Passive Activity Limitations for partners
Section 469 provides rules that limit the deduction of certain losses and credits. These rules apply to partners who:
• Are individuals, estates, trusts, closely held corporations, or personal service corporations and • Have a passive activity loss or credit for the tax year. Generally, passive activities include:
1. Trade or business activities in which you did not materially participate and 2. Activities that meet the definition of rental activities under Temporary Regulations section 1.469-1T(e)(3) and Regulations section 1.469-1(e)(3). Passive activities do not include:
1. Trade or business activities in which you materially participated. 2. Rental real estate activities in which you materially participated if you were a real estate professional for the tax year. You were a real estate professional only if you met both of the following conditions: a. More than half of the personal services you performed in trades or businesses were performed in real property trades or businesses in which you materially participated and b. You performed more than 750 hours of services in real property trades or businesses in which you materially participated. Note. For a closely held C corporation (defined in section 465(a)(1)(B)), the above
conditions are treated as met if more than 50% of the corporation’s gross receipts were from real property trades or businesses in which the corporation materially participated.
For purposes of this rule, 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 the Instructions for Schedule E (Form 1040).
If you are married filing jointly, either you or your spouse must separately meet both of the above conditions, 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.
3. Working interests in oil or gas wells if you were a general partner. 4. The rental of a dwelling unit any partner used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days that the residence was rented at fair rental value. 5. Activities of trading personal property for the account of owners of interests in the activities. If you are an individual, an estate, or a trust, and you have a passive activity loss or credit, use Form 8582, Passive Activity Loss Limitations, to figure your allowable passive losses and Form 8582-CR, Passive Activity Credit Limitations, to figure your allowable passive credits. For a corporation, use Form 8810, Corporate Passive Activity Loss and Credit Limitations. See the instructions for these forms for more information.
If the partnership had more than one activity, it will attach a statement to your Schedule K-1 that identifies each activity (trade or business activity, rental real estate activity, rental activity other than rental real estate, etc.) and specifies the income (loss), deductions, and credits from each activity.
Material participation. You must determine if you materially participated (a) in each trade or business activity held through the partnership and (b) if you were a real estate professional (defined above), in each rental real estate activity held through the partnership. All determinations of material participation are made based on your participation during the partnership’s tax year.
Material participation standards for partners who are individuals are listed below. Special rules apply to certain retired or disabled farmers and to the surviving spouses of farmers. See the Instructions for Form 8582 for details.
Corporations should refer to the Instructions for Form 8810 for the material participation standards that apply to them.
Individuals (other than limited partners). If you are an individual (either a general partner or a limited partner who
owned a general partnership interest at all times during the tax year), you materially participated in an activity only if one or more of the following apply:
1. You participated in the activity for more than 500 hours during the tax year. 2. Your participation in the activity for the tax year constituted substantially all the participation in the activity of all individuals (including individuals who are not owners of interests in the activity). 3. You participated in the activity for more than 100 hours during the tax year, and your participation in the activity for the tax year was not less than the participation in the activity of any other individual (including individuals who were not owners of interests in the activity) for the tax year. 4. The activity was a significant participation activity for the tax year, and you participated in all significant participation activities (including activities outside the partnership) 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 test 4). 5. You materially participated in the activity for any 5 tax years (whether or not consecutive) during the 10 tax years that immediately precede the tax year. 6. The activity was a personal service activity and you materially participated in the activity for any 3 tax years (whether or not consecutive) preceding the tax year. A personal service activity involves the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or 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. Limited partners. If you are a limited partner, you do not materially participate in an activity unless you meet one of the tests in paragraphs 1, 5, or 6 above.
Work counted toward material participation. Generally, any work that you or your spouse does in connection with an activity held through a partnership (where you own your partnership interest at the time the work is done) is counted toward material participation. However, work in connection with the activity is not counted toward material participation if either of the following applies.
1. The work is not the type of work that owners of the activity would usually do and one of the principal purposes of the work that you or your spouse does is to avoid the passive loss or credit limitations. 2. You do the work in your capacity as an investor and you are not directly involved in the day-to-day operations of the activity. Examples of work done as an investor that would not count toward material participation include: a. Studying and reviewing financial statements or reports on operations of the activity. Partner’s Instructions for Schedule K-1 (Form 1065) -3
� b. Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use. c. Monitoring the finances or operations of the activity in a nonmanagerial capacity. Effect of determination. Income (loss), deductions, and credits from an activity are nonpassive if you determine that:
• You materially participated in a trade or business activity of the partnership or • You were a real estate professional (defined on page 3) in a rental real estate activity of the partnership. If you determine that you did not materially participate in a trade or business activity of the partnership or if you have income (loss), deductions, or credits from a rental activity of the partnership (other than a rental real estate activity in which you materially participated as a real estate professional), the amounts from that activity are passive. Report passive income (losses), deductions, and credits as follows:
1. If you have an overall gain (the excess of income over deductions and losses, including any prior year unallowed loss) from a passive activity, report the income, deductions, and losses from the activity as indicated in these instructions. 2. If you have an overall loss (the excess of deductions and losses, including any prior year unallowed loss, over income) or credits from a passive activity, report the income, deductions, losses, and credits from all passive activities using the Instructions for Form 8582 or Form 8582-CR (or Form 8810), to see if your deductions, losses, and credits are limited under the passive activity rules.