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State tax return free Publication 1212 - Introductory Material Table of Contents Future Developments Photographs of Missing Children IntroductionOrdering forms and publications. State tax return free Tax questions. State tax return free Useful Items - You may want to see: Future Developments For the latest information about developments related to Pub. State tax return free 1212, such as legislation enacted after it was published, go to www. State tax return free irs. State tax return free gov/pub1212. State tax return free Photographs of Missing Children The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. State tax return free Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. State tax return free You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. State tax return free Introduction This publication has two purposes. State tax return free Its primary purpose is to help brokers and other middlemen identify publicly offered original issue discount (OID) debt instruments they may hold as nominees for the true owners, so they can file Forms 1099-OID or Forms 1099-INT as required. State tax return free The other purpose of the publication is to help owners of publicly offered OID debt instruments determine how much OID to report on their income tax returns. State tax return free The list of publicly offered OID debt instruments (OID list) is on the IRS website. State tax return free The original issue discount tables, Sections I-A through III-F, are only available on the IRS website at www. State tax return free irs. State tax return free gov/pub1212 by clicking the link under Recent Developments. State tax return free The tables are posted to the website in late November or early December of each year. State tax return free The information on these lists come from the issuers of the debt instruments and from financial publications and is updated annually. State tax return free (However, see Debt Instruments Not on the OID List, later. State tax return free ) Brokers and other middlemen can rely on this list to determine, for information reporting purposes, whether a debt instrument was issued at a discount and the OID to be reported on information returns. State tax return free However, because the information in the list has generally not been verified by the IRS as correct, the following tax matters are subject to change upon examination by the IRS. State tax return free The OID reported by owners of a debt instrument on their income tax returns. State tax return free The issuer's classification of an instrument as debt for federal income tax purposes. State tax return free Instructions for issuers of OID debt instruments. State tax return free   In general, issuers of publicly offered OID debt instruments must, within 30 days after the issue date, report information about the instruments to the IRS on Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. State tax return free See the form instructions for more information. State tax return free Issuers should report errors in and omissions from the list in writing at the following address:  IRS OID Publication Project SE:W:CAR:MP:T  1111 Constitution Ave. State tax return free NW, IR-6526 Washington, D. State tax return free C. State tax return free 20224 REMIC and CDO information reporting requirements. State tax return free   Brokers and other middlemen must follow special information reporting requirements for real estate mortgage investment conduits (REMIC) regular, and collateralized debt obligations (CDO) interests. State tax return free The rules are explained in Publication 938, Real Estate Mortgage Investment Conduits (REMICs) Reporting Information (And Other Collateralized Debt Obligations (CDOs)). State tax return free   Holders of interests in REMICs and CDOs should see chapter 1 of Publication 550 for information on REMICs and CDOs. State tax return free Comments and suggestions. State tax return free   We welcome your comments about this publication and your suggestions for future editions. State tax return free   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. State tax return free NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. State tax return free Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. State tax return free   You can send your comments from www. State tax return free irs. State tax return free gov/formspubs/. State tax return free Click on “More Information” and then on “Comment on Tax Forms and Publications. State tax return free ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. State tax return free Ordering forms and publications. State tax return free   Visit www. State tax return free irs. State tax return free gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. State tax return free Internal Revenue Service 1201 N. State tax return free Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. State tax return free   If you have a tax question, check the information available on IRS. State tax return free gov or call 1-800-829-1040. State tax return free We cannot answer tax questions sent to any of the preceding addresses. State tax return free Useful Items - You may want to see: Publication 515 Withholding of Tax on Nonresident Aliens and Foreign Entities 550 Investment Income and Expenses 938 Real Estate Mortgage Investment Conduits (REMICs) Reporting Information (And Other Collateralized Debt Obligations (CDOs)). State tax return free Form (and Instructions) 1096 Annual Summary and Transmittal of U. State tax return free S. State tax return free Information Returns 1099-B Proceeds From Broker and Barter Exchange Transactions 1099-INT Interest Income 1099-OID Original Issue Discount 8949 Sales and Other Dispositions of Capital Assets Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends Schedule D (Form 1040) Capital Gains and Losses W-8 Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY See How To Get Tax Help near the end of this publication for information about getting publications and forms. State tax return free Prev  Up  Next   Home   More Online Publications
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State tax return free Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. State tax return free Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. State tax return free For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. State tax return free Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. State tax return free See Passive Activity Deductions, later. State tax return free Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. State tax return free However, there is a special allowance under which some or all of your passive activity loss may be allowed. State tax return free See Special $25,000 allowance , later. State tax return free Definition of passive activity loss. State tax return free    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. State tax return free See Passive Activity Income and Deductions , later. State tax return free   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. State tax return free For details on net active income, see the Instructions for Form 8810. State tax return free For the definition of passive activity gross income, see Passive Activity Income , later. State tax return free For the definition of passive activity deductions, see Passive Activity Deductions , later. State tax return free Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. State tax return free Allocation of disallowed passive activity loss among activities. State tax return free   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. State tax return free The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. State tax return free Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. State tax return free Loss from an activity. State tax return free   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. State tax return free   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. State tax return free See Significant Participation Passive Activities , later. State tax return free Example. State tax return free John Pine holds interests in three passive activities, A, B, and C. State tax return free The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. State tax return free Therefore, a ratable portion of the losses from activities A and B is disallowed. State tax return free He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. State tax return free   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. State tax return free The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. State tax return free Excluded deductions. State tax return free    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. State tax return free See Recharacterization of Passive Income , later. State tax return free Separately identified deductions. State tax return free   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. State tax return free   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. State tax return free   Deductions that must be accounted for separately include (but are not limited to) the following deductions. State tax return free Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. State tax return free See Active participation , later. State tax return free Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. State tax return free See Active participation , later. State tax return free Losses from sales or exchanges of capital assets. State tax return free Section 1231 losses. State tax return free See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. State tax return free Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. State tax return free The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. State tax return free For more information, see Regulations section 1. State tax return free 469-1(f)(4). State tax return free Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. State tax return free The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. State tax return free Credits that are included in figuring the general business credit are subject to the passive activity rules. State tax return free See the Instructions for Form 8582-CR for more information. State tax return free Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). State tax return free You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. State tax return free You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. State tax return free Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. State tax return free This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. State tax return free For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. State tax return free Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. State tax return free These rules do not apply to C corporations. State tax return free For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. State tax return free Passive Activities There are two kinds of passive activities. State tax return free Trade or business activities in which you do not materially participate during the year. State tax return free Rental activities, even if you do materially participate in them, unless you are a real estate professional. State tax return free Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . State tax return free Treatment of former passive activities. State tax return free   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. State tax return free You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. State tax return free Treat any remaining prior year unallowed loss like you treat any other passive loss. State tax return free   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. State tax return free The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. State tax return free You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). State tax return free Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). State tax return free A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. State tax return free You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. State tax return free Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. State tax return free See Real Estate Professional under Activities That Are Not Passive Activities, later. State tax return free 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. State tax return free It does not matter whether the use is under a lease, a service contract, or some other arrangement. State tax return free Exceptions. State tax return free   Your activity is not a rental activity if any of the following apply. State tax return free The average period of customer use of the property is 7 days or less. State tax return free You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. State tax return free If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. State tax return free The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. State tax return free The activity's average period of customer use will equal the sum of the amounts for each class. State tax return free The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. State tax return free Significant personal services include only services performed by individuals. State tax return free 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. State tax return free Significant personal services do not include the following. State tax return free Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. State tax return free You provide extraordinary personal services in making the rental property available for customer use. State tax return free Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. State tax return free The rental is incidental to a nonrental activity. State tax return free 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 from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. State tax return free The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. State tax return free The rental of property is incidental to a trade or business activity if all of the following apply. State tax return free You own an interest in the trade or business activity during the year. State tax return free The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. State tax return free Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. State tax return free Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. State tax return free You customarily make the rental property available during defined business hours for nonexclusive use by various customers. State tax return free You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. State tax return free    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. State tax return free Special $25,000 allowance. State tax return free   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. State tax return free This special allowance is an exception to the general rule disallowing the passive activity loss. State tax return free Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. State tax return free   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. State tax return free If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. State tax return free   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. State tax return free See Phaseout rule , later. State tax return free Example. State tax return free Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. State tax return free She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. State tax return free She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). State tax return free Commercial revitalization deduction (CRD). State tax return free   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. State tax return free Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. State tax return free You cannot claim a CRD for a building placed in service after December 31, 2009. State tax return free Active participation. State tax return free   Active participation is not the same as material participation (defined later). State tax return free Active participation is a less stringent standard than material participation. State tax return free For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. State tax return free Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. State tax return free   Only individuals can actively participate in rental real estate activities. State tax return free However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. State tax return free   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. State tax return free The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. State tax return free   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). State tax return free   Limited partners are not treated as actively participating in a partnership's rental real estate activities. State tax return free   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. State tax return free   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. State tax return free Example. State tax return free Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. State tax return free He advertised and rented the house to the current tenant himself. State tax return free He also collected the rents and did the repairs or hired someone to do them. State tax return free Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. State tax return free Phaseout rule. State tax return free   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). State tax return free If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. State tax return free    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. State tax return free Taxable social security and tier 1 railroad retirement benefits. State tax return free Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. State tax return free The exclusion from income of interest from qualified U. State tax return free S. State tax return free savings bonds used to pay qualified higher education expenses. State tax return free The exclusion from income of amounts received from an employer's adoption assistance program. State tax return free Passive activity income or loss included on Form 8582. State tax return free Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). State tax return free Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). State tax return free The deduction for the employer-equivalent portion of self-employment tax. State tax return free The deduction for domestic production activities. State tax return free The deduction allowed for interest on student loans. State tax return free The deduction for qualified tuition and related expenses. State tax return free Example. State tax return free During 2013, John was unmarried and was not a real estate professional. State tax return free For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. State tax return free His modified adjusted gross income is $120,000. State tax return free When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. State tax return free He must carry over the remaining $16,000 passive activity loss to 2014. State tax return free He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. State tax return free   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. State tax return free For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). State tax return free   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. State tax return free Ordering rules. State tax return free   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. State tax return free The portion of passive activity losses not attributable to the CRD. State tax return free The portion of passive activity losses attributable to the CRD. State tax return free The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. State tax return free The portion of passive activity credits attributable to the rehabilitation credit. State tax return free The portion of passive activity credits attributable to the low-income housing credit. State tax return free Activities That Are Not Passive Activities The following are not passive activities. State tax return free Trade or business activities in which you materially participated for the tax year. State tax return free A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). State tax return free It does not matter whether you materially participated in the activity for the tax year. State tax return free However, if 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) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. State tax return free  See Temporary Regulations section 1. State tax return free 469-1T(e)(4)(ii). State tax return free The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. State tax return free An activity of trading personal property for the account of those who own interests in the activity. State tax return free See Temporary Regulations section 1. State tax return free 469-1T(e)(6). State tax return free Rental real estate activities in which you materially participated as a real estate professional. State tax return free See Real Estate Professional , later. State tax return free You should not enter income and losses from these activities on Form 8582. State tax return free Instead, enter them on the forms or schedules you would normally use. State tax return free Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. State tax return free Material participation tests. State tax return free    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. State tax return free You participated in the activity for more than 500 hours. State tax return free Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. State tax return free 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. State tax return free The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. State tax return free 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. State tax return free See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. State tax return free You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. State tax return free The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. State tax return free An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), 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. State tax return free Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. State tax return free   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. State tax return free Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). State tax return free Participation. State tax return free   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. State tax return free Work not usually performed by owners. State tax return free   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. State tax return free The work is not work that is customarily done by the owner of that type of activity. State tax return free One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. State tax return free Participation as an investor. State tax return free   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. State tax return free Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. State tax return free Spouse's participation. State tax return free   Your participation in an activity includes your spouse's participation. State tax return free This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. State tax return free Proof of participation. State tax return free You can use any reasonable method to prove your participation in an activity for the year. State tax return free You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. State tax return free For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. State tax return free Limited partners. State tax return free   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. State tax return free However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. State tax return free   You are not treated as a limited partner, however, 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 that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). State tax return free Retired or disabled farmer and surviving spouse of a farmer. State tax return free   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. State tax return free Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. State tax return free Corporations. State tax return free   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. State tax return free   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. State tax return free See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. State tax return free Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. State tax return free However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. State tax return free For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. State tax return free See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. State tax return free If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). State tax return free If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. State tax return free Qualifications. State tax return free   You qualified as a real estate professional for the year if you met both of the following requirements. State tax return free More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. State tax return free You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. State tax return free   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. State tax return free You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. State tax return free   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. State tax return free However, you can count your spouse's participation in an activity in determining if you materially participated. State tax return free Real property trades or businesses. State tax return free   A real property trade or business is a trade or business that does any of the following with real property. State tax return free Develops or redevelops it. State tax return free Constructs or reconstructs it. State tax return free Acquires it. State tax return free Converts it. State tax return free Rents or leases it. State tax return free Operates or manages it. State tax return free Brokers it. State tax return free Closely held corporations. State tax return free   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. State tax return free Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. State tax return free Self-charged interest. State tax return free   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. State tax return free   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. State tax return free This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. State tax return free   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. State tax return free    Exception. State tax return free 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. State tax return free 469-7(g) to avoid the application of these rules. State tax return free For more details on the self-charged interest rules, see Regulations section 1. State tax return free 469-7. State tax return free Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. State tax return free Passive activity income does not include the following items. State tax return free Income from an activity that is not a passive activity. State tax return free These activities are discussed under Activities That Are Not Passive Activities , earlier. State tax return free Portfolio income. State tax return free This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. State tax return free It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. State tax return free The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. State tax return free For more information on self-charged interest, see Self-charged interest , earlier. State tax return free Personal service income. State tax return free This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. State tax return free Income from positive section 481 adjustments allocated to activities other than passive activities. State tax return free (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. State tax return free ) Income or gain from investments of working capital. State tax return free 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, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. State tax return free This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. State tax return free Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. State tax return free Any other income that must be treated as nonpassive income. State tax return free See Recharacterization of Passive Income , later. State tax return free Overall gain from any interest in a publicly traded partnership. State tax return free See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. State tax return free State, local, and foreign income tax refunds. State tax return free Income from a covenant not to compete. State tax return free Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. State tax return free Alaska Permanent Fund dividends. State tax return free Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. State tax return free See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. State tax return free Disposition of property interests. State tax return free   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. State tax return free The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. State tax return free An exception to this general rule may apply if you previously used the property in a different activity. State tax return free Exception for more than one use in the preceding 12 months. State tax return free   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. State tax return free Any gain allocated to a passive activity is passive activity income. State tax return free   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. State tax return free Exception for substantially appreciated property. State tax return free   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. State tax return free You used the property in a passive activity for 20% of the time you held your interest in the property. State tax return free You used the property in a passive activity for the entire 24-month period before its disposition. State tax return free If neither condition applies, the gain is not passive activity income. State tax return free However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. State tax return free   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. State tax return free Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. State tax return free   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. State tax return free Disposition of property converted to inventory. State tax return free   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. State tax return free Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. State tax return free This rule applies only if you meet all of the following conditions. State tax return free At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). State tax return free Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. State tax return free You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. State tax return free Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. State tax return free For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. State tax return free See Coordination with other limitations on deductions that apply before the passive activity rules , later. State tax return free Passive activity deductions generally include losses from dispositions 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. State tax return free Exceptions. State tax return free   Passive activity deductions do not include the following items. State tax return free Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. State tax return free Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. State tax return free For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. State tax return free Losses from dispositions of property that produce portfolio income or property held for investment. State tax return free State, local, and foreign income taxes. State tax return free Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. State tax return free Charitable contribution deductions. State tax return free Net operating loss deductions. State tax return free Percentage depletion carryovers for oil and gas wells. State tax return free Capital loss carrybacks and carryovers. State tax return free Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. State tax return free See Coordination with other limitations on deductions that apply before the passive activity rules , later. State tax return free Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. State tax return free Net negative section 481 adjustments allocated to activities other than passive activities. State tax return free (Section 481 adjustments are adjustments required due to changes in accounting methods. State tax return free ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. State tax return free The deduction for the employer-equivalent portion of self-employment tax. State tax return free Coordination with other limitations on deductions that apply before the passive activity rules. State tax return free   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. State tax return free The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. State tax return free Proration of deductions disallowed under basis limitations. State tax return free   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. State tax return free For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. State tax return free   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. State tax return free For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. State tax return free Proration of deductions disallowed under at-risk limitation. State tax return free   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. State tax return free For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. State tax return free Coordination of basis and at-risk limitations. State tax return free   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. State tax return free Separately identified items of deduction and loss. State tax return free   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. State tax return free   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. State tax return free See Grouping Your Activities , later. State tax return free Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). State tax return free See Section 1231 Gains and Losses in Publication 544 for more information. State tax return free Are attributable to pre-enactment interests in activities. State tax return free See Regulations section 1. State tax return free 469-11T(c). State tax return free Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. State tax return free Grouping is important for a number of reasons. State tax return free If you group two activities into one larger activity, you need only show material participation in the activity as a whole. State tax return free But if the two activities are separate, you must show material participation in each one. State tax return free On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. State tax return free But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. State tax return free Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. State tax return free Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. State tax return free You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. State tax return free The following factors have the greatest weight in determining whether activities form an appropriate economic unit. State tax return free All of the factors do not have to apply to treat more than one activity as a single activity. State tax return free The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. State tax return free Example 1. State tax return free John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. State tax return free Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. State tax return free For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. State tax return free Example 2. State tax return free Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. State tax return free Betty is also a partner in DEF (a trucking business). State tax return free ABC and DEF are under common control. State tax return free The main part of DEF's business is transporting goods for ABC. State tax return free DEF is the only trucking business in which Betty is involved. State tax return free Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. State tax return free Consistency and disclosure requirement. State tax return free   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. State tax return free You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. State tax return free   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. State tax return free   See Disclosure Requirement , later. State tax return free Regrouping by the IRS. State tax return free   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. State tax return free Rental activities. State tax return free   In general, you cannot group a rental activity with a trade or business activity. State tax return free However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. State tax return free Example. State tax return free Herbert and Wilma are married and file a joint return. State tax return free Healthy Food, an S corporation, is a grocery store business. State tax return free Herbert is Healthy Food's only shareholder. State tax return free Plum Tower, an S corporation, owns and rents out the building. State tax return free Wilma is Plum Tower's only shareholder. State tax return free Plum Tower rents part of its building to Healthy Food. State tax return free Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. State tax return free Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. State tax return free The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). State tax return free If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. State tax return free Grouping of real and personal property rentals. State tax return free   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. State tax return free However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. State tax return free Certain activities may not be grouped. State tax return free   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. State tax return free Holding, producing, or distributing motion picture films or video tapes. State tax return free Farming. State tax return free Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). State tax return free For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. State tax return free Exploring for, or exploiting, oil and gas resources. State tax return free Exploring for, or exploiting, geothermal deposits. State tax return free   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. State tax return free Limited entrepreneur. State tax return free   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. State tax return free Activities conducted through another entity. State tax return free   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. State tax return free Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. State tax return free    You may not treat activities grouped together by the entity as separate activities. State tax return free Personal service and closely held corporations. State tax return free   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. State tax return free See Material Participation , earlier, and Significant Participation Passive Activities , later. State tax return free Publicly traded partnership (PTP). State tax return free   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. State tax return free Partial dispositions. State tax return free   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. State tax return free However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. State tax return free Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. State tax return free You are required to report certain changes to your groupings that occur during the tax year to the IRS. State tax return free If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. State tax return free You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. State tax return free If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. State tax return free New grouping. State tax return free   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. State tax return free The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. State tax return free In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. State tax return free Addition to an existing grouping. State tax return free   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. State tax return free The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. State tax return free In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. State tax return free Regrouping. State tax return free   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. State tax return free The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. State tax return free If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. State tax return free In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. State tax return free Groupings by partnerships and S corporations. State tax return free   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. State tax return free Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. State tax return free S. State tax return free Return of Partnership Income, or Form 1120S, U. State tax return free S. State tax return free Income Tax Return for an S Corporation, whichever is applicable. State tax return free   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. State tax return free   A partner or shareholder may not treat activities grouped together by the entity as separate activities. State tax return free Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. State tax return free Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. State tax return free If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. State tax return free If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). State tax return free If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. State tax return free Instead, enter income or losses on the form and schedules you normally use. State tax return free However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. State tax return free Limit on recharacterized passive income. State tax return free   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. State tax return free Investment income and investment expense. State tax return free   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. State tax return free Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. State tax return free If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. State tax return free Corporations. State tax return free   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. State tax return free The corporation is not treated as materially participating in the activity for the year. State tax return free One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. State tax return free Worksheet A. State tax return free   Complete Worksheet A. State tax return free Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. State tax return free Begin by entering the name of each activity in the left column. State tax return free Column (a). State tax return free   Enter the number of hours you participated in each activity and total the column. State tax return free   If the total is more than 500, do not complete Worksheet A or B. State tax return free None of the activities are passive activities because you satisfy test 4 for material participation. State tax return free (See Material participation tests , earlier. State tax return free ) Report all the income and losses from these activities on the forms and schedules you normally use. State tax return free Do not include the income and losses on Form 8582. State tax return free Column (b). State tax return free   Enter the net loss, if any, from the activity. State tax return free Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). State tax return free Enter -0- here if the prior year unallowed loss is the same as the current year net income. State tax return free Column (c). State tax return free   Enter net income (if any) from the activity. State tax return free Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. State tax return free Column (d). State tax return free   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). State tax return free If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. State tax return free Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88