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Turbo Tax 1040x

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Turbo Tax 1040x

Turbo tax 1040x 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. Turbo tax 1040x Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x See Passive Activity Deductions, later. Turbo tax 1040x Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. Turbo tax 1040x However, there is a special allowance under which some or all of your passive activity loss may be allowed. Turbo tax 1040x See Special $25,000 allowance , later. Turbo tax 1040x Definition of passive activity loss. Turbo tax 1040x    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. Turbo tax 1040x See Passive Activity Income and Deductions , later. Turbo tax 1040x   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. Turbo tax 1040x For details on net active income, see the Instructions for Form 8810. Turbo tax 1040x For the definition of passive activity gross income, see Passive Activity Income , later. Turbo tax 1040x For the definition of passive activity deductions, see Passive Activity Deductions , later. Turbo tax 1040x 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. Turbo tax 1040x Allocation of disallowed passive activity loss among activities. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. Turbo tax 1040x Loss from an activity. Turbo tax 1040x   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. Turbo tax 1040x   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. Turbo tax 1040x See Significant Participation Passive Activities , later. Turbo tax 1040x Example. Turbo tax 1040x John Pine holds interests in three passive activities, A, B, and C. Turbo tax 1040x 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. Turbo tax 1040x Therefore, a ratable portion of the losses from activities A and B is disallowed. Turbo tax 1040x 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. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x Excluded deductions. Turbo tax 1040x    “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. Turbo tax 1040x See Recharacterization of Passive Income , later. Turbo tax 1040x Separately identified deductions. Turbo tax 1040x   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. Turbo tax 1040x   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. Turbo tax 1040x   Deductions that must be accounted for separately include (but are not limited to) the following deductions. Turbo tax 1040x Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. Turbo tax 1040x See Active participation , later. Turbo tax 1040x Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. Turbo tax 1040x See Active participation , later. Turbo tax 1040x Losses from sales or exchanges of capital assets. Turbo tax 1040x Section 1231 losses. Turbo tax 1040x See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x For more information, see Regulations section 1. Turbo tax 1040x 469-1(f)(4). Turbo tax 1040x Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. Turbo tax 1040x 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. Turbo tax 1040x Credits that are included in figuring the general business credit are subject to the passive activity rules. Turbo tax 1040x See the Instructions for Form 8582-CR for more information. Turbo tax 1040x 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). Turbo tax 1040x You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. Turbo tax 1040x You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Turbo tax 1040x Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. Turbo tax 1040x This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x These rules do not apply to C corporations. Turbo tax 1040x For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. Turbo tax 1040x Passive Activities There are two kinds of passive activities. Turbo tax 1040x Trade or business activities in which you do not materially participate during the year. Turbo tax 1040x Rental activities, even if you do materially participate in them, unless you are a real estate professional. Turbo tax 1040x Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . Turbo tax 1040x Treatment of former passive activities. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x Treat any remaining prior year unallowed loss like you treat any other passive loss. Turbo tax 1040x   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. Turbo tax 1040x 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. Turbo tax 1040x 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). Turbo tax 1040x 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). Turbo tax 1040x 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. Turbo tax 1040x You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. Turbo tax 1040x 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. Turbo tax 1040x See Real Estate Professional under Activities That Are Not Passive Activities, later. Turbo tax 1040x 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. Turbo tax 1040x It does not matter whether the use is under a lease, a service contract, or some other arrangement. Turbo tax 1040x Exceptions. Turbo tax 1040x   Your activity is not a rental activity if any of the following apply. Turbo tax 1040x The average period of customer use of the property is 7 days or less. Turbo tax 1040x 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. Turbo tax 1040x If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. Turbo tax 1040x 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. Turbo tax 1040x The activity's average period of customer use will equal the sum of the amounts for each class. Turbo tax 1040x 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. Turbo tax 1040x Significant personal services include only services performed by individuals. Turbo tax 1040x 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. Turbo tax 1040x Significant personal services do not include the following. Turbo tax 1040x 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. Turbo tax 1040x You provide extraordinary personal services in making the rental property available for customer use. Turbo tax 1040x 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. Turbo tax 1040x The rental is incidental to a nonrental activity. Turbo tax 1040x 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. Turbo tax 1040x The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. Turbo tax 1040x The rental of property is incidental to a trade or business activity if all of the following apply. Turbo tax 1040x You own an interest in the trade or business activity during the year. Turbo tax 1040x 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. Turbo tax 1040x Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. Turbo tax 1040x 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. Turbo tax 1040x You customarily make the rental property available during defined business hours for nonexclusive use by various customers. Turbo tax 1040x 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. Turbo tax 1040x    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. Turbo tax 1040x Special $25,000 allowance. Turbo tax 1040x   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. Turbo tax 1040x This special allowance is an exception to the general rule disallowing the passive activity loss. Turbo tax 1040x 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. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. Turbo tax 1040x See Phaseout rule , later. Turbo tax 1040x Example. Turbo tax 1040x 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. Turbo tax 1040x She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. Turbo tax 1040x 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). Turbo tax 1040x Commercial revitalization deduction (CRD). Turbo tax 1040x   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. Turbo tax 1040x 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. Turbo tax 1040x You cannot claim a CRD for a building placed in service after December 31, 2009. Turbo tax 1040x Active participation. Turbo tax 1040x   Active participation is not the same as material participation (defined later). Turbo tax 1040x Active participation is a less stringent standard than material participation. Turbo tax 1040x For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Turbo tax 1040x Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Turbo tax 1040x   Only individuals can actively participate in rental real estate activities. Turbo tax 1040x 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. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). Turbo tax 1040x   Limited partners are not treated as actively participating in a partnership's rental real estate activities. Turbo tax 1040x   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. Turbo tax 1040x   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. Turbo tax 1040x Example. Turbo tax 1040x 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. Turbo tax 1040x He advertised and rented the house to the current tenant himself. Turbo tax 1040x He also collected the rents and did the repairs or hired someone to do them. Turbo tax 1040x 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. Turbo tax 1040x Phaseout rule. Turbo tax 1040x   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). Turbo tax 1040x 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. Turbo tax 1040x    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. Turbo tax 1040x Taxable social security and tier 1 railroad retirement benefits. Turbo tax 1040x Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. Turbo tax 1040x The exclusion from income of interest from qualified U. Turbo tax 1040x S. Turbo tax 1040x savings bonds used to pay qualified higher education expenses. Turbo tax 1040x The exclusion from income of amounts received from an employer's adoption assistance program. Turbo tax 1040x Passive activity income or loss included on Form 8582. Turbo tax 1040x 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). Turbo tax 1040x Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). Turbo tax 1040x The deduction for the employer-equivalent portion of self-employment tax. Turbo tax 1040x The deduction for domestic production activities. Turbo tax 1040x The deduction allowed for interest on student loans. Turbo tax 1040x The deduction for qualified tuition and related expenses. Turbo tax 1040x Example. Turbo tax 1040x During 2013, John was unmarried and was not a real estate professional. Turbo tax 1040x For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. Turbo tax 1040x His modified adjusted gross income is $120,000. Turbo tax 1040x When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. Turbo tax 1040x He must carry over the remaining $16,000 passive activity loss to 2014. Turbo tax 1040x 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. Turbo tax 1040x   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. Turbo tax 1040x 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). Turbo tax 1040x   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. Turbo tax 1040x Ordering rules. Turbo tax 1040x   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. Turbo tax 1040x The portion of passive activity losses not attributable to the CRD. Turbo tax 1040x The portion of passive activity losses attributable to the CRD. Turbo tax 1040x The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. Turbo tax 1040x The portion of passive activity credits attributable to the rehabilitation credit. Turbo tax 1040x The portion of passive activity credits attributable to the low-income housing credit. Turbo tax 1040x Activities That Are Not Passive Activities The following are not passive activities. Turbo tax 1040x Trade or business activities in which you materially participated for the tax year. Turbo tax 1040x 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). Turbo tax 1040x It does not matter whether you materially participated in the activity for the tax year. Turbo tax 1040x 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. Turbo tax 1040x  See Temporary Regulations section 1. Turbo tax 1040x 469-1T(e)(4)(ii). Turbo tax 1040x 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. Turbo tax 1040x An activity of trading personal property for the account of those who own interests in the activity. Turbo tax 1040x See Temporary Regulations section 1. Turbo tax 1040x 469-1T(e)(6). Turbo tax 1040x Rental real estate activities in which you materially participated as a real estate professional. Turbo tax 1040x See Real Estate Professional , later. Turbo tax 1040x You should not enter income and losses from these activities on Form 8582. Turbo tax 1040x Instead, enter them on the forms or schedules you would normally use. Turbo tax 1040x Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. Turbo tax 1040x Material participation tests. Turbo tax 1040x    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. Turbo tax 1040x You participated in the activity for more than 500 hours. Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. Turbo tax 1040x 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. Turbo tax 1040x See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. Turbo tax 1040x You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. Turbo tax 1040x The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. Turbo tax 1040x 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. Turbo tax 1040x Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. Turbo tax 1040x   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. Turbo tax 1040x 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). Turbo tax 1040x Participation. Turbo tax 1040x   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. Turbo tax 1040x Work not usually performed by owners. Turbo tax 1040x   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. Turbo tax 1040x The work is not work that is customarily done by the owner of that type of activity. Turbo tax 1040x 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. Turbo tax 1040x Participation as an investor. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x Spouse's participation. Turbo tax 1040x   Your participation in an activity includes your spouse's participation. Turbo tax 1040x 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. Turbo tax 1040x Proof of participation. Turbo tax 1040x You can use any reasonable method to prove your participation in an activity for the year. Turbo tax 1040x You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. Turbo tax 1040x 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. Turbo tax 1040x Limited partners. Turbo tax 1040x   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. Turbo tax 1040x 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. Turbo tax 1040x   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). Turbo tax 1040x Retired or disabled farmer and surviving spouse of a farmer. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x Corporations. Turbo tax 1040x   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. Turbo tax 1040x   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. Turbo tax 1040x See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. Turbo tax 1040x Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. Turbo tax 1040x However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Turbo tax 1040x 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. Turbo tax 1040x See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. Turbo tax 1040x 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). Turbo tax 1040x 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. Turbo tax 1040x Qualifications. Turbo tax 1040x   You qualified as a real estate professional for the year if you met both of the following requirements. Turbo tax 1040x 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. Turbo tax 1040x You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. Turbo tax 1040x However, you can count your spouse's participation in an activity in determining if you materially participated. Turbo tax 1040x Real property trades or businesses. Turbo tax 1040x   A real property trade or business is a trade or business that does any of the following with real property. Turbo tax 1040x Develops or redevelops it. Turbo tax 1040x Constructs or reconstructs it. Turbo tax 1040x Acquires it. Turbo tax 1040x Converts it. Turbo tax 1040x Rents or leases it. Turbo tax 1040x Operates or manages it. Turbo tax 1040x Brokers it. Turbo tax 1040x Closely held corporations. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x Self-charged interest. Turbo tax 1040x   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. Turbo tax 1040x   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. Turbo tax 1040x This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. Turbo tax 1040x   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. Turbo tax 1040x    Exception. Turbo tax 1040x 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. Turbo tax 1040x 469-7(g) to avoid the application of these rules. Turbo tax 1040x For more details on the self-charged interest rules, see Regulations section 1. Turbo tax 1040x 469-7. Turbo tax 1040x 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. Turbo tax 1040x Passive activity income does not include the following items. Turbo tax 1040x Income from an activity that is not a passive activity. Turbo tax 1040x These activities are discussed under Activities That Are Not Passive Activities , earlier. Turbo tax 1040x Portfolio income. Turbo tax 1040x This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. Turbo tax 1040x It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. Turbo tax 1040x The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. Turbo tax 1040x For more information on self-charged interest, see Self-charged interest , earlier. Turbo tax 1040x Personal service income. Turbo tax 1040x 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. Turbo tax 1040x Income from positive section 481 adjustments allocated to activities other than passive activities. Turbo tax 1040x (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. Turbo tax 1040x ) Income or gain from investments of working capital. Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x Any other income that must be treated as nonpassive income. Turbo tax 1040x See Recharacterization of Passive Income , later. Turbo tax 1040x Overall gain from any interest in a publicly traded partnership. Turbo tax 1040x See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. Turbo tax 1040x State, local, and foreign income tax refunds. Turbo tax 1040x Income from a covenant not to compete. Turbo tax 1040x 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. Turbo tax 1040x Alaska Permanent Fund dividends. Turbo tax 1040x 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. Turbo tax 1040x See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. Turbo tax 1040x Disposition of property interests. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x An exception to this general rule may apply if you previously used the property in a different activity. Turbo tax 1040x Exception for more than one use in the preceding 12 months. Turbo tax 1040x   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. Turbo tax 1040x Any gain allocated to a passive activity is passive activity income. Turbo tax 1040x   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. Turbo tax 1040x Exception for substantially appreciated property. Turbo tax 1040x   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. Turbo tax 1040x You used the property in a passive activity for 20% of the time you held your interest in the property. Turbo tax 1040x You used the property in a passive activity for the entire 24-month period before its disposition. Turbo tax 1040x If neither condition applies, the gain is not passive activity income. Turbo tax 1040x 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. Turbo tax 1040x   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. Turbo tax 1040x Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. Turbo tax 1040x   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. Turbo tax 1040x Disposition of property converted to inventory. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x This rule applies only if you meet all of the following conditions. Turbo tax 1040x 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). Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x See Coordination with other limitations on deductions that apply before the passive activity rules , later. Turbo tax 1040x 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. Turbo tax 1040x Exceptions. Turbo tax 1040x   Passive activity deductions do not include the following items. Turbo tax 1040x Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. Turbo tax 1040x Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. Turbo tax 1040x For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. Turbo tax 1040x Losses from dispositions of property that produce portfolio income or property held for investment. Turbo tax 1040x State, local, and foreign income taxes. Turbo tax 1040x Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. Turbo tax 1040x Charitable contribution deductions. Turbo tax 1040x Net operating loss deductions. Turbo tax 1040x Percentage depletion carryovers for oil and gas wells. Turbo tax 1040x Capital loss carrybacks and carryovers. Turbo tax 1040x Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. Turbo tax 1040x See Coordination with other limitations on deductions that apply before the passive activity rules , later. Turbo tax 1040x Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. Turbo tax 1040x Net negative section 481 adjustments allocated to activities other than passive activities. Turbo tax 1040x (Section 481 adjustments are adjustments required due to changes in accounting methods. Turbo tax 1040x ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. Turbo tax 1040x The deduction for the employer-equivalent portion of self-employment tax. Turbo tax 1040x Coordination with other limitations on deductions that apply before the passive activity rules. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x Proration of deductions disallowed under basis limitations. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x Proration of deductions disallowed under at-risk limitation. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x Coordination of basis and at-risk limitations. Turbo tax 1040x   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. Turbo tax 1040x Separately identified items of deduction and loss. Turbo tax 1040x   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. Turbo tax 1040x   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. Turbo tax 1040x See Grouping Your Activities , later. Turbo tax 1040x 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). Turbo tax 1040x See Section 1231 Gains and Losses in Publication 544 for more information. Turbo tax 1040x Are attributable to pre-enactment interests in activities. Turbo tax 1040x See Regulations section 1. Turbo tax 1040x 469-11T(c). Turbo tax 1040x 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. Turbo tax 1040x Grouping is important for a number of reasons. Turbo tax 1040x If you group two activities into one larger activity, you need only show material participation in the activity as a whole. Turbo tax 1040x But if the two activities are separate, you must show material participation in each one. Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. Turbo tax 1040x Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. Turbo tax 1040x You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. Turbo tax 1040x The following factors have the greatest weight in determining whether activities form an appropriate economic unit. Turbo tax 1040x All of the factors do not have to apply to treat more than one activity as a single activity. Turbo tax 1040x 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. Turbo tax 1040x Example 1. Turbo tax 1040x John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. Turbo tax 1040x Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. Turbo tax 1040x 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. Turbo tax 1040x Example 2. Turbo tax 1040x Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. Turbo tax 1040x Betty is also a partner in DEF (a trucking business). Turbo tax 1040x ABC and DEF are under common control. Turbo tax 1040x The main part of DEF's business is transporting goods for ABC. Turbo tax 1040x DEF is the only trucking business in which Betty is involved. Turbo tax 1040x Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. Turbo tax 1040x Consistency and disclosure requirement. Turbo tax 1040x   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. Turbo tax 1040x 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. Turbo tax 1040x   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. Turbo tax 1040x   See Disclosure Requirement , later. Turbo tax 1040x Regrouping by the IRS. Turbo tax 1040x   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. Turbo tax 1040x Rental activities. Turbo tax 1040x   In general, you cannot group a rental activity with a trade or business activity. Turbo tax 1040x 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. Turbo tax 1040x Example. Turbo tax 1040x Herbert and Wilma are married and file a joint return. Turbo tax 1040x Healthy Food, an S corporation, is a grocery store business. Turbo tax 1040x Herbert is Healthy Food's only shareholder. Turbo tax 1040x Plum Tower, an S corporation, owns and rents out the building. Turbo tax 1040x Wilma is Plum Tower's only shareholder. Turbo tax 1040x Plum Tower rents part of its building to Healthy Food. Turbo tax 1040x Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. Turbo tax 1040x Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. Turbo tax 1040x The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). Turbo tax 1040x 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. Turbo tax 1040x Grouping of real and personal property rentals. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x Certain activities may not be grouped. Turbo tax 1040x   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. Turbo tax 1040x Holding, producing, or distributing motion picture films or video tapes. Turbo tax 1040x Farming. Turbo tax 1040x Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). Turbo tax 1040x For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. Turbo tax 1040x Exploring for, or exploiting, oil and gas resources. Turbo tax 1040x Exploring for, or exploiting, geothermal deposits. Turbo tax 1040x   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. Turbo tax 1040x Limited entrepreneur. Turbo tax 1040x   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. Turbo tax 1040x Activities conducted through another entity. Turbo tax 1040x   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. Turbo tax 1040x 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. Turbo tax 1040x    You may not treat activities grouped together by the entity as separate activities. Turbo tax 1040x Personal service and closely held corporations. Turbo tax 1040x   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. Turbo tax 1040x See Material Participation , earlier, and Significant Participation Passive Activities , later. Turbo tax 1040x Publicly traded partnership (PTP). Turbo tax 1040x   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. Turbo tax 1040x Partial dispositions. Turbo tax 1040x   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. Turbo tax 1040x 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. Turbo tax 1040x Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. Turbo tax 1040x You are required to report certain changes to your groupings that occur during the tax year to the IRS. Turbo tax 1040x If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. Turbo tax 1040x 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. Turbo tax 1040x If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. Turbo tax 1040x New grouping. Turbo tax 1040x   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. Turbo tax 1040x The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. Turbo tax 1040x 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. Turbo tax 1040x Addition to an existing grouping. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x Regrouping. Turbo tax 1040x   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. Turbo tax 1040x The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. Turbo tax 1040x 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. Turbo tax 1040x In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. Turbo tax 1040x Groupings by partnerships and S corporations. Turbo tax 1040x   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. Turbo tax 1040x Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. Turbo tax 1040x S. Turbo tax 1040x Return of Partnership Income, or Form 1120S, U. Turbo tax 1040x S. Turbo tax 1040x Income Tax Return for an S Corporation, whichever is applicable. Turbo tax 1040x   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. Turbo tax 1040x   A partner or shareholder may not treat activities grouped together by the entity as separate activities. Turbo tax 1040x Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x 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). Turbo tax 1040x 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. Turbo tax 1040x Instead, enter income or losses on the form and schedules you normally use. Turbo tax 1040x 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. Turbo tax 1040x Limit on recharacterized passive income. Turbo tax 1040x   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. Turbo tax 1040x Investment income and investment expense. Turbo tax 1040x   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. Turbo tax 1040x 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. Turbo tax 1040x 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. Turbo tax 1040x Corporations. Turbo tax 1040x   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. Turbo tax 1040x The corporation is not treated as materially participating in the activity for the year. Turbo tax 1040x 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. Turbo tax 1040x Worksheet A. Turbo tax 1040x   Complete Worksheet A. Turbo tax 1040x Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. Turbo tax 1040x Begin by entering the name of each activity in the left column. Turbo tax 1040x Column (a). Turbo tax 1040x   Enter the number of hours you participated in each activity and total the column. Turbo tax 1040x   If the total is more than 500, do not complete Worksheet A or B. Turbo tax 1040x None of the activities are passive activities because you satisfy test 4 for material participation. Turbo tax 1040x (See Material participation tests , earlier. Turbo tax 1040x ) Report all the income and losses from these activities on the forms and schedules you normally use. Turbo tax 1040x Do not include the income and losses on Form 8582. Turbo tax 1040x Column (b). Turbo tax 1040x   Enter the net loss, if any, from the activity. Turbo tax 1040x 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). Turbo tax 1040x Enter -0- here if the prior year unallowed loss is the same as the current year net income. Turbo tax 1040x Column (c). Turbo tax 1040x   Enter net income (if any) from the activity. Turbo tax 1040x Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. Turbo tax 1040x Column (d). Turbo tax 1040x   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). Turbo tax 1040x If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. Turbo tax 1040x Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88
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Home Office Deduction

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If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes. 

Simplified Option

For taxable years starting on, or after, January 1, 2013 (filed beginning in 2014), you now have a simpler option for computing the business use of your home (IRS Revenue Procedure 2013-13, January 15, 2013). The standard method has some calculation, allocation, and substantiation requirements that are complex and burdensome for small business owners. This new simplified option can significantly reduce recordkeeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.

Regular Method

Taxpayers using the regular method (required for tax years 2012 and prior), instead of the optional method, must determine the actual expenses of their home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.

Requirements to Claim the Deduction

Regardless of the method chosen, there are two basic requirements for your home to qualify as a deduction:

1. Regular and Exclusive Use.

You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.

2. Principal Place of Your Business.

You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.

Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.

Additional tests for employee use. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the tests discussed above plus:

  • Your business use must be for the convenience of your employer, and
  • You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.

If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.

For a full explanation of tax deductions for your home office refer to Publication 587, Business Use of Your Home. In this publication you will find:

  • Requirements for qualifying to deduct expenses (including special rules for storing inventory or product samples).
  • Types of expenses you can deduct.
  • How to figure the deduction (including depreciation of your home).
  • Special rules for daycare providers.
  • Tax implications of selling a home that was used partly for business.
  • Records you should keep
  • Where to deduct your expenses (including Form 8829, Expenses for Business Use of Your Home (PDF), required if you are self-employed and claiming this deduction using the regular method).

The rules in the publication apply to individuals.

Page Last Reviewed or Updated: 03-Feb-2014

The Turbo Tax 1040x

Turbo tax 1040x Index A Assistance (see Tax help) F Free tax services, How To Get Tax Help H Help (see Tax help) High-low method: Introduction, High-low method. Turbo tax 1040x October 1, 2010 (Table 1) (see List of states under October 1, 2010 (High-low method) ) Transition rules, High-low method. Turbo tax 1040x I Internet: Per diem rates, Per diem rates on the Internet. Turbo tax 1040x Introduction, Introduction M More information (see Tax help) O October 1, 2010 (High-low method): Arizona (AZ), Per Diem Rate Tables California (CA), Per Diem Rate Tables Colorado (CO), Per Diem Rate Tables District of Columbia (DC), Per Diem Rate Tables Florida (FL), Per Diem Rate Tables Illinois (IL), Per Diem Rate Tables Maryland (MD), Per Diem Rate Tables Massachusetts (MA), Per Diem Rate Tables New York (NY), Per Diem Rate Tables Pennsylvania (PA), Per Diem Rate Tables Rhode Island (RI), Per Diem Rate Tables Utah (UT), Per Diem Rate Tables Virginia (VA), Per Diem Rate Tables Washington (WA), Per Diem Rate Tables Wyoming (WY), Per Diem Rate Tables P Per diem rates: High-cost localities, High-low method. Turbo tax 1040x High-low method, High-low method. Turbo tax 1040x Internet, Per diem rates on the Internet. Turbo tax 1040x Regular federal method, Regular federal per diem rate method. Turbo tax 1040x Standard rate for unlisted localities, High-low method. Turbo tax 1040x , Regular federal per diem rate method. Turbo tax 1040x Transition rules, High-low method. Turbo tax 1040x , Federal per diem rate method. Turbo tax 1040x Publications (see Tax help) R Regular federal method: Introduction, Regular federal per diem rate method. Turbo tax 1040x Transition rules, Federal per diem rate method. Turbo tax 1040x T Table 2 (High-low method, October 1, 2010), Per Diem Rate Tables Tax help, How To Get Tax Help Taxpayer Advocate, Taxpayer Advocate Service. Turbo tax 1040x Transition rules:, Transition Rules Example: High-low method, High-low method. Turbo tax 1040x Regular federal method, Federal per diem rate method. Turbo tax 1040x High-low method, High-low method. Turbo tax 1040x Regular federal method, Federal per diem rate method. Turbo tax 1040x TTY/TDD information, How To Get Tax Help Prev  Up     Home   More Online Publications