Page 242 - Individual Forms & Instructions Guide

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
rules for partnerships and Basis rules the activity, or to acquire your interest in Passive Activity Loss Rules
for S corporations, later, in Part II. the activity that are not secured by your The passive activity loss rules may limit
• At-risk rules apply to losses from own property (other than property used the amount of losses you can deduct.
rental real estate or royalties. They also in the activity). However, there is an ex- These rules apply to losses in Parts I, II,
apply to losses from a partnership, S ception for certain nonrecourse financ- and III, and line 40 of Schedule E.
corporation, estate, or trust. See At-Risk ing borrowed by you in connection with
Rules, later, in the General Instructions. the activity of holding real property Losses from passive activities may be
If the loss is from a partnership or S (other than mineral property). See subject first to the at-risk rules. Losses
corporation, also see At-risk rules, later, Qualified nonrecourse financing, later. deductible under the at-risk rules are
in Part II. • Cash, property, or borrowed then subject to the passive activity loss
• Passive activity loss rules apply to amounts used in the activity (or contrib- rules.
losses from rental real estate. They also uted to the activity, or used to acquire
apply to losses from a partnership, S your interest in the activity) that are pro- You can deduct losses from passive
corporation, estate, or trust. See Passive tected against loss by a guarantee, activities in most cases only to the ex-
Activity Loss Rules, later, in the General stop-loss agreement, or other similar ar- tent of income from passive activities.
Instructions. If the loss is from a rangement (excluding casualty insurance An exception for certain rental real es-
partnership or S corporation, also see and insurance against tort liability). tate activities (explained later) may ap-
Passive activity loss rules, later, in Part • Amounts borrowed for use in the ply.
II. activity from a person who has an inter-
• Excess business loss rules apply to est in the activity (other than as a cred- Passive Activity
losses from all noncorporate trades or itor) or who is related under section A passive activity is any business activi-
businesses. This loss limitation is 465(b)(3)(C) to a person (other than ty in which you did not materially par-
figured using Form 461 after you you) having such an interest. ticipate and any rental activity, except as
complete your Schedule E. Any Qualified nonrecourse financing. explained later. If you are a limited part-
limitation to your loss resulting from Qualified nonrecourse financing is trea- ner, in most cases, you are not treated as
these rules will not be reflected on your ted as an amount at risk if it is secured having materially participated in the
Schedule E. Instead, it will be included by real property used in an activity of partnership's activities for the year.
as income on Schedule 1 (Form 1040), holding real property subject to the
line 8p, and treated as a net operating at-risk rules. Qualified nonrecourse fi- The rental of real or personal proper-
loss that must be carried forward and nancing is financing for which no one is ty is a rental activity under the passive
deducted in a subsequent year. These personally liable for repayment and is: activity loss rules in most cases, but ex-
rules also apply to losses from a • Borrowed by you in connection ceptions apply. If your rental of property
partnership or S corporation. with the activity of holding real property is not treated as a rental activity, you
must determine whether it is a trade or
At-Risk Rules (other than mineral property); business activity and, if so, whether you
• Not convertible from a debt obli-
In most cases, you must complete Form gation to an ownership interest; and materially participated in the activity for
6198 to figure your loss if you have: • Loaned or guaranteed by any fed- the tax year.
• A loss from an activity carried on eral, state, or local government, or bor- See the Instructions for Form 8582 to
as a trade or business or for the produc- rowed by you from a qualified person. determine whether you materially par-
tion of income, and ticipated in the activity and for the defi-
• Amounts in the activity for which Qualified person. A qualified person nition of “rental activity.”
you are not at risk. is a person who actively and regularly See Pub. 925 for special rules that ap-
engages in the business of lending mon-
The at-risk rules in most cases limit ey, such as a bank or savings and loan ply to rentals of:
the amount of loss (including loss on the association. A qualified person cannot • Substantially nondepreciable prop-
disposition of assets) you can claim to be: erty,
the amount you could actually lose in • Related to you (unless the nonre- • Property incidental to development
the activity. However, the at-risk rules course financing obtained is commer- activities, and
do not apply to losses from an activity of cially reasonable and on substantially • Property related to activities in
holding real property placed in service the same terms as loans involving unre- which you materially participate.
before 1987. They also do not apply to lated persons),
losses from your interest acquired before • The seller of the property (or a per- Activities That Are Not Passive
1987 in a pass-through entity engaged in son related to the seller), or Activities
such activity. The activity of holding • A person who receives a fee due to
mineral property does not qualify for your investment in real property (or a Activities of real estate professionals.
this exception. person related to that person). If you were a real estate professional for
2022, any rental real estate activity in
In most cases, you are not at risk for More information. For more details which you materially participated is not
amounts such as the following. about the at-risk rules, see the Instruc- a passive activity. You were a real estate
• Nonrecourse loans used to finance tions for Form 6198 and Pub. 925. professional for the year only if you met
the activity, to acquire property used in both of the following conditions.

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