U.S. Individual Income Tax Return

2007 Instructions for Form 8582
Passive Activity Loss Limitations
Purpose: This is the first circulated draft of the Instructions for Form 8582 Passive
Activity Loss Limitations, for review and comments. A discussion of the major changes
is attached.
TPCC Meeting: There is no meeting scheduled, but you may request one.
Form: The 2007 Form 8582 was circulated earlier. It can be found at the following link:
http://taxforms.web.irs.gov/Products/Drafts/2007-2/07f8582_d1.pdf
Prior Revision: The 2006 Instructions for Form 8582 can be viewed by clicking on the
following link:
http://www.irs.gov/pub/irs-pdf/i8582.pdf
Other Products: Circulations of draft tax forms, instructions, notices, and publications
are posted at:
http://taxforms.web.irs.gov/draft_products.html
Comments: Please email, fax, call, or mail any comments by July 20, 2007
Moneta Howland
moneta.s.howland@irs.gov
Tax Forms and Publications
SE:W:CAR:MP:T:I:S
Phone: (202) 622-3161
Fax: (202)622-5022

Description of Major Changes for the
Instructions for Form 8582, Passive Activity Loss Limitations

Page 8
We added the deduction for tuition and fees to the bulleted list under Line 7; the
deduction has been extended per P.L. 109-432, section 101.
We deleted the caution after the list.

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Instructions for Form 8582

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Draft
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2007

Draft as of 06/07/2007
Department of the Treasury
Internal Revenue Service

Instructions for Form 8582
Passive Activity Loss Limitations
Section references are to the Internal
Revenue Code unless otherwise noted.

rental passive activities. Overall loss is
defined under Definitions on page 2.

General Instructions

In figuring your overall gain or loss
from all passive activities for the year,
do not include the following income or
losses.
1. Net income that is not passive
activity income. See Passive Activity
Income beginning on page 5.
2. Net losses that are not passive
activity net losses. See Activities That
Are Not Passive Activities on page 2.
3. Net income or net loss from
your interest in any publicly traded
partnership (PTP). See Publicly Traded
Partnerships (PTPs) beginning on
page 11.
4. Any overall loss from an entire
disposition of a passive activity. See
Dispositions beginning on page 6 for
more information.

Purpose of Form
Form 8582 is used by noncorporate
taxpayers to figure the amount of any
passive activity loss (PAL) for the
current tax year.
A PAL occurs when total losses
(including prior year unallowed losses)
from all your passive activities exceed
the total income from all your passive
activities.
Generally, passive activities include:
• Trade or business activities in which
you did not materially participate for the
tax year.
• Rental activities, regardless of your
participation.
PALs cannot be used to offset
income from nonpassive activities.
However, a special allowance for rental
real estate activities may allow some
losses even if the losses exceed
passive income.
PALs not allowed in the current year
are carried forward until they are
allowed either against passive activity
income, against the special allowance,
if applicable, or when you sell or
exchange your entire interest in the
activity in a fully taxable transaction to
an unrelated party.
For more information, see Pub. 925,
Passive Activity and At-Risk Rules,
which contains a filled-in example of
Form 8582 with step-by-step
instructions for reporting losses from
passive activities.
Note. Corporations subject to the
passive activity rules must use Form
8810, Corporate Passive Activity Loss
and Credit Limitations.

Who Must File
Form 8582 is filed by individuals,
estates, and trusts who have losses
(including prior year unallowed losses)
from passive activities. You do not have
to file Form 8582 if you meet Exception
1 or 2 below.

Exception 1
You do not have an overall loss when
you combine all your net income and
net losses (including any prior year
unallowed losses) from business or

Exception 2
You actively participated in rental real
estate activities (see Special Allowance
for Rental Real Estate Activities on
beginning page 3), and you meet all of
the following conditions.
• Rental real estate activities with
active participation were your only
passive activities.
• You have no prior year unallowed
losses from these activities.
• Your total loss from the rental real
estate activities was not more than
$25,000 ($12,500 if married filing
separately and you lived apart from
your spouse all year).
• If you are married filing separately,
you lived apart from your spouse all
year.
• You have no current or prior year
unallowed credits from a passive
activity.
• Your modified adjusted gross income
was not more than $100,000 (not more
than $50,000 if married filing separately
and you lived apart from your spouse
all year).
• You do not hold any interest in a
rental real estate activity as a limited
partner or as a beneficiary of an estate
or a trust.
For the definition of modified
adjusted gross income, see the
instructions for line 7 on page 8.
If all the above conditions are met,
your rental real estate losses are not
Cat. No. 64294A

limited, and you do not need to
complete Form 8582. Enter losses
reported on Schedule E (Form 1040),
Part I, line 22, on Schedule E, Part l
line 23. For losses from a partnership
or an S corporation, enter the amount
of the allowable loss from Schedule K-1
in Schedule E (Form 1040), Part II,
column (f). Enter losses reported on
line 32 of Form 4835, Farm Rental
Income and Expenses, on Form 4835,
line 33c.

Coordination With Other
Limitations
Generally, PALs are subject to other
limitations (for example, basis and
at-risk limitations) before they are
subject to the passive loss limitations.
Once a loss becomes allowable under
these other limitations, you must
determine whether the loss is limited
under the passive loss rules. See Form
6198, At-Risk Limitations, for details on
the at-risk rules. Also, capital losses
that are allowable under the passive
loss rules may be limited under the
capital loss limitations of section 1211.
Percentage depletion deductions that
are allowable under the passive loss
rules may be limited under section
613A(d).

Before Completing Form
8582
To find out if your activity is treated as a
passive activity, read the following
sections of these instructions.
• Trade or Business Activities if your
activity is a trade or business activity
(page 3).
• Rental Activities if your activity is the
renting of tangible property (beginning
on page 2).
• Material Participation (on page 4).
• Grouping of Activities (page 5).
To find out how to treat income and
deductions from your activity, read
Passive Activity Income and
Deductions, Former Passive Activities,
and Dispositions (pages 5 through 7).
To find out how to enter income and
losses on Form 8582, read the
instructions for Worksheets 1, 2, and 3
(beginning on page 7).

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Instructions for Form 8582

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Draft as of 06/07/2007
Definitions
Except as otherwise indicated, the
following terms in these instructions are
defined as shown below.
Net income. This is the excess of
current year income over current year
deductions from the activity. This
includes any current year gains or
losses from the disposition of assets or
an interest in the activity.
Net loss. This is the excess of current
year deductions over current year
income from the activity. This includes
any current year gains or losses from
the disposition of assets or an interest
in the activity.
Overall gain. This is the excess of the
“net income” from the activity over the
prior year unallowed losses from the
activity.
Overall loss. This is (a) the excess of
the prior year unallowed losses from
the activity over the “net income” from
the activity or (b) the prior year
unallowed losses from the activity plus
the “net loss” from the activity.
Prior year unallowed losses. These
are the losses from an activity that were
disallowed under the PAL limitations in
a prior year and carried forward to the
tax year under section 469(b). See
Regulations section 1.469-1(f)(4) and
Pub. 925.

Activities That Are Not
Passive Activities
The following are not passive activities.
1. Trade or business activities in
which you materially participated for the
tax year.
2. Any rental real estate activity in
which you materially participated if you
were a “real estate professional” for the
tax year. You were a real estate
professional only if:
a. More than half of the personal
services you performed in trades or
businesses during the tax year were
performed in real property trades or
businesses in which you materially
participated, and
b. You performed more than 750
hours of services during the tax year in
real property trades or businesses in
which you materially participated.
For purposes of item (2), each
interest in rental real estate is a
separate activity, unless you elect to
treat all interests in rental real estate as
one activity. For details on making this
election, see page E-1 of the
instructions for Schedule E (Form
1040).
If you are married filing jointly, one
spouse must separately meet both
(2)(a) and (2)(b), without taking into
account services performed by the
other spouse.

A real property trade or business is
any real property development,
redevelopment, construction,
reconstruction, acquisition, conversion,
rental, operation, management, leasing,
or brokerage trade or business.
Services you performed as an
employee are not treated as performed
in a real property trade or business
unless you owned more than 5% of the
stock (or more than 5% of the capital or
profits interest) in the employer.
Note. If a rental real estate activity is
not a passive activity for the current
year, any prior year unallowed loss is
treated as a loss from a former passive
activity. See Former Passive Activities
on page 6.
3. A working interest in an oil or
gas well. Your working interest must be
held directly or through an entity that
does not limit your liability (such as a
general partner interest in a
partnership). In this case, it does not
matter whether you materially
participated in the activity for the tax
year.
If, however, your liability was limited
for part of the year (for example, you
converted your general partner interest
to a limited partner interest during the
year), some of your income and losses
from the working interest may be
treated as passive activity gross income
and passive activity deductions. See
Temporary Regulations section
1.469-1T(e)(4)(ii).
4. The rental of a dwelling unit
you used as a residence if section
280A(c)(5) applies. This section applies
if you rented out a dwelling unit that you
also used as a home during the year for
a number of days that exceeds the
greater of 14 days or 10% of the
number of days during the year that the
home was rented at a fair rental.
5. An activity of trading personal
property for the account of owners of
interests in the activity. For purposes of
this rule, personal property means
property that is actively traded, such as
stocks, bonds, and other securities.
See Temporary Regulations section
1.469-1T(e)(6) for more details.
Generally, income and losses from
these activities are not entered on Form
8582. However, losses from these
activities may be subject to limitations
other than the passive loss rules.

Rental Activities
A rental activity is a passive activity
even if you materially participated in the
activity (unless it is a rental real estate
activity in which you materially
participated and you were a real estate
professional).
However, if you meet any of the five
exceptions beginning below, the rental
of the property is not treated as a rental

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activity. See Reporting Income and
Losses From the Activities on page 3 if
you meet any of the exceptions.
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 does not matter whether the
use is under a lease, a service contract,
or some other arrangement.

Exceptions
An activity is not a rental activity if:
1. The average period of
customer use is:
a. 7 days or less, or
b. 30 days or less and significant
personal services were provided in
making the rental property available for
customer use.
Figure the average period of
customer use for a class of property by
dividing the total number of days in all
rental periods by the number of rentals
during the tax year. If the activity
involves renting more than one class of
property, multiply the average period of
customer use of each class by the ratio
of the gross rental income from that
class to the activity’s total gross rental
income. The activity’s average period of
customer use equals the sum of these
class-by-class average periods
weighted by gross income. See
Regulations section 1.469-1(e)(3)(iii).
Significant personal services include
only services performed by individuals.
To determine if personal services are
significant, all relevant facts and
circumstances are taken into
consideration, including the frequency
of the services, the type and amount of
labor required to perform the services,
and the value of the services relative to
the amount charged for use of the
property.
2. Extraordinary personal
services were provided in making the
rental property available for customer
use. This applies only if the services
are performed by individuals and the
customers’ use of the property is
incidental to their receipt of the
services.
3. Rental of the property is
incidental to a nonrental activity.
The rental of property is incidental to
an activity of holding property for
investment if the main purpose of
holding the property is to realize a gain
from its appreciation and the gross
rental income is less than 2% of the
smaller of the unadjusted basis or the
fair market value (FMV) of the property.
Unadjusted basis is the cost of the
property without regard to depreciation
deductions or any other basis
adjustment described in section 1016.

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Instructions for Form 8582

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Draft as of 06/07/2007
The rental of property is incidental to
a trade or business activity if:
a. You own an interest in the
trade or business activity during the tax
year,
b. The rental property was mainly
used in the trade or business activity
during the tax year or during at least 2
of the 5 preceding tax years, and
c. The gross rental income from
the property is less than 2% of the
smaller of the unadjusted basis or the
FMV of the property.
Lodging provided for the employer’s
convenience to an employee or the
employee’s spouse or dependents is
incidental to the activity or activities in
which the employee performs services.
4. You customarily make the
rental property available during defined
business hours for nonexclusive use by
various customers.
5. You provide property for use in
a nonrental activity of a partnership,
S corporation, or a joint venture in your
capacity as an owner of an interest in
the partnership, S corporation, or joint
venture.
Example. If a partner contributes
the use of property to a partnership,
none of the partner’s distributive share
of partnership income is income from a
rental activity unless the partnership is
engaged in a rental activity.
Also, a partner’s gross income from
a guaranteed payment under section
707(c) is not income from a rental
activity. The determination of whether
the property used in the activity is
provided in the partner’s capacity as an
owner of an interest in the partnership
is made on the basis of all the facts and
circumstances.

Reporting Income and
Losses From the Activities
If an activity meets any of the five
exceptions listed above, it is not a
rental activity. You must then
determine:
1. Whether your rental of the
property is a trade or business activity
(see Trade or Business Activities on
this page) and, if so,
2. Whether you materially
participated in the activity for the tax
year (see Material Participation on
page 4).

• If the activity is a trade or business

activity in which you did not materially
participate, enter the income and losses
from the activity on Worksheet 3.
• If the activity is a trade or business
activity in which you did materially
participate, report any income or loss
from the activity on the forms or
schedules normally used.
If the rental activity did not meet any
of the five exceptions, it is generally a
passive activity. However, special rules

apply if you conduct the rental activity
through a PTP or if any of the rules
described under Recharacterization of
Passive Income on page 6 apply. See
the PTP rules beginning on page 11.
If none of the special rules apply,
enter the income and losses from the
passive rental activity on Worksheet 1,
2, or 3.
Worksheet 1 is for passive rental
real estate activities in which you
actively participated. See Special
Allowance for Rental Real Estate
Activities beginning on this page.
Worksheet 2 is for commercial
revitalization deductions (CRDs) from
rental real estate activities. CRDs from
rental real estate activities are not
entered on Worksheet 1 or 3. See
Commercial revitalization deduction
(CRD) on page 4.
Worksheet 3 is for passive rental
real estate activities in which you did
not actively participate, activities of
renting personal property, and other
passive trade or business activities.
See the instructions for Worksheets
1, 2, and 3 beginning on page 7.

Trade or Business
Activities
A trade or business activity is an
activity (other than a rental activity or
an activity treated as incidental to an
activity of holding property for
investment) that:
1. Involves the conduct of a trade
or business (within the meaning of
section 162),
2. Is conducted in anticipation of
starting a trade or business, or
3. Involves research or
experimental expenditures deductible
under section 174 (or that would be if
you chose to deduct rather than
capitalize them).
Trade or business activities are
generally reported on Schedule C,
C-EZ, or F, or in Part II or III of
Schedule E. See Publicly Traded
Partnerships (PTPs) beginning on page
11. For trade or business activities that
are significant participation passive
activities (defined on page 4), see Pub.
925 for how to report their income or
losses.

Special Allowance for
Rental Real Estate
Activities
Active participation. If you actively
participated in a passive rental real
estate activity, you may be able to
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 losses in

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excess of income from passive
activities.
The special allowance is not
available if you were married, are filing
a separate return for the year, and lived
with your spouse at any time during the
year.
Only an individual, a qualifying
estate, or a qualified revocable trust
that made an election to treat the trust
as part of the decedent’s estate may
actively participate in a rental real
estate activity. Unless future regulations
provide an exception, limited partners
are not treated as actively participating
in a partnership’s rental real estate
activity.
A qualifying estate is the estate of a
decedent for tax years ending less than
2 years after the date of the decedent’s
death if the decedent would have
satisfied the active participation
requirements for the rental real estate
activity for the tax year the decedent
died.
A qualified revocable trust may elect
to be treated as part of a decedent’s
estate for purposes of the special
allowance for active participation in
rental real estate activities. The election
must be made by both the executor (if
any) of the decedent’s estate and the
trustee of the revocable trust. For
details, see Regulations section
1.645-1.
You are not considered to actively
participate in a rental real estate activity
if at any time during the tax year your
interest (including your spouse’s
interest) in the activity was less than
10% (by value) of all interests in the
activity.
Active participation is a less stringent
requirement than material participation
(see Material Participation beginning on
page 4). You may be treated as actively
participating if, for example, you
participated in making management
decisions or arranged for others to
provide services (such as repairs) in a
significant and bona fide sense.
Management decisions that may count
as active participation include:
• Approving new tenants,
• Deciding on rental terms,
• Approving capital or repair
expenditures, and
• Other similar decisions.
The maximum special allowance is:

• $25,000 for single individuals and

married individuals filing a joint return
for the tax year.
• $12,500 for married individuals who
file separate returns for the tax year
and lived apart from their spouses at all
times during the tax year.
• $25,000 for a qualifying estate
reduced by the special allowance for
which the surviving spouse qualified.

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Instructions for Form 8582

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Draft as of 06/07/2007
Modified adjusted gross income
limitation. If your modified adjusted
gross income (see the instructions for
line 7 on page 8) is $100,000 or less
($50,000 or less if married filing
separately), your loss is deductible up
to the amount of the maximum special
allowance referred to in the preceding
paragraph.
If your modified adjusted gross
income is more than $100,000 ($50,000
if married filing separately) but less than
$150,000 ($75,000 if married filing
separately), your special allowance is
limited to 50% of the difference
between $150,000 ($75,000 if married
filing separately) and your modified
adjusted gross income.
Generally, if your modified adjusted
gross income is $150,000 or more
($75,000 or more if married filing
separately), there is no special
allowance.
If you qualify under the active
participation rules, use Worksheet 1
(see page 7).
Commercial revitalization deduction
(CRD). The special $25,000 allowance
for the CRD from rental real estate
activities is not subject to the active
participation rules or modified adjusted
gross income limits discussed above.
The $25,000 allowance must first be
applied to losses from rental real estate
activities with active participation,
figured without regard to the CRD (see
Part II). Any remaining portion of the
$25,000 allowance is available for the
CRD from rental real estate activities
(see Part III). See the instructions for
Worksheet 2 on page 8. For general
information about the CRD, see Pub.
954, Tax Incentives for Distressed
Communities, and section 1400I.

Material Participation
For the material participation tests listed
below, participation generally includes
any work done in connection with an
activity if you owned an interest in the
activity at the time you did the work.
The capacity in which you did the work
does not matter. However, work is not
participation if:
• It is not work that an owner would
customarily do in the same type of
activity, and
• One of your main reasons for doing
the work was to avoid the disallowance
of losses or credits from the activity
under the passive activity rules.
Proof of participation. You may
prove your participation in an activity by
any reasonable means. You do not
have to maintain contemporaneous
daily time reports, logs, or similar
documents if you can establish your
participation by other reasonable
means. For this purpose, reasonable
means include, but are not limited to,
identifying services performed over a

period of time and the approximate
number of hours spent performing the
services during that period, based on
appointment books, calendars, or
narrative summaries.
Tests for individuals. You materially
participated for the tax year in an
activity if you satisfy at least one of the
following tests.
1. You participated in the activity
for more than 500 hours.
2. Your participation in the activity
for the tax year was substantially all of
the participation in the activity of all
individuals (including individuals who
did not own any interest in the activity)
for the year.
3. You participated in the activity
for more than 100 hours during the tax
year, and you participated at least as
much as any other individual (including
individuals who did not own any interest
in the activity) for the year.
4. The activity is a significant
participation activity for the tax year,
and you participated in all significant
participation activities during the year
for more than 500 hours.
A significant participation activity is
any trade or business activity in which
you participated for more than 100
hours during the year and in which you
did not materially participate under any
of the material participation tests (other
than this fourth test).
5. You materially participated in
the activity for any 5 (whether or not
consecutive) of the 10 immediately
preceding tax years.
6. The activity is a personal
service activity in which you materially
participated for any 3 (whether or not
consecutive) preceding tax years.
An activity is a personal service
activity if it involves the performance of
personal services in the fields of health,
law, engineering, architecture,
accounting, actuarial science,
performing arts, consulting, or in any
other trade or business in which capital
is not a material income-producing
factor.
7. Based on all the facts and
circumstances, you participated in the
activity on a regular, continuous, and
substantial basis during the tax year.
You did not materially participate in
the activity under this seventh test,
however, if you participated in the
activity for 100 hours or less during the
tax year.
Your participation in managing the
activity does not count in determining
whether you materially participated
under this test if:
a. Any person (except you)
received compensation for performing
services in the management of the
activity, or
b. Any individual spent more
hours during the tax year performing

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services in the management of the
activity than you did (regardless of
whether the individual was
compensated for the management
services).
Test for a spouse. Participation by
your spouse during the tax year in an
activity you own may be counted as
your participation in the activity even if
your spouse did not own an interest in
the activity and whether or not you and
your spouse file a joint return for the tax
year.
Tests for investors. Work done as an
investor in an activity is not treated as
participation unless you were directly
involved in the day-to-day management
or operations of the activity. For
purposes of this test, work done as an
investor includes:
1. Studying and reviewing
financial statements or reports on
operations of the activity.
2. Preparing or compiling
summaries or analyses of the finances
or operations of the activity for your
own use.
3. Monitoring the finances or
operations of the activity in a
nonmanagerial capacity.
Special rules for limited partners. If
you were a limited partner in an activity,
you generally did not materially
participate in the activity. You did
materially participate in the activity,
however, if you met material
participation test 1, 5, or 6 (see Tests
for individuals on this page) for the tax
year.
However, for purposes of the
material participation tests, you are not
treated as a limited partner if you also
were 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 the portion of the partnership’s
tax year in which you directly or
indirectly owned your limited partner
interest).
A limited partner’s share of an
electing large partnership’s taxable
income or loss from all trade or
business and rental activities is treated
as income or loss from the conduct of a
single passive trade or business
activity.
Special rules for certain retired or
disabled farmers and surviving
spouses of farmers. Certain retired
or disabled farmers and surviving
spouses of farmers are treated as
materially participating in a farming
activity if the real property used in the
activity would meet the estate tax rules
for special valuation of farm property
passed from a qualifying decedent. See
Temporary Regulations section
1.469-5T(h)(2).

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Instructions for Form 8582

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Draft as of 06/07/2007
Estates and trusts. The PAL
limitations apply in figuring the
distributable net income and taxable
income of an estate or trust. The rules
for determining material participation for
this purpose have not yet been issued.

Grouping of Activities
Generally, one or more trade or
business activities or rental activities
may be treated as a single activity if the
activities make up an appropriate
economic unit for the measurement of
gain or loss under the passive activity
rules.
Whether activities make up an
appropriate economic unit depends on
all the relevant facts and
circumstances. The factors given the
greatest weight in determining whether
activities make up an appropriate
economic unit are:
1. Similarities and differences in
types of trades or businesses,
2. The extent of common control,
3. The extent of common
ownership,
4. Geographical location, and
5. Interdependencies between or
among the activities.
Example. You have a significant
ownership interest in a bakery and a
movie theater in Baltimore and in a
bakery and a movie theater in
Philadelphia. Depending on all the
relevant facts and circumstances, there
may be more than one reasonable
method for grouping your activities. For
instance, the following groupings may
or may not be permissible:
• A single activity,
• A movie theater activity and a bakery
activity,
• A Baltimore activity and a
Philadelphia activity, or
• Four separate activities.
Once you choose a grouping under
these rules, you must continue using
that grouping in later tax years unless a
material change in the facts and
circumstances makes it clearly
inappropriate.
The IRS may regroup your activities
if your grouping fails to reflect one or
more appropriate economic units and
one of the primary purposes of your
grouping is to avoid the passive activity
limitations.
Limitation on grouping certain
activities. The following activities may
not be grouped together.
1. A rental activity with a trade or
business activity unless the activities
being grouped together make up an
appropriate economic unit and:
a. The rental activity is
insubstantial relative to the trade or
business activity or vice versa, or
b. Each owner of the trade or
business activity has the same

proportionate ownership interest in the
rental activity. If so, the portion of the
rental activity involving the rental of
property used in the trade or business
activity may be grouped with the trade
or business activity.
2. An activity involving the rental
of real property with an activity involving
the rental of personal property (except
personal property provided in
connection with the real property or vice
versa).
3. Any activity with another
activity in a different type of business
and in which you hold an interest as a
limited partner or as a limited
entrepreneur (as defined in section
464(e)(2)) if that other activity engages
in holding, producing, or distributing
motion picture films or videotapes;
farming; leasing section 1245 property;
or exploring for or exploiting oil and gas
resources or geothermal deposits.
Activities conducted through
partnerships, S corporations, and C
corporations subject to section 469.
Once a partnership or corporation
determines its activities under these
rules, a partner or shareholder may use
these rules to group those activities
with:
• Each other,
• Activities conducted directly by the
partner or shareholder, or
• Activities conducted through other
partnerships and corporations.
A partner or shareholder may not
treat as separate activities those
activities grouped together by the
partnership or corporation.

Passive Activity Income
and Deductions
Take into account only passive activity
income and passive activity deductions
to figure your net income or net loss
from all passive activities or any
passive activity.
If your passive activity is reported on
Schedule C, C-EZ, E, or F, and the
activity has no prior year unallowed
losses or any gain or loss from the
disposition of assets or an interest in
the activity, take into account only the
passive activity income and passive
activity deductions from the activity to
figure the amount to enter on Form
8582 and the worksheets.
If you own an interest in a passive
activity through a partnership or an
S corporation, the partnership or
S corporation will generally provide you
with the net income or net loss from the
passive activity. If, however, the
partnership or S corporation must state
an item of gross income or deduction
separately to you, and the gross
income or deduction is passive activity
gross income or a passive activity
deduction (respectively), include that

-5-

amount in the net income or net loss
entered on Form 8582 and the
worksheets.
The partnership or S corporation
does not have a record of any
CAUTION prior year unallowed losses from
the passive activities of the partnership
or S corporation. If you had prior year
unallowed losses from these activities,
they can be found in column (c) of your
2006 Worksheet 5.

!

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. The self-charged interest
rules do not 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
To figure your overall gain or loss from
all passive activities or any passive
activity, take into account only passive
activity income. Do not enter income
that is not passive activity income on
Form 8582 or the worksheets.
Passive activity income includes all
income from passive activities,
including (with certain exceptions
described in Temporary Regulations
section 1.469-2T(c)(2) and Regulations
section 1.469-2(c)(2)) gain from the
disposition of an interest in a passive
activity or of property used in a passive
activity at the time of the disposition.
Passive activity income does not
include the following.
• Income from an activity that is not a
passive activity.
• Portfolio income, including interest
(other than self-charged interest treated
as passive activity income), dividends,
annuities, and royalties not derived in
the ordinary course of a trade or
business, and gain or loss from the
disposition of property that produces
portfolio income or is held for
investment (see section 163(d)(5)). See
Temporary Regulations section
1.469-2T(c)(3).

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• Alaska Permanent Fund dividends.
• Personal service income, including

salaries, wages, commissions,
self-employment income from trade or
business activities in which you
materially participated for the tax year,
deferred compensation, taxable social
security and other retirement benefits,
and payments from partnerships to
partners for personal services. See
Temporary Regulations section
1.469-2T(c)(4).
• Income from positive section 481
adjustments allocated to activities other
than passive activities. See Temporary
Regulations section 1.469-2T(c)(5).
• Income or gain from investments of
working capital.
• Income from an oil or gas property if
you treated any loss from a working
interest in the property for any tax year
beginning after 1986 as a nonpassive
loss under the rule excluding working
interests in oil and gas wells from
passive activities (see item 3 under
Activities That Are Not Passive
Activities on page 2). See Regulations
section 1.469-2(c)(6).
• Any income from intangible property
if your personal efforts significantly
contributed to the creation of the
property.
• Any income treated as not from a
passive activity under Temporary
Regulations section 1.469-2T(f) and
Regulations section 1.469-2(f). See
Recharacterization of Passive Income
on this page.
• Overall gain from any interest in a
PTP (see item 2 under Special
Instructions for PTPs beginning on
page 11).
• State, local, and foreign income tax
refunds.
• Income from a covenant not to
compete.
• Any reimbursement of a casualty or
theft loss included in income as
recovery of all or part of a prior year
loss deduction if the deduction for the
loss was not treated as a passive
activity deduction.
• Cancellation of debt income to the
extent that at the time the debt was
discharged the debt was not properly
allocable under Temporary Regulations
section 1.163-8T to passive activities.

Recharacterization of
Passive Income
Certain income from passive activities
must be recharacterized and excluded
from passive activity income. The
amount of income recharacterized
equals the net income from the sources
given below. If during the tax year you
received net income from any of these
sources (either directly or through a
partnership or an S corporation), see
Pub. 925 to find out how to report net
income or loss from these sources. For
more information, see Temporary

Regulations section 1.469-2T(f) and
Regulations section 1.469-2(f).
Income from the following sources
may be subject to the net income
recharacterization rules.
• Significant participation passive
activities defined on page 4.
• Rental of property if less than 30% of
the unadjusted basis of the property is
subject to depreciation.
• Passive equity-financed lending
activities.
• Rental of property incidental to a
development activity.
• Rental of property to a nonpassive
activity.
• Acquisition of an interest in a
pass-through entity that licenses
intangible property.

Passive Activity Deductions
To figure your overall gain or overall
loss from all passive activities or any
passive activity, take into account only
passive activity deductions.
Passive activity deductions include
all deductions from activities that are
passive activities for the current tax
year and all deductions from passive
activities that were disallowed under the
PAL rules in prior tax years and carried
forward to the current tax year. See
Regulations section 1.469-1(f)(4).
Passive activity deductions include
losses from a disposition of property
used in a passive activity at the time of
the disposition and losses from a
disposition of less than your entire
interest in a passive activity. See
Dispositions on this page for the
treatment of losses upon disposition of
your entire interest in an activity.
Passive activity deductions do not
include the following.
• Deductions for expenses (other than
interest expense) that are clearly and
directly allocable to portfolio income.
• Qualified home mortgage interest,
capitalized interest expenses, and other
interest expenses (except self-charged
interest treated as a passive activity
deduction (discussed on page 5) and
interest expenses properly allocable to
passive activities).
• Losses from dispositions of property
that produce portfolio income or
property held for investment.
• State, local, and foreign income
taxes.
• Miscellaneous itemized deductions
that may be disallowed under
section 67.
• Charitable contribution deductions.
• Net operating loss deductions,
percentage depletion carryovers under
section 613A(d), and capital loss
carryovers.
• Deductions and losses that would
have been allowed for tax years
beginning before 1987, but for basis or
at-risk limitations.

-6-

• Net negative section 481
adjustments allocated to activities other
than passive activities. See Temporary
Regulations section 1.469-2T(d)(7).
• Deductions for losses from fire,
storm, shipwreck, or other casualty or
from theft if losses similar in cause and
severity do not recur regularly in the
activity.
• The deduction allowed for one-half of
self-employment taxes.

Former Passive
Activities
A former passive activity is any activity
that was a passive activity in a prior tax
year but is not a passive activity in the
current tax year. A prior year unallowed
loss from a former passive activity is
allowed to the extent of current year
income from the activity.
If current year net income from the
activity is less than the prior year
unallowed loss, enter the prior year
unallowed loss and any current year
net income from the activity on Form
8582 and the applicable worksheets.
If current year net income from the
activity is more than or equal to the
prior year unallowed loss from the
activity, report the income and loss on
the forms and schedules normally used;
do not enter the amounts on Form
8582.
If the activity has a net loss for the
current year, enter the prior year
unallowed loss (but not the current year
loss) on Form 8582 and the applicable
worksheets.
To report a disposition of a former
passive activity, follow the rules below
under Dispositions.

Dispositions
Disposition of an Entire
Interest
If you disposed of your entire interest in
a passive activity or a former passive
activity to an unrelated person in a fully
taxable transaction during the tax year,
your losses allocable to the activity for
the year are not limited by the PAL
rules.
A fully taxable transaction is a
transaction in which you recognize all
realized gain or loss.
If you are using the installment
method to report this kind of
disposition, figure the loss for the
current year that is not limited by the
PAL rules by multiplying your overall
loss (which does not include losses
allowed in prior years) by the following
fraction:
Gain recognized in the current year
Unrecognized gain as of the
beginning of the current year

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A partner in a PTP is not treated as
having disposed of an entire interest in
an activity of a PTP until there is an
entire disposition of the partner’s
interest in the PTP.

Reporting an Entire
Disposition on Schedule D or
Form 4797
If you completely dispose of your entire
interest in a passive activity or a former
passive activity, you may have to report
net income or loss and prior year
unallowed losses from the activity. All
the net income and losses are reported
on the forms and schedules normally
used.
Combine all income and losses
(including any prior year unallowed
losses) from the activity for the tax year
to see if you have an overall gain or
loss.
If you have an overall gain and you
have other passive activities to report
on Form 8582, include the income,
losses, and prior year unallowed losses
on Worksheet 1, 2, or 3.
If you have an overall gain and this
is your only passive activity or a former
passive activity, report all income and
losses (including any prior year
unallowed losses) on the forms and
schedules normally used and do not
use Form 8582.
If you have an overall loss when you
combine the income and losses, do not
use the worksheets or Form 8582 for
the activity. All losses (including prior
year unallowed losses) are allowed in
full. Report the income and losses on
the forms and schedules normally used.
An overall loss from an entire
disposition of a passive activity is a
nonpassive loss if you have an
aggregate loss from all other passive
activities. When figuring your modified
adjusted gross income for line 7 of
Form 8582, be sure to take into
account the overall loss from the
disposition of the activity.
Example 1. Activity with overall
gain. You sell your entire interest in a
rental real estate activity in which you
actively participated for a gain of
$15,525. $7,300 of the gain is section
1231 gain reported on Form 4797,
Part I, and $8,225 is ordinary recapture
income reported on Form 4797, Part II.
On line 23 of Schedule E (Form 1040),
you report a total loss of $15,450,
which includes a current year $2,800
net loss and a $12,650 prior year
unallowed loss. You have an overall
gain from the disposition ($15,525 –
$15,450 = $75).
Because you had other passive
activities reportable on Form 8582, you
make the following entries on
Worksheet 1. You enter the $15,525
gain on the disposition in column (a),

the current year loss of $2,800 in
column (b), and the prior year
unallowed loss of $12,650 in column
(c).
Example 2. Activity with overall
loss. You sell your entire interest in
an oil and gas limited partnership that
was your only passive activity for a gain
of $2,000. You have a current year
Schedule E loss of $3,330 and a
Schedule E prior year unallowed loss of
$1,115.
Because you have an overall loss of
$2,445 after combining the gain and
losses, none of the amounts are
entered on Worksheet 3 or on Form
8582.
You enter the net loss plus the prior
year unallowed loss ($3,330 + $1,115 =
$4,445) on Schedule E, Part II, column
(h), and the $2,000 gain on the sale on
Schedule D, in either Part I or Part II,
depending on how long you held the
partnership interest.

Disposition of Less Than an
Entire Interest
Gains and losses from the disposition
of less than an entire interest in an
activity are treated as part of the net
income or net loss from the activity for
the current year.
A disposition of less than
substantially all of an entire
CAUTION interest does not trigger the
allowance of prior year unallowed
losses.
Disposition of substantially all of an
activity. You may treat the disposition
of substantially all of an activity as a
separate activity if you can prove with
reasonable certainty:
1. The prior year unallowed
losses, if any, allocable to the part of
the activity disposed of, and
2. The net income or loss for the
year of disposition allocable to the part
of the activity disposed of.

!

Specific Instructions
Part I—2007 Passive
Activity Loss
Use Part I to combine the net income
and net loss from all passive activities
to determine if you have a passive
activity loss (PAL) for 2007. Use
Worksheets 1, 2, and 3 to determine
the entries for lines 1 – 3 of Part I, as
follows.
• Worksheet 1 is used for rental real
estate activities with active
participation.
• Worksheet 2 is used for commercial
revitalization deductions (CRDs) from
rental real estate activities (with or
without active participation).

-7-

• Worksheet 3 is used for all other
passive activities.
See Pub. 925 for examples showing
how to complete the worksheets.

Worksheet 1
Individuals and qualifying estates who
actively participated in rental real estate
activities must include the income or
loss from those activities in Worksheet
1 to figure the amounts to enter on lines
1a through 1c of Form 8582. Do not
include any commercial revitalization
deductions (CRDs) from these activities
in the net income or loss reported in
Worksheet 1.
Do not enter a prior year unallowed
loss in column (c) of Worksheet 1
unless you actively participated in the
activity in both the year the loss arose
and the current tax year. If you did not
actively participate in both years, enter
the prior year unallowed loss in column
(c) of Worksheet 3.
Married individuals who file
separate returns and lived with
CAUTION their spouses at any time during
the tax year do not qualify under the
active participation rule and must use
Worksheet 3 instead of Worksheet 1.
Column (a). Enter the current year net
income from each activity. Enter the
total of column (a) on line 1a of Form
8582.
Example. A Schedule E rental
activity has current year profit of $5,000
and a Form 4797 gain of $2,000. You
enter $7,000 in column (a).
Column (b). Enter the current year net
loss for each activity. Do not enter any
prior year unallowed losses in this
column. Enter the total of column (b) on
line 1b of Form 8582.
If an activity has net income on one
form or schedule and a net loss on
another form or schedule, report the net
amounts separately in columns (a) and
(b) of Worksheet 1.
Example. A Schedule E rental
activity has current year income of
$1,000 on line 22 of Schedule E and a
current year Form 4797 loss of $4,500.
You enter $1,000 in column (a) and
($4,500) in column (b).
Column (c). Enter the prior year
unallowed losses for each activity. You
find these amounts on Worksheet 5,
column (c), of your 2006 Form 8582.
Enter the total of column (c) from your
2007 Worksheet 1 on line 1c of Form
8582.
Columns (d) and (e). Combine
income and losses in columns (a)
through (c) for each activity, and either
enter the overall gain for the activity in
column (d) or enter the overall loss for
the activity in column (e). Do not enter
amounts from columns (d) and (e) on
Form 8582. These amounts will be
used when Form 8582 is completed to

!

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Draft as of 06/07/2007
figure the loss allowed for the current
year.

Worksheet 2
Use Worksheet 2 to figure the amounts
to enter on lines 2a and 2b for
commercial revitalization deductions
(CRD) from rental real estate activities
(see Commercial revitalization
deduction (CRD) on page 4). Do not
include the following amounts.
• Income or other deductions from the
same activity. Instead, report any net
income or net loss from the activity,
except for the CRD, in Worksheet 1 if
you actively participated in the activity
or in Worksheet 3 if you did not actively
participate.
• CRDs from passive activities other
than rental real estate activities.
Instead, report these deductions as part
of the net income or loss from the
passive activity in Worksheet 3.
Column (a). Enter the current year
CRD from each rental real estate
activity. Enter the total of column (a) on
line 2a of Form 8582.
Column (b). Enter the unallowed
CRDs from the prior year for each
rental real estate activity. Enter the total
of column (b) on line 2b of Form 8582.
Column (c). Combine the amounts in
columns (a) and (b) for each activity
and enter the overall loss for the activity
in column (c). Do not enter amounts
from column (c) on Form 8582. These
amounts will be used when Form 8582
is completed to figure the loss allowed
for the current year.

Worksheet 3
Use Worksheet 3 to figure the amounts
to enter on lines 3a through 3c for:
• Passive trade or business activities,
• Passive rental real estate activities
that do not qualify for the special
allowance (but do not include CRDs
reported in Worksheet 2), and
• Rental activities other than rental real
estate activities.
Column (a). Enter the current year
net income for each activity. Enter the
total of column (a) on line 3a of Form
8582. (See the example under Column
(a) for Worksheet 1, on page 7.)
Column (b). Enter the current year net
loss for each activity. Enter the total of
column (b) on line 3b of Form 8582.
(See the example under Column (b) for
Worksheet 1, on page 7.)
Column (c). Enter the unallowed
losses for the prior years for each
activity. You find these amounts on
Worksheet 5, column (c), of your 2006
Form 8582. Enter the total of column
(c) from your 2007 Worksheet 3 on
line 3c of Form 8582.
Columns (d) and (e). Combine
income and losses in columns (a)
through (c) for each activity, and either
enter the overall gain for the activity in

column (d) or enter the overall loss for
the activity in column (e). Do not enter
amounts from columns (d) and (e) on
Form 8582. These amounts will be
used when Form 8582 is completed to
figure the loss allowed for the current
year.

Part II—Special
Allowance for Rental
Real Estate Activities
With Active Participation
Use Part II to figure the maximum
amount of rental loss allowed if you
have a net loss from a rental real estate
activity with active participation.
Enter all numbers in Part II as
positive amounts (that is, greater than
zero).
Example. Line 5 has a loss of
$42,000 (reported as a positive
amount) and line 9 is $25,000. You
enter $25,000 on line 10 (the smaller of
line 5 or line 9, both treated as positive
amounts).
Married persons filing separate
returns who lived with their
CAUTION spouses at any time during the
year are not eligible for the special
allowance. They must enter -0- on line
10 and go to line 15.
Line 5. Enter on line 5 the smaller of
the loss on line 1d or the loss on line 4.
Example. Line 1d has a loss of
$3,000, line 2c is zero, and line 3d has
a gain of $100. The combined loss on
line 4 is $2,900. You enter $2,900 as a
positive number on line 5 (the smaller
of the loss on line 1d or the loss on
line 4).
Line 6. Married persons filing separate
returns who lived apart from their
spouses at all times during the year
must enter $75,000 on line 6 instead of
$150,000.
Line 7. To figure modified adjusted
gross income, combine all the amounts
used to figure adjusted gross income
except do not take into account:
• Passive income or loss included on
Form 8582,
• Any rental real estate loss allowed to
real estate professionals (defined under
Activities That Are Not Passive
Activities on page 2),
• Any overall loss from a PTP,
• The taxable amount of social security
and tier 1 railroad retirement benefits,
• The deduction allowed under section
219 for contributions to IRAs and
certain other qualified retirement plans,
• The domestic production activities
deduction,
• The deduction allowed for one-half of
self-employment taxes,
• The exclusion from income of interest
from series EE and I U.S. savings

!

-8-

bonds used to pay higher education
expenses,
• The exclusion of amounts received
under an employer’s adoption
assistance program,
• The student loan interest deduction,
or
• The tuition and fees deduction.
Include in modified adjusted gross
income any portfolio income and
expenses that are clearly and directly
allocable to portfolio income. Also
include any income that is treated as
nonpassive income, such as overall
gain from a PTP and net income from
an activity or item of property subject to
the recharacterization of passive
income rules. When figuring modified
adjusted gross income, include any
overall loss from the entire disposition
of a passive activity (considered a
nonpassive loss).
Example. Your adjusted gross
income on line 37 of Form 1040 is
$92,000, and you have taxable social
security benefits of $5,500 on line 20b.
Your modified adjusted gross income is
$86,500 ($92,000 – $5,500).
Line 9. Do not enter more than
$12,500 on line 9 if you are married
filing a separate return and you and
your spouse lived apart at all times
during the year.

Part III—Special
Allowance for
Commercial
Revitalization
Deductions From Rental
Real Estate Activities
Use Part III to figure the maximum
amount of commercial revitalization
deductions allowed if you have a
commercial revitalization deduction
from a rental real estate activity.
Enter all numbers in Part III as
positive amounts (that is, greater than
zero.)
Married persons filing separate
returns who lived with their
CAUTION spouses at any time during the
year are not eligible for the special
allowance. They must enter -0- on line
14 and go to line 15.
Line 11. Enter $12,500 (reduced by
the amount, if any, on line 10) on line
11 if you are married filing a separate
return and you and your spouse lived
apart at all times during the year.

!

Part IV—Total Losses
Allowed
Use Part IV to figure the amount of the
PAL (as determined in Part I) allowed
for 2007 from all passive activities.

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Draft as of 06/07/2007
Line 16. Use the worksheets on Form
8582 and the following instructions for
those worksheets to figure the
unallowed loss to be carried forward
and the allowed loss to report on your
forms and schedules for 2007.

Worksheets 1, 2, and 3
Worksheets 1 and 3, columns (d) and
(e), show whether an activity had an
overall gain or loss. Worksheet 2,
column (c), shows the overall loss for
CRDs from rental real estate activities.
If you have activities that show overall
gain in column (d) of Worksheet 1 or 3,
report all the income and losses listed
in columns (a), (b), and (c) for those
activities on the proper forms and
schedules.
If you have activities that show an
overall loss in column (e) of Worksheet
1 or 3 or column (c) of Worksheet 2,
you must allocate your allowed loss on
line 16 of Form 8582 to those activities
by completing Worksheets 4, 5, and 6
or 7.
Complete Worksheet 4 only if you
entered an amount (other than zero) on
line 10 or 14 of Form 8582. Otherwise,
skip Worksheet 4 and complete
Worksheet 5 for all activities in
Worksheets 1 or 3 that have overall
losses in column (e) and all activities in
Worksheet 2.

Worksheet 4
Use Worksheet 4 to allocate the special
allowance on line 10 or line 14 of Form
8582 among your rental real estate
activities.
In the first column of Worksheet 4,
enter the name of each activity. In the
second column, enter the form or
schedule and line number on which the
loss will be reported.
Example. You receive a Schedule
K-1 from partnership P that reports
losses from two rental real estate
activities, Activity X and Activity Y. The
losses from partnership P are reported
on line 28A of Schedule E. In the first
two columns of Worksheet 4, enter:

• If you entered an amount on line 14,
list on Worksheet 4 all activities with an
overall loss in column (c) of
Worksheet 2.
• If you entered amounts on both lines
10 and 14 of Form 8582, you must
complete two separate Worksheets 4.
For the second worksheet, you either
may attach an extra copy of page 2 of
Form 8582 or your own schedule in the
same format as Worksheet 4. On the
first Worksheet 4, list all activities with
an overall loss in column (e) of
Worksheet 1. On the second
Worksheet 4, list all activities with an
overall loss in column (c) of
Worksheet 2.
Column (a). Enter the overall loss
from column (e) of Worksheet 1 or
column (c) of Worksheet 2 for each
activity.
Column (b). Divide each of the
individual losses shown in column (a)
by the total of all the losses in column
(a) and enter this ratio for each activity
in column (b). The total of all the ratios
in column (b) must equal 1.00.
Column (c). Multiply each ratio in
column (b) by the amount on line 10 or
line 14 of Form 8582, and enter the
results in column (c). The total of
column (c) must be the same as line 10
or line 14 of Form 8582.
Column (c) total is the same as
column (a) total. If the total losses in
column (c) are the same as those in
column (a), the losses in Worksheets 1
and 2 are allowed in full and are not
carried over to Worksheet 5. Report all
amounts in columns (a), (b), and (c) of
Worksheet 1 and columns (a) and (b) of
Worksheet 2 on the proper forms and
schedules.
Column (c) total is less than
column (a) total. If the total losses in
column (c) are less than the total losses
in column (a), complete column (d).
Column (d). Subtract column (c) from
column (a) and enter the results in
column (d). Also enter the amounts
from column (d) of Worksheet 4 in
column (a) of Worksheet 5.

These worksheets allocate your
unallowed and allowed losses for each
activity.
If you have losses from any activity
that are reported on two or more
different forms or schedules, use
Worksheet 7 instead of Worksheet 6 for
that activity.
Also use Worksheet 7 instead of
Worksheet 6 for any activity with two or
more transactions that are reported on
the same form or schedule but must be
separately identified for tax purposes.
Transactions that must be separately
identified include capital losses that are
28% rate losses and those that are not.
Note. 28% rate gain or loss includes
all collectibles gains and deductible
long-term losses and section 1202 gain
on the sale of qualified small business
stock. See the instructions for Schedule
D (Form 1040) for details, including the
definitions of “collectibles gains and
losses” and “section 1202 gain.”

Column (a). Enter the amounts, if any,
from column (d) of Worksheet 4 (from
column (e) of Worksheet 1 or column
(c) of Worksheet 2 if you did not have
to complete Worksheet 4). Also enter
the losses, if any, from column (e) of
Worksheet 3.
Column (b). Divide each of the
individual losses shown in column (a)
by the total of all the losses in column
(a) and enter this ratio for each activity
in column (b). The total of all the ratios
must equal 1.00.
Column (c). Complete the following
computation.
A. Enter as a positive amount
line 4 of Form 8582 . . . . . . .
B. Add lines 10 and 14 of
Form 8582 . . . . . . . . . . . . .
C. Subtract line B from line A . .

Multiply each ratio in column (b) by
the amount on line C above, and enter
the result in column (c).

Worksheets 6 and 7

Name of Activity

Form or Schedule

Worksheet 5

Worksheet 6

Activity X

Sch E, line 28A

Activity Y

Sch E, line 28A

Complete Worksheet 5 if any activities
have an overall loss in column (e) of
Worksheet 3 or losses in column (d) of
Worksheet 4 (in column (e) of
Worksheet 1 or column (c) of
Worksheet 2 if you did not have to
complete Worksheet 4).
On Worksheet 5, enter the name of
each activity and the form or schedule
and line number on which the loss will
be reported. See the example for
Worksheet 4. Identify any deduction
from Worksheet 2 on a separate line
(even if the amount is from an activity
also shown on Worksheet 1 or 3) and
add “CRD” after the name of the
activity.

Use Worksheet 6 for any activity listed
in Worksheet 5 if all the loss from that
activity is reported on one form or
schedule and no transactions need to
be identified separately (as discussed
above).
Example. Use Worksheet 6 if all
the loss from an activity is reported on
Schedule E, even though part of the
loss is a current year Schedule E loss
and part of it is from a Schedule E prior
year unallowed loss.
On Worksheet 6, enter the name of
each activity and the form or schedule
and line number on which the loss is
reported. See the example for
Worksheet 4. Identify each CRD from

If the loss from an activity is reported in
more than one place, identify both
locations in the second column (for
example, Sch E, line 28A/Form 4797,
line 2). If you need additional space,
show this information on an attached
statement.
Enter all activities with overall losses
from Worksheets 1 and 2 as follows.
• If you entered an amount on line 10,
list on Worksheet 4 all activities with an
overall loss in column (e) of
Worksheet 1.

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Instructions for Form 8582

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Draft as of 06/07/2007
Worksheet 5 on a separate line and
add “CRD” after the name of the
activity.
Column (a). For each activity entered
in Worksheet 6, enter the net loss plus
the prior year unallowed loss for the
activity. Figure this amount by adding
the losses in columns (b) and (c) of
Worksheets 1 and 3 or enter the loss
from column (c) of Worksheet 2.
Column (b). For each activity entered
in Worksheet 6, enter the amount from
column (c) of Worksheet 5 for the
activity. These are your unallowed
losses for 2007. Keep a record of these
amounts so the losses can be used to
figure your PAL next year.
Column (c). Subtract column (b) from
column (a). These are your allowed
losses for 2007. Report the amounts in
this column on the forms and schedules
normally used.
See the forms and schedules listed
under How To Report Allowed Losses
on page 11. Also, see Pub. 925 for an
extensive example of how to report
passive income and losses on the
forms and schedules.

Worksheet 7
Use Worksheet 7 for any activity listed
in Worksheet 5 that has losses that are
reported on two or more different forms
and schedules or on different parts of
the same form or schedule (for
example, 28% rate and non-28%-rate
capital losses reported on Schedule D).
Worksheet 7 allocates the allowed and
unallowed loss for the activity and
allocates the allowed loss to the
different forms or schedules (or
different parts of the same form or
schedule) used to report the losses.
Only losses that would cause a
difference in tax liability if they were
reported on a different form or schedule
or on different parts of the same form or
schedule are kept separate. Those
forms, schedules, and parts are:
• Schedules C, E, and F.
• Schedule D (Parts I and II (28% rate
losses and non-28%-rate losses)).
Note. You must make a separate
entry in Schedule D, Part I or Part II, for
each transaction reported. See the
Instructions for Schedule D (Form
1040).
• Forms 4684 (Section B), 4797
(Parts I and II), and 4835.
Use a separate copy of Worksheet 7
for each activity for which you have
losses reported on two or more different
forms or schedules or different parts of
the same form or schedule.
On Worksheet 7, enter the form or
schedule and line number on the dotted
line above each line 1a (for example,
Schedule D, line 12, to report a 28%
rate loss from a partnership).
Line 1a, column (a). Enter the net
loss plus any prior year unallowed loss

from the activity that is reported on the
same form or, in the case of Schedule
D and Form 4797, the same part.
If you have a Schedule D 28% rate
loss and a Schedule D non-28%-rate
loss, see Example of Schedule D (Form
1040) transactions on this page before
completing Worksheet 7.
Line 1b, column (a). Enter any net
income from the activity that is reported
on the same form or schedule (or on
the same part of the same form or
schedule) as the loss on line 1a,
column (a).
Example. You enter a prior year
unallowed loss from Form 4797, Part I,
on line 1a. If the activity has a current
year Form 4797, Part I, gain, enter the
gain on line 1b, column (a). If the
activity does not have a Form 4797,
Part I, gain, enter -0- on line 1b, column
(a).
Line 1c, column (b). Subtract line 1b,
column (a), from line 1a, column (a),
and enter the result in column (b). If line
1b, column (a), is more than line 1a,
column (a), enter -0- in column (b).
Column (c). Divide each of the losses
entered in column (b) by the total of
column (b) and enter the ratio in
column (c). The total of this column
must be 1.00.
Column (d). Multiply the unallowed
loss for this activity, found in Worksheet
5, column (c), by each ratio in column
(c) of Worksheet 7. If -0- is entered in
column (b) of Worksheet 7, also enter
-0- for that form or schedule in column
(d).
The amount in column (d) is the
unallowed loss for 2007. Keep a record
of this worksheet so you can use the
losses to figure your PAL next year.
Column (e). Subtract the amount in
column (d) from the loss entered on line
1a, column (a). This is the allowed loss
for 2007 to enter on the forms or
schedules. The forms and schedules
you use must show the losses from this
column and the income, if any, for that
activity from column (a) of Worksheet 1
or Worksheet 3.
Example of Schedule D (Form
1040) transactions. The taxpayer had
the following Schedule D (Form 1040)
transactions from passive activities in
2007.
Activity I
A passive activity prior year
unallowed long-term capital loss (a 28%
rate loss) of $1,000 and a current year
long-term capital loss (a non-28%-rate
loss) of $3,000.
Activity II
A current year collectibles loss (a
28% rate loss) of $230 and net income
of $1,100 from Schedule E (Form
1040).
Worksheet 3

-10-

Activity I has an overall loss of
$4,000 (current year long-term capital
loss of $3,000 and a prior year
unallowed long-term capital loss of
$1,000). Activity II has an overall gain
of $870 (current year net income of
$1,100 less a current year long-term
capital loss of $230). Line 16 of Form
8582 shows an allowed loss of $1,100.
Since Activity II has an overall gain,
the amounts shown in columns (a) and
(b) of Worksheet 3 for that activity are
reported on the proper forms and
schedules and are not shown on any
other worksheet.
Worksheet 5
Activity I has an unallowed loss of
$3,130 (line 4 of Form 8582 ($3,130)
less the sum of lines 10 and 14 of Form
8582 (-0-) x 100%).
Worksheet 7
This worksheet is used to figure the
portion of the unallowed loss
attributable to the 28% rate loss and
the portion attributable to the
non-28%-rate loss.
The loss attributable to the 28% rate
loss ($1,000) and the loss attributable
to the non-28%-rate loss ($3,000) are
separate entries in Worksheet 7. The
ratio of each loss to the total of the two
losses is figured as follows. $1,000/
$4,000 = .25. $3,000/$4,000 = .75.
Each of these ratios is multiplied by the
unallowed loss for Activity I, shown in
column (c) of Worksheet 5 ($3,130).
Unallowed losses for Activity I:
• 28% rate loss: .25 x $3,130 =
$782.50.
• Non-28%-rate loss: .75 x $3,130 =
$2,347.50.
Allowed losses for Activity I:
• 28% rate loss: $1,000 − $782.50 =
$217.50.
• Non-28%-rate loss: $3,000 −
$2,347.50 = $652.50.
The total loss allowed for Activity I
($870) is entered in Part II of Schedule
D (Form 1040). The 28% rate loss
($217.50) is entered on the 28% Rate
Gain Worksheet (see Schedule D
instructions for line 18). Keep a record
of the unallowed 28% rate and
non-28%-rate losses to figure the PAL
for these transactions next year.
See the forms and schedules listed
under How To Report Allowed Losses
beginning below. Also, see Pub. 925 for
an extensive example of how to report
passive income and losses on the
forms and schedules.

How To Report
Allowed Losses
Line 4 is income. If line 4 of Form
8582 shows net income or zero, all the
losses in columns (b) and (c) of
Worksheets 1 and 3 and all the
deductions in columns (a) and (b) of

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Instructions for Form 8582

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Draft as of 06/07/2007
Worksheet 2 are allowed in full. Report
the income and losses in columns (a),
(b), and (c) of Worksheets 1 and 3 and
deductions in columns (a) and (b) of
Worksheet 2 on the forms and
schedules normally used.
Line 16 is the same as the total of
lines 1b, 1c, 2a, 2b, 3b, and 3c. In
this case also, all the losses in columns
(b) and (c) of Worksheets 1 and 3 and
all the deductions in columns (a) and
(b) of Worksheet 2 are allowed in full.
Report the income and losses in
columns (a), (b), and (c) of Worksheets
1 and 3 and deductions in columns (a)
and (b) of Worksheet 2 on the forms
and schedules normally used.
Columns (a) and (c) of Worksheet 4
are the same amount. In this case, all
the losses in columns (b) and (c) of
Worksheet 1 and all the deductions in
columns (a) and (b) of Worksheet 2 are
allowed in full. Report the income and
losses in columns (a), (b), and (c) of
Worksheet 1 and the deductions in
columns (a) and (b) of Worksheet 2 on
the forms and schedules normally used.
Losses allowed in column (c) of
Worksheet 6. The amounts in column
(c) of Worksheet 6 are the losses or
deductions allowed for 2007 for the
activities listed in that worksheet.
Report the loss allowed from column (c)
of Worksheet 6 and the income, if any,
for that activity from column (a) of
Worksheet 1 or 3, on the form or
schedule normally used.
Losses allowed in column (e) of
Worksheet 7. The amounts in column
(e) of Worksheet 7 are the losses or
deductions allowed for 2007 for the
activity listed on that worksheet. Report
the losses allowed from column (e) of
Worksheet 7 and the income, if any, for
that activity from column (a) of
Worksheet 1 or 3, on the forms or
schedules normally used.
Schedules C and F, and Form 4835.
Enter on the net profit or loss line of
your schedule or form the allowed
passive loss from the worksheet. To the
left of the entry space enter “PAL.”
If the net profit or loss line on your
form or schedule shows net profit for
the year, reduce the net profit by the
allowed loss from Worksheet 6 or 7,
and enter the result on the net profit or
loss line.
Example. Schedule C shows net
profit for the year of $5,000 from a
passive activity. The activity also has a
Form 4797 gain of $2,500 and a prior
year unallowed Schedule C loss of
$6,000. The loss allowed for 2007 is
$6,000. You enter a net loss of $1,000
on line 31 of Schedule C (the $5,000
net profit for the year less the $6,000
loss allowed for the year). To the left of
the entry space, you enter “PAL.”
See Schedule D and Form 4797
instructions on this page if you also had

passive gains and losses from the sale
of assets or of an interest in a passive
activity.
Schedule E, Part I. Enter the allowed
loss from the worksheet on line 23 of
Schedule E. An activity that has net
profit for the year and prior year
unallowed losses will have net profit on
line 22 and the allowed loss on line 23.
The allowed loss on line 23 will include
the loss allowed to the extent of the net
profit. Line 24 of Schedule E will show
total net profit and line 25 will show
total losses allowed (both passive and
nonpassive). Line 26 will show the total
net profit or loss.
Schedule E, Parts II and III. Any net
income shown on your Schedule K-1
that is passive income must be entered
as passive income in the appropriate
column of Schedule E, Part II or III.
Enter the passive loss allowed from
Worksheet 6 or 7 in the appropriate
column for passive losses. The passive
losses allowed include the loss allowed
to the extent of any net income from the
activity. Passive net income or loss
reportable on Schedule E, Part II,
includes any self-charged interest
income and deductions treated as
passive activity income and deductions.
See Schedule D and Form 4797
instructions on this page if you also had
passive gains or losses from the sale of
assets or of an interest in a passive
activity.
Form 4684, Section B. Any passive
activity gain from Form 4684 is
unchanged. It was used on Form 8582
to determine allowable PALs. If you do
not have passive losses on Form 4684,
complete Form 4684 and follow the
instructions for that form for where to
report the gain.
If you have passive losses on Form
4684, cross through the amount you
first entered on line 34, 35, 41a, 41b, or
42 of that form, and enter the allowed
loss from the worksheet. To the left of
the entry space, enter “PAL.”
Schedule D and Form 4797. If you
sold assets from a passive activity or
you sold an interest in your passive
activity, all gains from the activity must
be entered on the appropriate line of
Schedule D or Form 4797. Identify the
gain as “FPA.” Enter any allowed
losses for Schedule D or Form 4797 on
the appropriate line, and to the left of
the entry space, enter “PAL.”
Entire disposition with an overall
loss. If you made an entire disposition
of your interest in a passive activity and
that activity had an overall loss, none of
the gains, if any, or losses were
entered on Form 8582 or the
worksheets. However, all the gains and
losses must be reported on the forms
or schedules normally used. To the left
of the entry space, enter “EDPA.”

-11-

Entire disposition with an overall
gain. Gains and losses from this
activity were included on Form 8582 so
that the gains might offset other PALs.
Report all the gains and losses on the
forms and schedules normally used,
and to the left of the entry space, enter
“EDPA.”

Publicly Traded
Partnerships (PTPs)
A PTP is a partnership whose interests
are traded on an established securities
market or are readily tradable on a
secondary market (or its substantial
equivalent).
An established securities market
includes any national securities
exchange and any local exchange
registered under the Securities
Exchange Act of 1934 or exempted
from registration because of the limited
volume of transactions. It also includes
any over-the-counter market.
A secondary market generally exists
if a person stands ready to make a
market in the interest. An interest is
treated as readily tradable if the interest
is regularly quoted by persons, such as
brokers or dealers, who are making a
market in the interest.
The substantial equivalent of a
secondary market exists if there is no
identifiable market maker, but holders
of interests have a readily available,
regular, and ongoing opportunity to sell
or exchange interests through a public
means of obtaining or providing
information on offers to buy, sell, or
exchange interests. Similarly, the
substantial equivalent of a secondary
market exists if prospective buyers and
sellers have the opportunity to buy, sell,
or exchange interests in a timeframe
and with the regularity and continuity
that the existence of a market maker
would provide.

Special Instructions for PTPs
Section 469(k) provides that the
passive activity limitations must be
applied separately to items from each
PTP. PALs from a PTP generally may
be used only to offset income or gain
from passive activities of the same
PTP. The special allowance (including
CRDs) for rental real estate activities
does not apply to PALs from a PTP.
Passive activity loss rules for
partners in PTPs. Do not report
passive income, gains, or losses from a
PTP on Form 8582. Instead, use the
following rules to figure and report your
income, gains, and losses from passive
activities you held through each PTP
you owned during the tax year.
1. Combine any current year
income, gains and losses, and any prior
year unallowed losses to see if you
have an overall loss from the PTP.

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Instructions for Form 8582

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Draft as of 06/07/2007
Include only the same types of income
and losses you would include to figure
your net income or loss from a
non-PTP passive activity. See Passive
Activity Income and Deductions on
page 5.
2. If you have an overall gain, the
net gain portion (total gain minus total
losses) is nonpassive income.
It is important to figure the
nonpassive income because it must be
included in modified adjusted gross
income to figure the special allowance
for active participation in a non-PTP
rental real estate activity on Form 8582.
Also, you may be able to include the
nonpassive income in investment
income when figuring your investment
interest expense deduction. See Form
4952, Investment Interest Expense
Deduction.
Report all gains and allowed losses
from the activity on the forms or
schedules normally used, and to the left
of each entry space, enter “From PTP.”
Example. You have Schedule E
income of $8,000 and a Form 4797
prior year unallowed loss of $3,500
from the passive activities of a PTP.
You have a $4,500 overall gain ($8,000
− $3,500) that is nonpassive income.
On Schedule E, Part II, you report the
$4,500 net gain as nonpassive income
in column (j). In column (g), you report
the remaining Schedule E gain of
$3,500 ($8,000 − $4,500) as passive
income. On the appropriate line of Form
4797, you report the prior year
unallowed loss of $3,500. You enter
“From PTP” to the left of each entry
space.
3. If you have an overall loss (but
did not dispose of your entire interest in
the PTP to an unrelated person in a
fully taxable transaction during the
year), the losses are allowed only to the
extent of the income, and the excess
loss is carried forward to use in a future
year if you have income to offset it.
Report as a passive loss on the
schedule or form you normally use the
portion of the loss equal to the income.
Report the income as passive income
on the form or schedule you normally
use.
Example. You have a Schedule E
loss of $12,000 (current year losses
plus prior year unallowed losses) and

Form 4797 gain of $7,200 from the
passive activities of a PTP. You report
the $7,200 gain on the appropriate line
of Form 4797. On Schedule E, Part II,
you report $7,200 of the losses as a
passive loss in column (f). You carry
forward the unallowed loss of $4,800
($12,000 − $7,200).
If you have unallowed losses from
more than one activity of the PTP or
from the same activity of the PTP that
must be reported on different forms or
schedules, allocate the unallowed
losses on a pro rata basis to figure the
amount allowed for each activity or on
each form or schedule.
To allocate and keep a record of

TIP the unallowed losses, use
Worksheets 5, 6, and 7 of Form
8582.
List each activity of the PTP in
Worksheet 5. Enter the overall loss
from each activity in column (a).
Complete column (b) of Worksheet 5
according to its instructions. Multiply the
total unallowed loss from the PTP by
each ratio in column (b) and enter the
result in column (c) of Worksheet 5.
Next, complete Worksheet 6 for
each activity listed in Worksheet 5 if all
the loss from that activity is reported on
one form or schedule. Use Worksheet 7
instead of Worksheet 6 for each activity
with losses reported on two or more
different forms or schedules (or on
different parts of the same form or
schedule). Enter the net loss plus any
prior year unallowed losses in column
(a) of Worksheet 6 (or Worksheet 7 if
applicable). The losses in column (c) of
Worksheet 6 (column (e) of Worksheet
7) are the allowed losses to report on
your forms or schedules. Report these
losses and any income from the PTP
on the forms and schedules normally
used.
4. If you have an overall loss and
you disposed of your entire interest in
the PTP to an unrelated person in a
fully taxable transaction during the year,
your losses (including prior year
unallowed losses) allocable to the
activity for the year are not limited by
the passive loss rules. A fully taxable
transaction is one in which you
recognize all your realized gain or loss.

-12-

Report the income and losses on the
forms and schedules normally used.
For rules on the disposition of an
entire interest reported using the
installment method, see Disposition of
an Entire Interest beginning on page 6.
Paperwork Reduction Act Notice.
We ask for the information on this form
to carry out the Internal Revenue laws
of the United States. You are required
to give us the information. We need it to
ensure that you are complying with
these laws and to allow us to figure and
collect the right amount of tax.
You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB
control number. Books or records
relating to a form or its instructions
must be retained as long as their
contents may become material in the
administration of any Internal Revenue
law. Generally, tax returns and return
information are confidential, as required
by section 6103.
The time needed to complete and
file this form will vary depending on
individual circumstances. The
estimated burden for individual
taxpayers filing this form is approved
under OMB control number 1545 – 0074
and is included in the estimates shown
in the instructions for their individual
income tax return. The estimated
burden for all other taxpayers who file
this form is shown below.
Recordkeeping . . . . . . . . 1 hr., 26 min.
Learning about the law or
the form . . . . . . . . . . . . . 1 hr., 43 min.
Preparing the form . . . . . 1 hr., 43 min.
Copying, assembling,
and sending the form to
the IRS . . . . . . . . . . . . . .

48 min.

If you have comments concerning
the accuracy of these time estimates or
suggestions for making this form
simpler, we would be happy to hear
from you. See the instructions for the
tax return with which this form is filed.