses in column (c) of

as passive income and loss. To the left of

Worksheet 6 (column (e) of Worksheet 7)

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

If you determine that you did not

are the allowed losses to report on the

important to identify the nonpassive

materially participate in a trade or

forms or schedules. Report both these

income because the nonpassive portion is

business activity of the partnership or if

losses and any income from the PTP on

included in modified adjusted gross

you have income (loss), deductions, or

the forms and schedules you normally

income for purposes of figuring on Form

credits from a rental activity of the

use.

8582 the “special allowance” for active

partnership (other than a rental real

4. If you have an overall loss and you

participation in a non-PTP rental real

estate activity in which you materially

disposed of your entire interest in the PTP

estate activity. In addition, the nonpassive

participated as a real estate professional),

to an unrelated person in a fully taxable

income is included in investment income

the amounts from that activity are

transaction during the year, your losses

when figuring your investment interest

passive. Report passive income (losses),

(including prior year unallowed losses)

expense deduction on Form 4952.

deductions, and credits as follows:

allocable to the activity for the year are

Example. If you have Schedule E

1. If you have an overall gain (the

not limited by the passive loss rules. A

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

excess of income over deductions and

fully taxable transaction is one in which

year unallowed loss of $3,500 from the

losses, including any prior year unallowed

you recognize all your realized gain or

passive activities of a particular PTP, you

loss) from a passive activity, report the

loss. Report the income and losses on the

have a $4,500 overall gain ($8,000 −

income, deductions, and losses from the

forms and schedules you normally use.

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

activity as indicated on Schedule K-1 or in

the $4,500 net gain as nonpassive

these instructions.

Note: For rules on the disposition of an

income in column (j). In column (g), report

2. If you have an overall loss (the

entire interest reported using the

the remaining Schedule E gain of $3,500

excess of deductions and losses,

installment method, see the Instructions

($8,000 − $4,500). On the appropriate line

including any prior year unallowed loss,

for Form 8582.

of Form 4797, report the prior year

over income) or credits from a passive

Special allowance for a rental real

unallowed loss of $3,500. Be sure to write

activity, report the income, deductions,

estate activity. If you actively

“From PTP” to the left of each entry

losses, and credits from all passive

participated in a rental real estate

space.

activities using the Instructions for Form

activity, you may be able to deduct up to

3. If you have an overall loss (but did

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

$25,000 of the loss from the activity from

not dispose of your entire interest in the

see if your deductions, losses, and credits

nonpassive income. This “special

PTP to an unrelated person in a fully

are limited under the passive activity

allowance” is an exception to the general

taxable transaction during the year), the

rules.

rule disallowing losses in excess of

losses are allowed to the extent of the

income from passive activities. The

Publicly traded partnerships. The

income, and the excess loss is carried

special allowance is not available if you

passive activity limitations are applied

forward to use in a future year when you

were married, file a separate return for

separately for items (other than the

have income to offset it. Report as a

the year, and did not live apart from your

low-income housing credit and the

passive loss on the schedule or form you

spouse at all times during the year.

rehabilitation credit) from each publicly

normally use the portion of the loss equal

traded partnership (PTP). Thus, a net

Only individuals and qualifying estates

to the income. Report the income as

passive loss from a PTP may not be

can actively participate in a rental real

passive income on the form or schedule

deducted from other passive income.

estate activity. Estates (other than

you normally use.

Instead, a passive loss from a PTP is

qualifying estates), trusts, and

Example. You have a Schedule E loss

suspended and carried forward to be

corporations cannot actively participate.

of $12,000 (current year losses plus prior

applied against passive income from the

Limited partners cannot actively

year unallowed losses) and a Form 4797

same PTP in later years. If the partner’s

participate unless future regulations

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

entire interest in the PTP is completely

provide an exception.

the appropriate line of Form 4797. On

disposed of, any unused losses are

You are not considered to actively

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

allowed in full in the year of disposition.

participate in a rental real estate activity if

losses as a passive loss in column (f).

If you have an overall gain from a PTP,

at any time during the tax year your

Carry forward to 2004 the unallowed loss

of $4,800 ($12,000 − $7,200).

the net gain is nonpassive income. In

interest (including your spouse’s interest)

addition, the nonpassive income is

in the activity was less than 10% (by

If you have unallowed losses from

included in investment income to figure

value) of all interests in the activity.

more than one activity of the PTP or from

your investment interest expense

Active participation is a less stringent

the same activity of the PTP that must be

deduction.

requirement than material participation.

reported on different forms, you must

You may be treated as actively

Do not report passive income, gains,

allocate the unallowed losses on a pro

participating if you participated, for

or losses from a PTP on Form 8582.

rata basis to figure the amount allowed

example, in making management

Instead, use the following rules to figure

from each activity or on each form.

decisions or arranging for others to

and report on the proper form or schedule

Tax tip. To allocate and keep a record

provide services (such as repairs) in a

your income, gains, and losses from

of the unallowed losses, use Worksheets

significant and bona fide sense.

passive activities that you held through

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

Management decisions that can count as

each PTP you owned during the tax year.

activity of the PTP in Worksheet 5. Enter

active participation include approving new

1. Combine any current year income,

the overall loss from each activity in

tenants, deciding rental terms, approving

gains and losses, and any prior year

column (a). Complete column (b) of

capital or repair expenditures, and other

unallowed losses to see if you have an

Worksheet 5 according to its instructions.

similar decisions.

overall gain or loss from the PTP. Include

Multiply the total unallowed loss from the

only the same types of income and losses

PTP by each ratio in column (b) and enter

An estate is a qualifying estate if the

you would include in your net income or

the result in column (c) of Worksheet 5.

decedent would have satisfied the active

-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) - 2003 Page 4

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