For the latest developments related to Pub. 925, such as legislation enacted after it was published, go to IRS.gov/Pub925.
Excess business loss limitation. If you are a noncorporate taxpayer and have allowable business losses after taking into account first the at-risk limitations and then the passive loss limitations (Form 8582), your losses may be subject to the excess business loss limitation. After taking into account all the other loss limitations, complete Form 461, Limitation on Business Losses, to figure the amount of your excess business loss. See Form 461 and its instructions for details on the excess business loss limitation.
Commercial revitalization deduction (CRD). The 120-month deduction period for rental real estate placed in service by December 31, 2009, has expired. See Form 8582 and its instructions for reporting requirements for unused CRDs.
Changes in rules on grouping and definition of real property trade or business. T.D. 9943 revised certain rules in the Regulations under section 469.
Regrouping due to Net Investment Income Tax. You may be able to regroup your activities if you’re subject to the Net Investment Income Tax. See Regrouping Due to Net Investment Income Tax under Grouping Your Activities , later, for more information.
At-risk amounts. The following rules apply to amounts borrowed after May 3, 2004.
Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 800-THE-LOST (800-843-5678) if you recognize a child.
This publication discusses two sets of rules that may limit the amount of your deductible loss from a trade, business, rental, or other income-producing activity. The first part of the publication discusses the passive activity rules. The second part discusses the at-risk rules. However, when you figure your allowable losses from any activity, you must apply the at-risk rules before the passive activity rules.
Comments and suggestions.
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The passive activity rules apply to:
Even though the rules don’t apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities.
For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions.
. Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis or at-risk rules. See Passive Activity Deductions, later. .
Generally, the passive activity loss for the tax year isn’t allowed. However, there is a special allowance under which some or all of your passive activity loss may be allowed. See Special $25,000 allowance , later.
Definition of passive activity loss.
Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. See Passive Activity Income and Deductions , later.
For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. For details on net active income, see the Instructions for Form 8810. For the definition of passive activity gross income, see Passive Activity Income , later. For the definition of passive activity deductions, see Passive Activity Deductions , later.
If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity.
Allocation of disallowed passive activity loss among activities.
If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that’s disallowed for the tax year by the fraction obtained by dividing:
Use Part VII of Form 8582 to figure the ratable portion of the loss from each activity that’s disallowed.
Loss from an activity.
The term “loss from an activity” means:
If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that doesn’t have a loss for such tax year. See Significant Participation Passive Activities , later.
Example.
Terry holds interests in three passive activities, A, B, and C. The gross income and deductions from these activities for the tax year are as follows.
| A | B | C | Total | |
| Gross income | $7,000 | $4,000 | $12,000 | $23,000 |
| Deductions | (16,000) | (20,000) | (8,000) | (44,000) |
| Net income (loss) | ($9,000) | ($16,000) | $4,000 | ($21,000) |
Terry’s $21,000 passive activity loss for the tax year is disallowed. Therefore, a ratable portion of the losses from activities A and B is disallowed. The disallowed portion of each loss is as follows.
| A: $21,000 x $9,000/$25,000 | $7,560 |
| B: $21,000 x $16,000/$25,000 | 13,440 |
| Total | $21,000 |
Allocation within loss activities.
If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined next) from such activity is disallowed. The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing:
Excluded deductions.
“Excluded deduction” means any passive activity deduction that’s taken into account in computing your net income from an item of property for a tax year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. See Recharacterization of Passive Income , later.
Separately identified deductions.
In identifying the deductions from an activity that are disallowed, you don’t need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately.
Use Form 8582, Part IX, for any activity if you have passive activity deductions for that activity that must be separately identified.
Deductions that must be accounted for separately include (but aren’t limited to) the following deductions.
In the case of an activity with respect to which any deductions or credits are disallowed for a tax year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. For more information, see Regulations section 1.469-1(f)(4).
Generally, the passive activity credit for the tax year is disallowed.
The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. Credits that are included in figuring the general business credit are subject to the passive activity rules.
See the Instructions for Form 8582-CR for more information.
You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). You must also apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP.
You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest.
For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the instructions for Forms 8582 and 8582-CR, respectively.
There are two kinds of passive activities.
Material participation in a trade or business is discussed, later, under Activities That Aren’t Passive Activities .
Treatment of former passive activities.
A former passive activity is an activity that was a passive activity in any earlier tax year, but isn’t a passive activity in the current tax year. You can deduct a prior-year unallowed loss from the activity up to the amount of your current-year net income from the activity. Treat any remaining prior-year unallowed loss like you treat any other passive loss.
In addition, any prior-year unallowed passive activity credits from a former passive activity offset the allocable part of your current-year tax liability. The allocable part of your current-year tax liability is that part of this year's tax liability that‘s allocable to the current-year net income from the former passive activity. You figure this after you reduce your net income from the activity by any prior-year unallowed loss from that activity (but not below zero).
A trade or business activity is an activity that:
A trade or business activity doesn’t include a rental activity or the rental of property that’s incidental to an activity of holding the property for investment.
You generally report trade or business activities on Schedule C, F, or in Part II or III of Schedule E.
A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. See Real Estate Professional under Activities That Aren’t Passive Activities , later. An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. It doesn’t matter whether the use is under a lease, a service contract, or some other arrangement.
Exceptions.
Your activity isn’t a rental activity if any of the following apply.
. If you meet any of the exceptions listed above, see the Instructions for Form 8582 for information about how to report any income or loss from the activity. .
Special $25,000 allowance.
If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that’s disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing the passive activity loss. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.
If you’re married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance can’t be more than $12,500. If you lived with your spouse at any time during the year and are filing a separate return, you can’t use the special allowance to reduce your nonpassive income or tax on nonpassive income.
The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. See Phaseout rule , later.
Example.
You are a single taxpayer. You have $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which you actively participated. Because your modified adjusted gross income is less than $100,000, you aren’t subject to the modified adjusted gross income phaseout rule. You can use $15,000 of your $26,000 loss to offset your $15,000 passive income from the partnership. You actively participated in your rental real estate activities, so you can use the remaining $11,000 rental real estate loss to offset $11,000 of your nonpassive income (wages).
Active participation.
Active participation isn’t the same as material participation (defined later). Active participation is a less stringent standard than material participation. For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions.
Only individuals can actively participate in rental real estate activities. However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died.
A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. The choice applies to tax years ending after the decedent's death and before:
The choice is irrevocable and can’t be made later than the due date for the estate's first income tax return (including any extensions).
Except as provided in regulations, limited partners aren’t treated as actively participating in a partnership's rental real estate activities.
You aren’t treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year.
Active participation isn’t required to take the low-income housing credit or the rehabilitation investment credit from rental real estate activities.
Example.
Stacey, a single taxpayer, had the following income and loss during the tax year.
| Salary | $42,300 | |
| Dividends | 300 | |
| Interest | 1,400 | |
| Rental loss | (4,000) | |
The rental loss came from a house Stacey owned. Stacey advertised and rented the house to the current tenant. Stacey also collected the rents and did the repairs or hired someone to do them.
Even though the rental loss is a loss from a passive activity, Stacey can use the entire $4,000 loss to offset other income because Stacey actively participated.
Phaseout rule.
The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that’s more than $100,000 ($50,000 if you’re married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you’re married filing separately), you generally can’t use the special allowance. This is because the special allowance is reduced to $0 since the modified adjusted gross income is over the $100,000 amount.
Modified adjusted gross income for this purpose is your adjusted gross income figured without the following.
Example.
During 2023, you were unmarried and weren’t a real estate professional. For 2023, you had $120,000 in salary and a $31,000 loss from your rental real estate activities in which you actively participated. Your modified adjusted gross income is $120,000. When you file your 2023 return, you can deduct only $15,000 of your passive activity loss. You must carry over the remaining $16,000 passive activity loss to 2024. You figure your deduction and carryover as follows.
| Adjusted gross income, modified as required | $120,000 | |
| Minus amount not subject to phaseout | –100,000 | |
| Amount subject to phaseout rule | $20,000 | |
| Multiply by 50% (0.50) | × 50% | |
| Required reduction to special allowance | $10,000 | |
| Maximum special allowance | $25,000 | |
| Minus required reduction (see above) | –10,000 | |
| Adjusted special allowance | $15,000 | |
| Passive loss from rental real estate | $31,000 | |
| Deduction allowable/Adjusted special allowance (see above) | –15,000 | |
| Amount that must be carried forward | $16,000 | |
Exceptions to the phaseout rules.
A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you’re a married individual filing a separate return and living apart at all times during the year).
There is no phaseout of the $25,000 special allowance for low-income housing credits.
Ordering rules.
If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order.
The following aren’t passive activities.
. You shouldn’t enter income and losses from these activities on Form 8582, as they are not passive activities. Instead, enter them on the forms or schedules you would normally use. .
A trade or business activity isn’t a passive activity if you materially participated in the activity.
Material participation tests.
You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests.
You didn’t materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Your participation in managing the activity doesn’t count in determining whether you materially participated under this test if:
Participation.
In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity.
Work not usually performed by owners.
You don’t treat the work you do in connection with an activity as participation in the activity if both of the following are true.
Participation as an investor.
You don’t treat the work you do in your capacity as an investor in an activity as participation unless you’re directly involved in the day-to-day management or operations of the activity. Work you do as an investor includes:
Spouse's participation.
Your participation in an activity includes your spouse's participation. This applies even if your spouse didn’t own any interest in the activity and you and your spouse don’t file a joint return for the year.
. Proof of participation. You can use any reasonable method to prove your participation in an activity for the year. You don’t have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. .
Limited partners.
If you owned an activity as a limited partner, you generally aren’t treated as materially participating in the activity. However, you’re treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year.
You aren’t treated as a limited partner, however, if you were also a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest).
Retired or disabled farmer and surviving spouse of a farmer.
If you’re a retired or disabled farmer, you’re treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. Similarly, if you’re a surviving spouse of a farmer, you’re treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm.
Corporations.
A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity.
A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. See Special exception for qualified corporations under Activities Covered by the At-Risk Rules , later.
Generally, rental activities are passive activities even if you materially participated in them. However, if you qualified as a real estate professional, rental real estate activities in which you materially participated aren’t passive activities. For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice.
If you qualified as a real estate professional for 2023, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). If you also have an unallowed loss from these activities from an earlier year when you didn’t qualify, see Treatment of former passive activities under Passive Activities , earlier.
Qualifications.
You qualified as a real estate professional for the year if you met both of the following requirements.
Don’t count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest.
If you file a joint return, don’t count your spouse's personal services to determine whether you met the preceding requirements. However, you can count your spouse's participation in an activity in determining if you materially participated.
Real property trades or businesses.
A real property trade or business is a trade or business that does any of the following with real property.
Real property development.
Real property development is a trade or business that includes the maintenance and improvement of raw land to make it suitable for subdivision, further development, or construction of residential or commercial buildings. Also included in real property development is the establishment, cultivation, maintenance, or improvement of timberlands.
Real property redevelopment.
Real property redevelopment is a trade or business that includes demolition, deconstruction, separation, and removal of existing buildings, landscaping, and infrastructure on a parcel of land to return the land to a raw condition or otherwise prepare the land for new development or construction, or for establishment, cultivation, maintenance, or improvement of timberlands.
Real property operations.
Real property operations involve handling the day-to-day operations of a trade or business relating to the maintenance and occupancy of the real property affecting its availability or functionality by a direct or indirect owner. The real property must be used, or held for use, by customers and payments received must be principally for the customer's use of the property and not for the provision of other significant or extraordinary personal services.
Real property management.
Real property management involves handling the day-to-day operations of a trade or business relating to the maintenance and occupancy of the real property affecting its availability or functionality by a professional manager. The real property must be used, or held for use, by customers and payments received must be principally for the customer's use of the property and not for the provision of other significant or extraordinary personal services. A professional manager is a person who is not a direct or indirect owner of the real property or properties and who is responsible for, on a full-time basis, management and oversight of the real property or properties.
Closely held corporations.
A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated.
In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions.
Self-charged interest.
Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity.
Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you.
It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity.
Exception. The self-charged interest rules don’t apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1.469-7(g) to avoid the application of these rules. For more details on the self-charged interest rules, see Regulations section 1.469-7.
Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity.
Passive activity income doesn’t include the following items.
Disposition of property interests.
Gain on the disposition of an interest in property is generally passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. The gain generally isn’t passive activity income if, at the time of disposition, the property was used in an activity that wasn’t a passive activity in the year of disposition. An exception to this general rule may apply if you previously used the property in a different activity.
Exception for more than one use in the preceding 12 months.
If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. Any gain allocated to a passive activity is passive activity income.
For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property isn’t more than the lesser of:
Exception for substantially appreciated property.
The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies.
If neither condition applies, the gain isn’t passive activity income. However, it’s treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities.
For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date.
If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion.
Disposition of property converted to inventory.
If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. This rule applies only if you meet all of the following conditions.
Generally, a deduction is a passive activity deduction for a tax year if and only if such deduction either:
For purposes of item (1) above, an item of deduction arises in the tax year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all tax years were determined without regard to the passive activity rules and without regard to the basis and at-risk limits. See Coordination with other limitations on deductions that apply before the passive activity rules , later.
Passive activity deductions generally include any loss from a disposition of property used in a passive activity at the time of the disposition and any loss from a disposition of less than your entire interest in a passive activity.
Exceptions.
Passive activity deductions don’t include the following items.
Coordination with other limitations on deductions that apply before the passive activity rules.
An item of deduction from a passive activity that’s disallowed for a tax year under the basis or at-risk limitations isn’t a passive activity deduction for the tax year. The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations.
Proration of deductions disallowed under basis limitations.
If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing:
If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing:
Proration of deductions disallowed under at-risk limitation.
If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing:
Separately identified items of deduction and loss.
In identifying the items of deduction and loss from an activity that aren’t disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you needn’t account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss not taken into account separately.
Items of deduction or loss that must be accounted for separately include (but aren’t limited to) items of deduction or loss that:
Excess business loss limitation that applies after the passive activity rules.
If you are a noncorporate taxpayer and have allowable business losses after considering first the at-risk limitations and then the passive loss limitations (Form 8582), your losses may be subject to the excess business loss limitation. After considering all the other loss limitations, complete Form 461, Limitation on Business Losses, to figure the amount of your excess business loss. See Form 461 and its instructions for details on the excess business loss limitation.
You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules.
Grouping is important for a number of reasons. If you group two activities into one larger activity, you need only show material participation in the activity as a whole. But if the two activities are separate, you must show material participation in each one. On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity.
Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity.
Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. The following factors have the greatest weight in determining whether activities form an appropriate economic unit. All of the factors don’t have to apply to treat more than one activity as a single activity. The factors that you should consider are:
Example 1.
Jackie owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping Jackie's activities. For example, Jackie may be able to group the movie theaters and the bakeries into:
Example 2.
Pat is a partner in ABC partnership, which sells nonfood items to grocery stores. Pat is also a partner in DEF (a trucking business). ABC and DEF are under common control. The main part of DEF's business is transporting goods for ABC. DEF is the only trucking business in which Pat is involved. Based on the rules of this section, Pat treats ABC's wholesale activity and DEF's trucking activity as a single activity.
Consistency and disclosure requirement.
Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings.
However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS.
Regrouping by the IRS.
If any of the activities resulting from your grouping isn’t an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities.
Rental activities.
In general, you can’t group a rental activity with a trade or business activity. However, you can group them together if the activities form an appropriate economic unit and:
Example.
Finley and Taylor are married and file a joint return. Healthy Food, an S corporation, is a grocery store business. Finley is Healthy Food's only shareholder. Plum Tower, an S corporation, owns and rents out the building. Taylor is Plum Tower's only shareholder. Plum Tower rents part of its building to Healthy Food. Plum Tower's grocery store rental business and Healthy Food's grocery business aren’t insubstantial in relation to each other.
Finley and Taylor file a joint return, so they’re treated as one taxpayer for purposes of the passive activity rules. The same owner (Finley and Taylor) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). If the grouping forms an appropriate economic unit, as discussed earlier, Finley and Taylor can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity.
Grouping of real and personal property rentals.
In general, you can’t treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property.
Certain activities may not be grouped: limited partnerships and limited entrepreneurs.
In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business.
If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit, as discussed earlier.
Limited entrepreneur.
A limited entrepreneur is a person who:
Certain activities may not be grouped: trading activities.
A trading activity of trading personal property is not a passive activity. Personal property is any personal property that is actively traded (for example, financial securities). A taxpayer who does not materially participate in a trading activity is prohibited from grouping the activity with any other activity including any other trading activity. The prohibition on grouping is effective for tax years beginning on or after March 22, 2021. If you are a calendar year taxpayer, the new provisions apply to you beginning in calendar year 2022.
Activities conducted through another entity.
A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section):
. You may not treat activities grouped together by the entity as separate activities. .
Personal service and closely held corporations.
You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. See Material Participation , earlier, and Significant Participation Passive Activities , later.
Publicly traded partnership (PTP).
You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP.
Partial dispositions.
If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. However, you can do this only if you can show with reasonable certainty:
You may be able to regroup your activities, as described below, if you’re subject to the Net Investment Income Tax (NIIT) for the first time. For detailed information, see Regulations section 1.469-11(b)(3)(iv).
Regrouping on an original return.
Under the NIIT “fresh start” election, you may regroup for the first tax year you are subject to the NIIT (without regard to the effect of regrouping). You may regroup only once under this election and that regrouping will apply to the tax year for which you regroup and all future tax years. You are eligible to regroup if:
Regrouping on an amended return.
You may regroup your activities on an amended tax return, but only if you were not subject to the NIIT on your original return (or previously amended return). You are eligible if:
This rule applies equally to changes to modified adjusted gross income or net investment income upon an IRS examination.
Manner of regrouping.
If you regroup your activities under this rule, you must attach to your original or amended return, as applicable, a statement that satisfies the requirements described in Regrouping under Disclosure Requirement , later.
For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. You’re required to report certain changes to your groupings that occur during the tax year to the IRS. If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure.
New grouping.
You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules.
Addition to an existing grouping.
You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. The statement must provide the name, address, and EIN, if applicable, for the activity that’s being added and for the activities in the existing group. In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules.
Regrouping.
You must file a written statement with your original income tax return for the tax year in which you regroup the activities. The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate.
Groupings by partnerships and S corporations.
Partnerships and S corporations aren’t subject to the rules for new grouping, addition to an existing grouping, or regrouping. Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U.S. Return of Partnership Income, or Form 1120-S, U.S. Income Tax Return for an S Corporation, whichever is applicable.
The partner or shareholder isn’t required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder:
A partner or shareholder may not treat activities grouped together by the entity as separate activities.
Net income from the following passive activities may have to be recharacterized and excluded from passive activity income.
If you’re engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity.
If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity).
If the result is net income, don’t enter any of the income or losses from the activity or property on Form 8582 or its separate parts, as they are recharacterized as nonpassive. Instead, enter income or losses on the form and schedules you normally use. However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity.
Limit on recharacterized passive income.
The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities can’t exceed the greatest amount that you treat as nonpassive income under any one of these rules.
Investment income and investment expense.
To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity.
A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but didn’t materially participate.
If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income.
Corporations.
An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true.
Worksheet A.
Complete Worksheet A. Significant Participation Passive Activities if you have income or losses from any significant participation activity. Begin by entering the name of each activity in the left column.
Column (a).
Enter the number of hours you participated in each activity and total the column.
If the total is more than 500, don’t complete Worksheet A or B. None of the activities are passive activities because you satisfy test 4 for material participation. (See Material participation tests , earlier.) Report all the income and losses from these activities on the forms and schedules you normally use. Don’t include the income and losses on Form 8582.
Column (b).
Enter the net loss, if any, from the activity. Net loss from an activity means either:
Column (c).
Enter net income (if any) from the activity. Net income means the excess of the current-year net income from the activity over any prior-year unallowed losses from the activity.
Column (d).
Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). If column (d) is a net loss, skip Worksheet B. Significant Participation Activities With Net Income. Include the income and losses in Part V of Form 8582 (or Worksheet 2 in the Instructions for Form 8810).
| Name of activity | (a) Hours of participation | (b) Net loss | (c) Net income | (d) Combine totals of cols. (b) and (c) | |
| ( | ) | ||||
| ( | ) | ||||
| ( | ) | ||||
| ( | ) | ||||
| ( | ) | ||||
| ( | ) | ||||
| ( | ) | ||||
| Totals | ( | ) | |||
Worksheet B.
On Worksheet B. Significant Participation Activities With Net Income, list only the significant participation passive activities that have net income as shown in column (c) of Worksheet A.
Column (a).
Enter the net income of each activity from column (c) of Worksheet A.
Column (b).
Divide each of the individual net income amounts in column (a) by the total of column (a). The result is a ratio. In column (b), enter the ratio for each activity as a decimal (rounded to at least three places). The total of these ratios must equal 1.000.
Column (c).
Multiply the amount in the Totals row of column (d) of Worksheet A by each of the ratios in column (b). Enter the results in column (c).
Column (d).
Subtract column (c) from column (a). To this figure, add the amount of prior-year unallowed losses (if any) that reduced the current-year net income. Enter the result in column (d). Enter these amounts on Part V of Form 8582 or Worksheet 2 in the Instructions for Form 8810. (See also Limit on recharacterized passive income , earlier.)
If you have net passive income (including prior-year unallowed losses) from renting property in a rental activity, and less than 30% of the unadjusted basis of the property is subject to depreciation, you treat the net passive income as nonpassive income.
Example.
Charlie acquires vacant land for $300,000, constructs improvements at a cost of $100,000, and leases the land and improvements to a tenant. Charlie then sells the land and improvements for $600,000, realizing a gain of $200,000 on the disposition.
The unadjusted basis of the improvements ($100,000) equals 25% of the unadjusted basis of all property ($400,000) used in the rental activity.
Charlie's net passive income from the activity (which is figured with the gain from the disposition, including gain from the improvements) is treated as nonpassive income.
| Name of activity with net income | (a) Net income | (b) Ratio (see instructions) | (c) Nonpassive income (see instructions) | (d) Passive income (subtract col. (c) from col. (a)) |
|---|---|---|---|---|
| Totals | 1.000 |
If you have gross income from an equity-financed lending activity, the lesser of the net passive income or the equity-financed interest income is nonpassive income.
For more information, see Temporary Regulations section 1.469-2T(f)(4).
Net income from this type of activity will be treated as nonpassive income if all of the following apply.
For more information, see Regulations section 1.469-2(f)(5).
If you rent property to a trade or business activity in which you materially participated, net rental income from the property is treated as nonpassive income. This rule doesn’t apply to net income from renting property under a written binding contract entered into before February 19, 1988. It also doesn’t apply to property described earlier under Rental of Property Incidental to a Development Activity .
Net royalty income from intangible property held by a pass-through entity in which you own an interest may be treated as nonpassive royalty income. This applies if you acquired your interest in the pass-through entity after the partnership, S corporation, estate, or trust created the intangible property or performed substantial services or incurred substantial costs for developing or marketing the intangible property.
This recharacterization rule doesn’t apply if:
For purposes of (2) above, capital expenditures are taken into account for the entity's tax year in which the expenditure is chargeable to a capital account, and your share of the expenditure is figured as if it were allowed as a deduction for the tax year.
Any passive activity losses (but not credits) that haven’t been allowed (including current-year losses) are generally allowed in full in the tax year in which you dispose of your entire interest in the passive (or former passive) activity. However, for the losses to be allowed, you must dispose of your entire interest in the activity in a transaction in which all realized gain or loss is recognized. Also, the person acquiring the interest from you must not be related to you.
. If you have a capital loss on the disposition of an interest in a passive activity, the loss may be limited. For individuals, your capital loss deduction is limited to the amount of your capital gains plus the lower of $3,000 ($1,500 in the case of a married individual filing a separate return) or the excess of your capital losses over capital gains. See Pub. 544 for more information. .
Example.
Carter earned a $60,000 salary and owned one passive activity through a 5% interest in the B Limited Partnership. In 2023, Carter sold that entire partnership interest to an unrelated person for $30,000. Carter’s adjusted basis in the partnership interest was $42,000, and Carter had carried over $2,000 of ordinary passive activity deductions from the activity.
Carter's deductible loss for 2023 is $5,000, figured as follows.
| Amount realized | $30,000 | |
| Minus: adjusted basis | –42,000 | |
| Capital loss | $12,000 | |
| Minus: capital loss limit | –3,000 | |
| Capital loss carryover | $9,000 | |
| Allowable capital loss on sale | $3,000 | |
| Carryover losses allowable | 2,000 | |
| Total current deductible loss | $5,000 | |
Carter deducts the $5,000 total current deductible loss in 2023 and must carry over the remaining $9,000 capital loss, which isn’t subject to the passive activity loss limit. Carter will treat it like any other capital loss carryover.
Installment sale of an entire interest.
If you sell your entire interest in a passive activity through an installment sale, to figure the loss for the current year that isn’t limited by the passive activity rules, multiply your overall loss (not including losses allowed in prior years) by a fraction. The numerator of the fraction is the gain recognized in the current year, and the denominator is the total gain from the sale minus all gains recognized in prior years.
Example.
Riley has a total gain of $10,000 from the sale of an entire interest in a passive activity. Under the installment method, Riley reports $2,000 of gain each year, including the year of sale. For the first year, 20% (2,000/10,000) of the losses are allowed. For the second year, 25% (2,000/8,000) of the remaining losses are allowed.
Partners and S corporation shareholders.
Generally, any gain or loss on the disposition of a partnership interest must be allocated to each trade or business, rental, or investment activity in which the partnership owns an interest. If you dispose of your entire interest in a partnership, the passive activity losses from the partnership that haven’t been allowed are generally allowed in full. They will also be allowed if the partnership (other than a PTP) disposes of all the property used in that passive activity.
If you don’t dispose of your entire interest, the gain or loss allocated to a passive activity is treated as passive activity income or deduction in the year of disposition. This includes any gain recognized on a distribution of money from the partnership that you receive in excess of the adjusted basis of your partnership interest.
These rules also apply to the disposition of stock in an S corporation.
Dispositions by gift.
If you give away your interest in a passive activity, the unused passive activity losses allocable to the interest can’t be deducted in any tax year. Instead, the basis of the transferred interest must be increased by the amount of these losses.
Dispositions by death.
If a passive activity interest is transferred because the owner dies, unused passive activity losses are allowed (to a certain extent) as a deduction against the decedent's income in the year of death. The decedent's losses are allowed only to the extent they exceed the amount by which the transferee's basis in the passive activity has been increased under the rules for determining the basis of property acquired from a decedent. For example, if the basis of an interest in a passive activity in the hands of a transferee is increased by $6,000 and unused passive activity losses of $8,000 were allocable to the interest at the date of death, then the decedent's deduction for the tax year would be limited to $2,000 ($8,000 − $6,000).
If you inherited property from a decedent who died in 2010, special rules may apply if the executor of the estate filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. For more information, see Pub. 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, which is available at IRS.gov/pub/irs-prior/p4895--2011.pdf.
Partial dispositions.
If you dispose of substantially all of an activity during your tax year, you may be able to treat the part of the activity disposed of as a separate activity. See Partial dispositions under Grouping Your Activities , earlier.
More than one form or schedule may be required for reporting your passive activities. The actual number of forms depends on the number and types of activities you must report. Some forms and schedules that may be required are:
Regardless of the number or complexity of passive activities you have, you should use only one Form 8582. If you need additional lines for any of the Form 8582 parts, you can either use copies of page 1, page 2, and/or page 3 of Form 8582, whichever is applicable, or your own schedule that’s in the same format as the applicable part.
For examples and further information, see the Form 8582 instructions.
The at-risk rules limit your losses from most activities to your amount at risk in the activity. You treat any loss that’s disallowed because of the at-risk limits as a deduction from the same activity in the next tax year. If your losses from an at-risk activity are allowed, they’re subject to recapture in later years if your amount at risk is reduced below zero.
. You must apply the at-risk rules before the passive activity rules discussed in the first part of this publication. .
Loss defined.
A loss is the excess of allowable deductions from the activity for the year (including depreciation or amortization allowed or allowable and disregarding the at-risk limits) over income received or accrued from the activity during the year. Income doesn’t include income from the recapture of previous losses (discussed, later, under Recapture Rule ).
Form 6198.
Use Form 6198 to figure how much loss from an activity you can deduct.
Loss limits for partners and S corporation shareholders.
Separate limits may apply to a partner's or shareholder's distributive share of an item of deduction or loss from a partnership or S corporation, respectively. The limits determine the amount each partner or shareholder can deduct on their own return. These limits and the order in which they apply are:
See Limitations on Losses, Deductions, and Credits in Partner's Instructions for Schedule K-1 (Form 1065) and Shareholder's Instructions for Schedule K-1 (Form 1120-S).
See also Excess business loss limitation that applies after the passive activity rules , earlier, for limitations that may apply after an allowable passive activity loss is determined.
The at-risk limits apply to individuals (including partners and S corporation shareholders), estates, trusts, and certain closely held C corporations.
Closely held C corporation.
For the at-risk rules, a C corporation is a closely held corporation if at any time during the last half of the tax year, more than 50% in value of its outstanding stock is owned, directly or indirectly, by or for five or fewer individuals.
To figure if more than 50% in value of the stock is owned by five or fewer individuals, apply the following rules.
If you’re involved in one of the following activities as a trade or business or for the production of income, you’re subject to the at-risk rules.
Section 1245 property.
Section 1245 property includes any property that is or has been subject to depreciation or amortization and is:
Exception for holding real property placed in service before 1987.
The at-risk rules don’t apply to the holding of real property placed in service before 1987. They also don’t apply to the holding of an interest acquired before 1987 in a pass-through entity engaged in holding real property placed in service before 1987. This exception doesn’t apply to holding mineral property.
Personal property and services that are incidental to making real property available as living accommodations are included in the activity of holding real property. For example, making personal property, such as furniture, and services available when renting a hotel or motel room or a furnished apartment is considered incidental to making real property available as living accommodations.
Exception for equipment leasing by a closely held corporation.
If a closely held corporation is actively engaged in equipment leasing, the equipment leasing is treated as a separate activity not covered by the at-risk rules. A closely held corporation is actively engaged in equipment leasing if 50% or more of its gross receipts for the tax year is from equipment leasing. Equipment leasing means the leasing, purchasing, servicing, and selling of equipment that’s section 1245 property.
However, equipment leasing doesn’t include the leasing of master sound recordings and similar contractual arrangements for tangible or intangible assets associated with literary, artistic, or musical properties, such as books, lithographs of artwork, or musical tapes. A closely held corporation can’t exclude these leasing activities from the at-risk rules nor count them as equipment leasing for the gross receipts test.
The equipment leasing exclusion also isn’t available for leasing activities related to other at-risk activities, such as motion picture films and video tapes, farming, oil and gas properties, and geothermal deposits. For example, if a closely held corporation leases a video tape, it can’t exclude this leasing activity from the at-risk rules under the equipment leasing exclusion.
Controlled group of corporations.
A controlled group of corporations is subject to special rules for the equipment leasing exclusion. See section 465(c) of the Internal Revenue Code.
Special exception for qualified corporations.
A qualified corporation isn’t subject to the at-risk limits for any qualifying business carried on by the corporation. Each qualifying business is treated as a separate activity.
Qualified corporation.
A qualified corporation is a closely held C corporation, defined earlier, that isn’t:
Qualifying business.
A qualifying business is any active business if all of the following apply.
Generally, you treat your activity involving each film or video tape, item of leased section 1245 property, farm, oil and gas property, or geothermal property as a separate activity. In addition, each investment that isn’t a part of a trade or business is treated as a separate activity.
Leasing by a partnership or S corporation.
For a partnership or S corporation, treat all leasing of section 1245 property that’s placed in service in any tax year of the partnership or S corporation as one activity.
Activities described in (6) under Activities Covered by the At-Risk Rules , earlier, that constitute a trade or business are treated as one activity if:
Active participation.
Active participation depends on all the facts and circumstances. Factors that indicate active participation include making decisions involving the operation or management of the activity, performing services for the activity, and hiring and discharging employees. Factors that indicate a lack of active participation include lack of control in managing and operating the activity, having authority only to discharge the manager of the activity, and having a manager of the activity who is an independent contractor rather than an employee.
Partners and S corporation shareholders.
Partners or shareholders may aggregate activities of their partnership or S corporation within each of the following categories.
For example, if a partnership or S corporation produces two films or video tapes, the partners or S corporation shareholders may treat the production of both films or video tapes as one activity for purposes of the at-risk rules.
You’re at risk in any activity for:
Amounts borrowed.
You’re at risk for amounts borrowed to use in the activity if you’re personally liable for repayment. You’re also at risk if the amounts borrowed are secured by property other than property used in the activity. In this case, the amount considered at risk is the net fair market value of your interest in the pledged property. The net fair market value of property is its fair market value (determined on the date the property is pledged) less any prior (or superior) claims to which it’s subject. However, no property will be taken into account as security if it’s directly or indirectly financed by debt that’s secured by property you contributed to the activity.
. If you borrow money to finance a contribution to an activity, you can’t increase your amount at risk by the contribution and the amount borrowed to finance the contribution. You may increase your at-risk amount only once. .
Certain borrowed amounts excluded.
Even if you’re personally liable for the repayment of a borrowed amount or you secure a borrowed amount with property other than property used in the activity, you aren’t considered at risk if you borrowed the money from a person having an interest in the activity or from someone related to a person (other than you) having an interest in the activity. This doesn’t apply to:
Related persons.
Related persons include:
To determine the direct or indirect ownership of the outstanding stock of a corporation, apply the following rules.
Effect of government price support programs.
A government target price program or other government price support programs for a product that you grow doesn’t, without agreements limiting your costs, reduce the amount you have at risk.
Effect of increasing amounts at risk in subsequent years.
Any loss that’s allowable in a particular year reduces your at-risk investment (but not below zero) as of the beginning of the next tax year and in all succeeding tax years for that activity. If you have a loss that’s more than your at-risk amount, the loss disallowed won’t be allowed in later years unless you increase your at-risk amount. Losses that are suspended because they’re greater than your investment that’s at risk are treated as a deduction for the activity in the following year. Consequently, if your amount at risk increases in later years, you may deduct previously suspended losses to the extent that the increases in your amount at risk exceed your losses in later years. However, your deduction of suspended losses may be limited by the passive loss rules.
You aren’t considered at risk for amounts protected against loss through nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements.
Nonrecourse financing.
Nonrecourse financing is financing for which you aren’t personally liable. If you borrow money to contribute to an activity and the lender's only recourse is to your interest in the activity or the property used in the activity, the loan is a nonrecourse loan.
You aren’t considered at risk for your share of any nonrecourse loan used to finance an activity or to acquire property used in the activity unless the loan is secured by property not used in the activity.
However, you’re considered at risk for qualified nonrecourse financing secured by real property used in an activity of holding real property. Qualified nonrecourse financing is financing for which no one is personally liable for repayment and that’s:
Other types of property used as security.
The rules in the next two paragraphs apply to any financing incurred after August 3, 1998. You can also choose to apply these rules to financing you obtained before August 4, 1998. If you do that, you must reduce the amounts at risk as a result of applying these rules to years ending before August 4, 1998, to the extent they increase the losses allowed for those years.
In determining whether qualified nonrecourse financing is secured only by real property used in the activity of holding real property, disregard property that’s incidental to the activity of holding real property. Also, disregard other property if the total gross fair market value of that property is less than 10% of the total gross fair market value of all the property securing the financing.
For this purpose, treat yourself as owning directly your proportional share of the assets in any partnership in which you own, directly or indirectly, an equity interest.
Qualified person.
A qualified person is a person who actively and regularly engages in the business of lending money. The most common example is a bank.
However, none of the following persons can be a qualified person.
Other loss limiting arrangements.
Any capital you have contributed to an activity isn’t at risk if you’re protected against economic loss by an agreement or arrangement for compensation or reimbursement. For example, you aren’t at risk if you will be reimbursed for part or all of any loss because of a binding agreement between yourself and another person.
Example 1.
Some commercial feedlots reimburse investors against any loss sustained on sales of the fed livestock above a stated dollar amount per head. Under such stop loss orders, the investor is at risk only for the portion of the investor's capital for which the investor isn’t entitled to a reimbursement.
Example 2.
You’re personally liable for a mortgage, but you separately obtain insurance to compensate you for any payments you must actually make because of your personal liability. You’re considered at risk only to the extent of the uninsured portion of the personal liability to which you’re exposed. You can include in the amount you have at risk the amount of any premium that you paid from your personal assets for the insurance. However, if you obtain casualty insurance or insurance protecting yourself against tort liability, it doesn’t affect the amount you’re otherwise considered to have at risk.
The amount you have at risk in any activity is reduced by any losses allowed in previous years under the at-risk rules. It may also be reduced because of distributions you received from the activity, debts changed from recourse to nonrecourse, or the initiation of a stop loss or similar agreement. If the amount at risk is reduced below zero, your previously allowed losses are subject to recapture, as explained next.
If the amount you have at risk in any activity at the end of any tax year is less than zero, you must recapture at least part of your previously allowed losses. You do this by adding to your income from the activity for that year the lesser of the following amounts.
Don’t use the recapture income to reduce any net loss from the activity for the tax year. Instead, treat the recaptured amount as a deduction for the activity in the next tax year.
Pre-1979 activity.
If the amount you had at risk in an activity at the end of your tax year that began in 1978 was less than zero, you apply the preceding rule for the recapture of losses by substituting that negative amount for zero. For example, if your at-risk amount for that tax year was minus $50, you will recapture losses only when your at-risk amount goes below minus $50.
If you have questions about a tax issue; need help preparing your tax return; or want to download free publications, forms, or instructions, go to IRS.gov to find resources that can help you right away.
Preparing and filing your tax return.
After receiving all your wage and earnings statements (Forms W-2, W-2G, 1099-R, 1099-MISC, 1099-NEC, etc.); unemployment compensation statements (by mail or in a digital format) or other government payment statements (Form 1099-G); and interest, dividend, and retirement statements from banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you qualify for free tax preparation, or hire a tax professional to prepare your return.
Free options for tax preparation.
Your options for preparing and filing your return online or in your local community, if you qualify, include the following.
Using online tools to help prepare your return.
Go to IRS.gov/Tools for the following.
. Getting answers to your tax questions. On IRS.gov, you can get up-to-date information on current events and changes in tax law. .
Need someone to prepare your tax return?
There are various types of tax return preparers, including enrolled agents, certified public accountants (CPAs), accountants, and many others who don’t have professional credentials. If you choose to have someone prepare your tax return, choose that preparer wisely. A paid tax preparer is:
. Although the tax preparer always signs the return, you're ultimately responsible for providing all the information required for the preparer to accurately prepare your return and for the accuracy of every item reported on the return. Anyone paid to prepare tax returns for others should have a thorough understanding of tax matters. For more information on how to choose a tax preparer, go to Tips for Choosing a Tax Preparer on IRS.gov. .
Employers can register to use Business Services Online.
The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure W-2 filing options to CPAs, accountants, enrolled agents, and individuals who process Form W-2, Wage and Tax Statement, and Form W-2c, Corrected Wage and Tax Statement.
IRS social media.
Go to IRS.gov/SocialMedia to see the various social media tools the IRS uses to share the latest information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our highest priority. We use these tools to share public information with you. Don’t post your social security number (SSN) or other confidential information on social media sites. Always protect your identity when using any social networking site.
The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, Spanish, and ASL.
Watching IRS videos.
The IRS Video portal (IRSVideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals.
Online tax information in other languages.
You can find information on IRS.gov/MyLanguage if English isn’t your native language.
Free Over-the-Phone Interpreter (OPI) Service.
The IRS is committed to serving taxpayers with limited-English proficiency (LEP) by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), most IRS offices, and every VITA/TCE tax return site. The OPI Service is accessible in more than 350 languages.
Accessibility Helpline available for taxpayers with disabilities.
Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and future accessibility products and services available in alternative media formats (for example, braille, large print, audio, etc.). The Accessibility Helpline does not have access to your IRS account. For help with tax law, refunds, or account-related issues, go to IRS.gov/LetUsHelp.
Form 9000, Alternative Media Preference, or Form 9000(SP) allows you to elect to receive certain types of written correspondence in the following formats.