10.12 Form 8582

The purpose of Form 8582 is to assemble in one place items of income and expenses from passive activities in order to determine the effect of the passive loss rules on these items. After this determination, income and allowable deductions are reported as regular income and deductions in appropriate schedules attached to your tax return. For example, net profits of a self-employed person who is not active in the business are reported on Schedule C, sales of capital assets of a passive activity are reported on Form 8949 and Schedule D, your share of partnership income and allowable deductions is reported on Schedule E, and rental income and allowable deductions are reported on Schedule E.

Forms 8949 & Schedule D or Form 4797.

Gains or losses from the sale of assets from a passive activity or from the sale of a partial interest that is less than “substantially all” of your entire interest in a passive activity are reported on Form 8949/Schedule D (capital assets) or on Form 4797 (business property). The gain is also entered on Form 8582. Losses must first be entered on Form 8582 to see how much, if any, is allowable under the passive loss restrictions before an amount can be entered as a loss on Form 8949/Schedule D or Form 4797.

A disposition of an insubstantial part of your interest in the activity does not allow a deduction of suspended passive losses from prior years. When you dispose of your entire interest in a passive activity to a nonrelated party in a fully taxable transaction, your losses for the year plus prior year suspended losses from the activity are fully deductible. The same rule applies to a partial disposition only if you are disposing of substantially all of the activity and you have proof of the current year and prior year suspended losses allocable to the disposed-of portion. You net the gain or loss from the disposition with the net income or loss from current year operations and any prior year suspended passive losses. If the netting gives you an overall gain, you need to file Form 8582 only if you have other passive activities. If you have an overall loss after the netting, you do not file Form 8582.

Schedule E.

If you have a net profit from rental property or other passive activity reported on Schedule E and you also have losses from other passive activities, the income reported on Schedule E is also entered on Form 8582. A net loss from rental activities generally must be entered on Form 8582 but Form 8582 is not needed if you qualify for the full $25,000 allowance (10.2) for rental real estate losses and meet these tests:

If you have a loss from a passive interest in a partnership, trust, estate, or S corporation, you first determine on Form 8582 whether the loss is deductible on Schedule E.

Schedule F.

A passive activity farm loss is entered on Form 8582 to determine the deductible loss. If only part of the loss is allowed, only that portion is claimed on Schedule F. A net profit from passive farm activities is also entered on Form 8582 to offset losses from other passive activities.

Other tax forms.

Other forms tied to Form 8582 are Form 4797 (sale of business assets or equipment), Form 4835 (farm rental income), and Form 4952 (investment interest deductions). For further details see Form 8582; also see IRS Publication 925 for filled-in sample forms.