Thank
goodness for
tax software!
X#! X#!!!
Page 20
At the end of this session, you will be able to . . .
•Determine which losses belong on Form 8582.
•Locate where Form 8582 losses belong on F1040.
•Compute modified AGI.
•Calculate allowable passive losses.
Page 20
Forms
•Sch. E Passive income and
allowable rental or 1065/1120S losses
•Sch. C Equipment leases
•Sch. C Business: TP does not
materially participate
•Sch. F TP does not materially
participate
•Sch. D Gain/loss on disposition of
1065/1120S interest; passive income
•Form 4797 Gain/loss on disposition of
asset; recapture of depreciation is
passive income!
Is a taxpayer ever
NOT required
to file Form 8582 ?
OH NO!
NOT THE
DREADED
FORM 8582
TP is not required
YES!
to file Form 8582 if:
1. There is enough passive income
to offset passive losses.
OR
2. Modified AGI is
less than $100,000
and
rental losses are
less than $25,000
and
no passive losses
are from 1065/1120S.
TP must file
Form 8582 with worksheets if:
1. Sch C or F loss passive
and
there’s no passive income.
OR 2. 1065/1120S loss passive
and
there’s no passive income.
OR 3. Rental loss and
modified AGI
is more than $100,000.
PITFALLS WITH FORM 8582!
Loss should not be on 8582:
•Rental loss if grouped with business
•K-1 trading loss, even if TP is limited partner
•Short-term rental loss if material participation
Income should not be on 8582:
•Rental income if lease is to TP’s business
•Leased land or land held for investment
•Royalties
Problem: Computer may automatically put
these losses and income on Form 8582!
X#! X#!!!
F
2?
8
5
8
ORM
OH NO!
NOT THE
DREADED
FORM 8582
Form 8582
Department of the Treasury
Passive Activity Loss Limitations
Internal Revenue Service
Page 20
2006
Form 8582
Computes
Allowable Passive Losses
For the Current Year
It’s only 16 lines!
Page 20
Form 8582
Simply computes:
Part II Special Allowance for Rental Real Estate with Active Participation
Note: Enter all numbers in Part II as positive amounts. See page 8 for an example.
5 Enter the smaller of the loss on line 1 d or the loss on line 4.
6 Enter $150,000. If married filing separately, see page 8.
6
7 Enter modified adjusted gross income but not less than zero (see page 8)
7
$25,000 offset
for
rentals
(lines 5-14)
5
Note: If line 7 is equal to or greater than line 6, skip lines 8 and
9, enter -0- on line 10. Otherwise, go to line 8.
8 Subtract line 7 from line 6
8
9 Multiply line 8 by .50 (.5). Do not enter more than $25,000. If married filing separately, see page 8.
10 Enter the smaller of line 5 or line 9
9
10
If line 2c is a loss, go to Part III. Otherwise go to line 15.
Part III Special Allowance for Commercial Revitalization Deductions From Rental Real Estate Activities
Note: Enter all numbers in Part III as positive amounts. See the example for Part II on page 8 of the instructions.
11
11 Enter $25,000 reduced by the amount, if any, on line 10. If married filing separately, see instructions
12
12 Enter the loss from line 4
13
13 Reduce line 12 by the amount on line 10
14
14 Enter the smallest of line 2c (treated as a positive amount), line 11, or line 13
Part IV Total Losses Allowed
15
15 Add the income, if any, on lines 1a and 3a and enter total
16 Total losses allowed from all passive activities 2006.
Add lines 10, 14, and 15. See pages 10 and 11 to find out how to report the losses on your tax return.
16
-0Form 8582
Page 20
PLUS
Passive income
(line 15)
Form 8582
Part II Special Allowance for Rental Real Estate with Active Participation
Note: Enter all numbers in Part II as positive amounts. See page 8 for an example.
5 Enter the smaller of the loss on line 1 d or the loss on line 4.
6 Enter $150,000. If married filing separately, see page 8.
6
7 Enter modified adjusted gross income but not less than zero (see page 8)
7
Line 16
(last line)
is all the
passive losses
allowed for
the current year.
5
Note: If line 7 is equal to or greater than line 6, skip lines 8 and
9, enter -0- on line 10. Otherwise, go to line 8.
8 Subtract line 7 from line 6
8
9 Multiply line 8 by .50 (.5). Do not enter more than $25,000. If married filing separately, see page 8.
10 Enter the smaller of line 5 or line 9
9
10
If line 2c is a loss, go to Part III. Otherwise go to line 15.
Part III Special Allowance for Commercial Revitalization Deductions FromRental Real Estate Activities
Note: Enter all numbers in Part III as positive amounts. See the example for Part II on page 8 of the instructions.
11
11 Enter $25,000 reduced by the amount, if any, on line 10. If married filing separately, see instructions
12
12 Enter the loss from line 4
13
13 Reduce line 12 by the amount on line 10
14
14 Enter the smallest of line 2c (treated as a positive amount), line 11, or line 13
Part IV Total Losses Allowed
15
15 Add the income, if any, on lines 1a and 3a and enter total
16 Total losses allowed fromall passive activities 2006.
Add lines 10, 14, and 15. See pages 10 and 11 to find out how to report the losses on your tax return.
16
-0Form 8582
Page 20
Form 8582
Form 8582
Department of the Treasury
Passive Activity Loss Limitations
2006
Internal Revenue Service
Name(s) shown on return
Line 16
Part I
Identifying number
2006 Passive Activity Loss
Caution: See the instructions for Worksheets 1, 2 and 3 on pages 7 and 8 before completing Part I.
Rental Real Estate Activities With Active Participation (For the definition of active participation
see Active Participation in Rental Real Estate Activity on page 3 of the instructions.)
1a Activities with net income (enter the amount from Worksheet 1,
column (a))
1a
b Activities with net loss (enter the amount from Worksheet 1,
column (b))
is just sum of:
1b
c Prior years unallowed losses (enter the amount from Worksheet
1, column (c))
1c
(
)
d Combine lines 1a, 1b, and 1c
Commercial Revitalization Deductions from Rental Real Estate Activities
2a Commercial revitalization deductions from Worksheet 2, column (a)
b Prior year unallowed commercial revitalization deductions from Worksheet 2,
column (b)
1d
2a
(
)
2b
(
)
c Add lines 2a and 2b
•Line 14 Rental losses
(up to $25,000)
AND
•Line 15 Passive income
2c
(
)
All Other Passive Activities
3a Activities with net income (enter the amount from Worksheet 3,
column (a))
3a
b Activities with net loss (enter the amount from Worksheet 3,
column (b))
3b
c Prior years unallowed losses (enter the amount from Worksheet
3, column (c))
3c (
)
d Combine lines 3a, 3b, and 3c
4 Combine lines 1d, 2c and 3d. If the result is net income or zero, all losses are allowed, including any prior year unallowed
losses entered on line 1c, 2b, or 3c. Do not complete Form 8582. Report the losses on the forms and schedules normally
used.
If line 4 is a loss and: Line 1d is a loss, go to Part II.
Line 2c is a loss (and line 1d is zero or more), skip part II and go to Part III
Line 3d is a loss (and lines 1d and 2c are zero or more), skip Parts II and III and go to line 15
3d
4
Caution: If your filing status is married filing separately and you lived with your spouse at any time during the year, do not
complete Part II or III. Instead go to line 15
Part II Special Allowance for Rental Real Estate with Active Participation
Note: Enter all numbers in Part II as positive amounts. See page 8 for an example.
5 Enter the smaller of the loss on line 1 d or the loss on line 4.
6 Enter $150,000. If married filing separately, see page 8.
6
7 Enter modified adjusted gross income but not less than zero (see page 8)
7
5
Note: If line 7 is equal to or greater than line 6, skip lines 8 and
9, enter -0- on line 10. Otherwise, go to line 8.
8 Subtract line 7 from line 6
8
9 Multiply line 8 by .50 (.5). Do not enter more than $25,000. If married filing separately, see page 8.
10 Enter the smaller of line 5 or line 9
9
10
If line 2c is a loss, go to Part III. Otherwise go to line 15.
Part III Special Allowance for Commercial Revitalization Deductions From Rental Real Estate Activities
Note: Enter all numbers in Part III as positive amounts. See the example for Part II on page 8 of the instructions.
11
11 Enter $25,000 reduced by the amount, if any, on line 10. If married filing separately, see instructions
12
12 Enter the loss from line 4
Reduce
line
12
by
the
amount
on
line
10
13
13
14
14 Enter the smallest of line 2c (treated as a positive amount), line 11, or line 13
Part IV Total Losses Allowed
15 Add the income, if any, on lines 1a and 3a and enter total
16 Total losses allowed from all passive activities 2006.
Add lines 10, 14, and 15. See pages 10 and 11 to find out how to report the losses on your tax return.
15
16
-0Form 8582
Page 20
Form 8582
Department of the Treasury
Passive Activity Loss Limitations
FORM 8582
2006
Internal Revenue Service
Name(s) shown on return
Part I
Identifying number
2006 Passive Activity Loss
Caution: See the instructions for Worksheets 1, 2 and 3 on pages 7 and 8 before completing Part I.
1 Rental real estate
Rental Real Estate Activities With Active Participation (For the definition of active participation
see Active Participation in Rental Real Estate Activity on page 3 of the instructions.)
1a Activities with net income (enter the amount from Worksheet 1,
column (a))
1a
b Activities with net loss (enter the amount from Worksheet 1,
column (b))
1b
c Prior years unallowed losses (enter the amount from Worksheet
1, column (c))
1c
(
)
d Combine lines 1a, 1b, and 1c
Commercial Revitalization Deductions from Rental Real Estate Activities
2a Commercial revitalization deductions from Worksheet 2, column (a)
b Prior year unallowed commercial revitalization deductions from Worksheet 2,
column (b)
1d
2a
(
)
2b
(
)
c Add lines 2a and 2b
2c
(
)
2 Commercial Revitalization
Rare
All Other Passive Activities
3 All other passive losses
3a Activities with net income (enter the amount from Worksheet 3,
column (a))
3a
b Activities with net loss (enter the amount from Worksheet 3,
column (b))
3b
c Prior years unallowed losses (enter the amount from Worksheet
3c (
3, column (c))
)
d Combine lines 3a, 3b, and 3c
4 Combine lines 1d, 2c and 3d. If the result is net income or zero, all losses are allowed, including any prior year unallowed
losses entered on line 1c, 2b, or 3c. Do not complete Form 8582. Report the losses on the forms and schedules normally
used.
If line 4 is a loss and: Line 1d is a loss, go to Part II.
Line 2c is a loss (and line 1d is zero or more), skip part II and go to Part III
Line 3d is a loss (and lines 1d and 2c are zero or more), skip Parts II and III and go to line 15
3d
7 Modified AGI
4
Caution: If your filing status is married filing separately and you lived with your spouse at any time during the year, do not
complete Part II or III. Instead go to line 15
Part II Special Allowance for Rental Real Estate with Active Participation
Note: Enter all numbers in Part II as positive amounts. See page 8 for an example.
5
5 Enter the smaller of the loss on line 1 d or the loss on line 4.
6 Enter $150,000. If married filing separately, see page 8.
6
7 Enter modified adjusted gross income but not less than zero (see page 8)
7
10 Portion of $25,000
allowed for rental real estate
Note: If line 7 is equal to or greater than line 6, skip lines 8 and
9, enter -0- on line 10. Otherwise, go to line 8.
8 Subtract line 7 from line 6
8
9 Multiply line 8 by .50 (.5). Do not enter more than $25,000. If married filing separately, see page 8.
10 Enter the smaller of line 5 or line 9
9
10
15 Total passive income
If line 2c is a loss, go to Part III. Otherwise go to line 15.
Part III Special Allowance for Commercial Revitalization Deductions From Rental Real Estate Activities
Note: Enter all numbers in Part III as positive amounts. See the example for Part II on page 8 of the instructions.
11
11 Enter $25,000 reduced by the amount, if any, on line 10. If married filing separately, see instructions
12
12 Enter the loss from line 4
13
13 Reduce line 12 by the amount on line 10
14
14 Enter the smallest of line 2c (treated as a positive amount), line 11, or line 13
Part IV Total Losses Allowed
15 Add the income, if any, on lines 1a and 3a and enter total
16 Total losses allowed from all passive activities 2006.
Add lines 10, 14, and 15. See pages 10 and 11 to find out how to report the losses on your tax return.
16 Total passive losses
15
16
-0Form 8582
Page 20
allowed in current year
So where are the losses
which are not allowed?
Form 8582
Department of the Treasury
Passive Activity Loss Limitations
2006
Internal Revenue Service
Name(s) shown on return
Identifying number
Part I 2006 Passive Activity Loss
Caution: See the instructions for Worksheets 1, 2 and 3 on pages 7 and 8 before completing Part I.
Rental Real Estate Activities With Active Participation (For the definition of active participation
see Active Participation in Rental Real Estate Activity on page 3 of the instructions.)
1a Activities with net income (enter the amount from Worksheet 1,
column (a))
1a
b Activities with net loss (enter the amount from Worksheet 1,
column (b))
1b
c Prior years unallowed losses (enter the amount from Worksheet
1, column (c))
1c
(
)
2a
(
)
2b
(
)
1d
d Combine lines 1a, 1b, and 1c
Commercial Revitalization Deductions from Rental Real Estate Activities
2a Commercial revitalization deductions from Worksheet 2, column (a)
b Prior year unallowed commercial revitalization deductions from Worksheet 2,
column (b)
2c
c Add lines 2a and 2b
(
)
All Other Passive Activities
3a Activities with net income (enter the amount from Worksheet 3,
column (a))
3a
b Activities with net loss (enter the amount from Worksheet 3,
column (b))
3b
c Prior years unallowed losses (enter the amount from Worksheet
3, column (c))
3c (
)
d Combine lines 3a, 3b, and 3c
4 Combine lines 1d, 2c and 3d. If the result is net income or zero, all losses are allowed, including any prior year unallowed
losses entered on line 1c, 2b, or 3c. Do not complete Form 8582. Report the losses on the forms and schedules normally
used.
If line 4 is a loss and: Line 1d is a loss, go to Part II.
Line 2c is a loss (and line 1d is zero or more), skip part II and go to Part III
Line 3d is a loss (and lines 1d and 2c are zero or more), skip Parts II and III and go to line 15
3d
4
Caution: If your filing status is married filing separately and you lived with your spouse at any time during the year, do not
complete Part II or III. Instead go to line 15
Part II Special Allowance for Rental Real Estate with Active Participation
Note: Enter all numbers in Part II as positive amounts. See page 8 for an example.
5
5 Enter the smaller of the loss on line 1 d or the loss on line 4.
6 Enter $150,000. If married filing separately, see page 8.
6
7 Enter modified adjusted gross income but not less than zero (see page 8)
7
Note: If line 7 is equal to or greater than line 6, skip lines 8 and
9, enter -0- on line 10. Otherwise, go to line 8.
8 Subtract line 7 from line 6
8
9 Multiply line 8 by .50 (.5). Do not enter more than $25,000. If married filing separately, see page 8.
10 Enter the smaller of line 5 or line 9
9
10
If line 2c is a loss, go to Part III. Otherwise go to line 15.
Part III Special Allowance for Commercial Revitalization Deductions From Rental Real Estate Activities
Note: Enter all numbers in Part III as positive amounts. See the example for Part II on page 8 of the instructions.
11
11 Enter $25,000 reduced by the amount, if any, on line 10. If married filing separately, see instructions
12
12 Enter the loss from line 4
13
13 Reduce line 12 by the amount on line 10
14
14 Enter the smallest of line 2c (treated as a positive amount), line 11, or line 13
Part IV Total Losses Allowed
15 Add the income, if any, on lines 1a and 3a and enter total
16 Total losses allowed from all passive activities 2006.
Add lines 10, 14, and 15. See pages 10 and 11 to find out how to report the losses on your tax return.
15
16
-0Form 8582
Page 20
Form 8582
does not
reflect those
losses!
Suspended losses are on
worksheet 6 “Unallowed Loss”.
Worksheet 6 - Allowed Losses (See page 9)
Name of activity
Form or schedule
to be reported on
(a) Loss
(b) Unallowed
loss
Total
Page 20
(c) Allowed loss
Form 8582
Department of the Treasury
Passive Activity Loss Limitations
Losses on line 16
of Form 8582
2006
Internal Revenue Service
Name(s) shown on return
Part I
Identifying number
2006 Passive Activity Loss
Caution: See the instructions for Worksheets 1, 2 and 3 on pages 7 and 8 before completing Part I.
Rental Real Estate Activities With Active Participation (For the definition of active participation
see Active Participation in Rental Real Estate Activity on page 3 of the instructions.)
1a Activities with net income (enter the amount from Worksheet 1,
column (a))
1a
b Activities with net loss (enter the amount from Worksheet 1,
column (b))
go to ...
1b
c Prior years unallowed losses (enter the amount from Worksheet
1, column (c))
1c
(
)
d Combine lines 1a, 1b, and 1c
Commercial Revitalization Deductions from Rental Real Estate Activities
2a Commercial revitalization deductions from Worksheet 2, column (a)
b Prior year unallowed commercial revitalization deductions from Worksheet 2,
column (b)
1d
2a
(
)
2b
(
)
c Add lines 2a and 2b
2c
(
)
All Other Passive Activities
Sch. E front:
3a Activities with net income (enter the amount from Worksheet 3,
column (a))
3a
b Activities with net loss (enter the amount from Worksheet 3,
column (b))
3b
c Prior years unallowed losses (enter the amount from Worksheet
3, column (c))
3c
(
)
d Combine lines 3a, 3b, and 3c
4 Combine lines 1d, 2c and 3d. If the result is net income or zero, all losses are allowed, including any prior year unallowed
losses entered on line 1c, 2b, or 3c. Do not complete Form 8582. Report the losses on the forms and schedules normally
used.
If line 4 is a loss and: Line 1d is a loss, go to Part II.
Line 2c is a loss (and line 1d is zero or more), skip part II and go to Part III
Line 3d is a loss (and lines 1d and 2c are zero or more), skip Parts II and III and go to line 15
3d
Rental losses
4
Caution: If your filing status is married filing separately and you lived with your spouse at any time during the year, do not
complete Part II or III. Instead go to line 15
Part II Special Allowance for Rental Real Estate with Active Participation
Note: Enter all numbers in Part II as positive amounts. See page 8 for an example.
5
5 Enter the smaller of the loss on line 1 d or the loss on line 4.
6 Enter $150,000. If married filing separately, see page 8.
6
7 Enter modified adjusted gross income but not less than zero (see page 8)
7
Sch. E back:
Note: If line 7 is equal to or greater than line 6, skip lines 8 and
9, enter -0- on line 10. Otherwise, go to line 8.
8 Subtract line 7 from line 6
8
9 Multiply line 8 by .50 (.5). Do not enter more than $25,000. If married filing separately, see page 8.
10 Enter the smaller of line 5 or line 9
passive loss column
9
10
If line 2c is a loss, go to Part III. Otherwise go to line 15.
Part III Special Allowance for Commercial Revitalization Deductions From Rental Real Estate Activities
Note: Enter all numbers in Part III as positive amounts. See the example for Part II on page 8 of the instructions.
11
11 Enter $25,000 reduced by the amount, if any, on line 10. If married filing separately, see instructions
12
12 Enter the loss from line 4
13
13 Reduce line 12 by the amount on line 10
14
14 Enter the smallest of line 2c (treated as a positive amount), line 11, or line 13
Part IV Total Losses Allowed
15 Add the income, if any, on lines 1a and 3a and enter total
16 Total losses allowed from all passive activities 2006.
Add lines 10, 14, and 15. See pages 10 and 11 to find out how to report the losses on your tax return.
15
16
-0Form 8582
Page 20
So what schedule does
Form 8582 line 16 go to??
16
Total losses allowed from all passive activities 2006.
Add lines 10, 14, and 15. See pages 10 and 11 to find out how to report the losses on your tax return.
1
6
Form 8582
Page 20
Losses on F8582
may
go on several different schedules,
but generally
they go on:
Sch. E:
Front: line 23
(Rental losses)
Back: line 28b (column (f))
(Passive 1065 & 1120S losses)
Page 20
Where on the 1040 do I
put the income on F8582?
Form 8582
does
not
report income!
All F8582 does is limit losses.
Form 8582
•Passive income
on lines 1a & 3a
should already
be on:
Department of the Treasury
Passive Activity Loss Limitations
2006
Internal Revenue Service
Name(s) shown on return
Identifying number
Part I 2006 Passive Activity Loss
Caution: See the instructions for Worksheets 1, 2 and 3 on pages 7 and 8 before completing Part I.
Rental Real Estate Activities With Active Participation (For the definition of active participation
see Active Participation in Rental Real Estate Activity on page 3 of the instructions.)
1a Activities with net income (enter the amount from Worksheet 1,
column (a))
1a
b Activities with net loss (enter the amount from Worksheet 1,
column (b))
1b
c Prior years unallowed losses (enter the amount from Worksheet
1, column (c))
1c (
)
d Combine lines 1a, 1b, and 1c
Commercial Revitalization Deductions from Rental Real Estate Activities
2a Commercial revitalization deductions from Worksheet 2, column (a)
b Prior year unallowed commercial revitalization deductions from Worksheet 2,
column (b)
1d
2a (
)
(
)
2b
c Add lines 2a and 2b
2c (
All Other Passive Activities
3a Activities with net income (enter the amount from Worksheet 3,
column (a))
3a
b Activities with net loss (enter the amount from Worksheet 3,
*Sch E line 22
OR
line 28 col (g) passive income
*Sch D line 11 (from Form 4797)
*Sch D line 8 (sale of 1065/1120S)
column (b))
3b
c Prior years unallowed losses (enter the amount from Worksheet
3, column (c))
3c (
d Combine lines 3a, 3b, and 3c
If not,
there’s unreported income!
Page 20
)
3d
)
SELF-RENTED BUILDING, LAND, & ROYALTIES
ARE …
NOT PASSIVE
SHOULD NOT
BE ON Form 8582.
100,000
What are all those complex
worksheets for?!
8582 Worksheets
Believe it or not,
all they do is....
8582 Worksheets
Allocate the $25,000 offset
among all rental real estate
on a prorata basis
AND
Allocate passive income
among all the passive activities
on a prorata basis.
Reason:
So TP knows how much loss
is deductible on disposition.
Page 20
Worksheet 1
Lists all rental real estate if active
Page 20
Important! Be careful!
Each “activity” is
entered on a
separate line.
An entity is
not
necessarily
an activity!
Page 20
If rental has
been grouped
with business &
TP materially
participated, loss
does not go on
Form 8582.
Worksheet 2
Lists the commercial revitalization deduction
Not many taxpayers have this deduction.
Worksheet 2 is often blank.
Worksheet 2 - For Form 8582, Lines 2a and 2b (See page 8)
Name of Activity
(a) Current year
deductions (line 2a)
Total. Enter
on Form
8582, lines
Page 20
(b) Prior year
unallowed deductions (line 2b)
(c) Overall Loss
Worksheet 3
Lists all other
passive activities:
• Business
(Sch. C/F, K-1 box 1)
in which TP
does not
materially
participate
Worksheet 3 - For Form 8582, Lines 3a, 3b, and 3c (See page 8)
Current year
• Vacation condos
Name of activity
• Equipment leases
Total. Enter on Form 8582, lines 2a,
2b, and 2c
Page 20
(a) Net Income
(line 3a)
(b) Net Loss
(line 3b)
Prior years
(c) Unallowed
loss (line 3c)
Overall gain or loss
(d) Gain
(e) Loss
Worksheet 4
Allocates $25,000
among line 1 rentals - prorata
Page 20
Worksheet 5
Allocates passive income
among passive losses - prorata
n
Page 20
Worksheet 6
Lists allowed & unallowed losses
and form where reported.
Page 20
Worksheet 7
Lists activities with losses
that are reported on more than one form
Page 20
8582 Worksheets
Anything of importance
on those worksheets?
Page 20
IRC 469(b)
8582 Worksheets
YES
Worksheet 6
Sch.
Form
Sch. D
E
C
F
E4797
4835
Farm
Back
Equipment
Business
Rental
Sale Sale
Farm
1065/1120S
1065/1120S
1041
Real
Asset
Rental
Lease
Estate
tells
where losses are reported
on the return.
Page 20
8582 Worksheets
Also …
from prior year’s
worksheet 6,
you can verify
that the
carryforward
amount is
correct.
Important with
New Client!
Page 20
Are suspended passive losses
anywhere on Sch. E?
NO! Only on Form 8582
worksheet 6.
New client? Review prior year
Form 8582 worksheet 6!
Page 20
Where do losses
on F8582 lines 1b and 3b
come from?
1b
3b
Page 20
2010
1b *Net rental real estate losses
from front of Sch E
*K-1 box 2 losses from 1065/1120S
(rental real estate)
Page 20
3b
*K-1 box 1 loss -1065/1120S
TP doesn’t materially participate
*K-1 box equipment leases
*Vacation cottage/condo/short-term
rental from Sch. E or C
*Sch C equipment leases
*Farm in which TP does
not materially participate
Page 20
Income on Form 8582
lines 1a and 3a
must be reflected on Form 1040.
Typically on Sch E:
Front - line 22 OR
Back - line 28 (column g) OR
Sch D line 11.
If income on Form 8582
is not on the return,
there’s unreported income!
Page 20
IT IS
IMPORTANT
TO VERIFY THAT
INCOME TRULY IS
PASSIVE
INCOME.
Passive losses are allowed only
up to passive income
+
-
NO PASSIVE INCOME. . . NO PASSIVE LOSS!!
PASSIVE
INCOME
Sources:
•Net profit from rental real estate
•F4797 gain on sale of
rental real estate
•Net income from business
in which TP does not
materially participate
Page 20 & 9
IRC 469(e)
PASSIVE INCOME IS NOT
•Business if TP materially participated
•Earned Income
wages, commissions, guaranteed pmts
•Portfolio
Interest & dividends
Royalties
Stocks & Bonds Gains
•Land rented or held for investment
•Self-Rental: Income from property leased
to a business where TP works.
Above types of income should
not be on Form 8582!
Page 20 & 9
IRC 469(e)
These types of income
should not be on
Form 8582.
Lines 1a and 3a
should NOT contain:
•Interest & dividends
•Royalties
•Income from a 1065
which trades in stocks & bonds
•Income/gain from land
•Rental income from building
leased to a business
where TP works
Page 20 & 9
Reg. 1.469-2T(c)(2)(C)
GAIN ON SALE
OF RENTAL PROPERTY
OR PASSIVE BUSINESS
Gain generally is passive income.
But …
Form 4797 gain
goes on Form 8582 only if
gain is more than
current and prior year losses.
If so,
Form 4797 gain,
current year losses,
and prior year losses
all go on Form 8582.
Page 20 & 7
IRC 469(i) (3)(F)
Line 7 Form 8582
What is modified AGI ?
Line 7
Page 20 & 17
It’s
AGI computed without
passive losses
or passive income …
and some other minor modifiers.
Line 7
Page 20 & 17
IRC 469(i) (3)(F)
Line 7 Modified AGI is . . .
AGI computed without:
•Passive losses
•Passive income
•Any rental losses
(including losses allowed as a RE Pro)
•IRA
•Taxable social security
•1/2 self-employment tax
•Exclusion for adoption expenses
•Student loan interest
Page 20 & 17
If you only compute AGI
without passive losses & income,
you will be substantially correct
most of the time!
Law: For every dollar
modified AGI exceeds $100,000,
the $25,000 offset
is reduced by 50 cents.
If MAGI is more than $150,000,
none of the $25,000 offset is allowed.
AUTOMATIC IRS ADJUSTMENTS!
IF:
Then:
Adjustments of any kind
push AGI over $150,000...
No $25,000 offset allowed.
No rental loss deductible!
When can this happen?
Unreported income adjustment
Limited scope audit/IRS project
Constructive dividend from corp
Flow through adjustments
from 1065/1120S
Any adjustment increasing AGI!
Page 17
AUTOMATIC ADJUSTMENTS!
Adjustments of any kind
push AGI over $150,000.
Result: No $25,000 offset
No rental loss deductible!
(Exception: real estate professional)
IF:
40,000
150,000
160,000
90,000
0
60,000
25,000 0
25,000 0
Page 17
That’s all folks!
For more info
on Form 8582:
•Instructions to Form 8582
•IRS Pub 925
•PAL Audit Guide