Schedule SE 1040 Self-Employment Tax

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I.R.S. SPECIFICATIONS
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FORM 8582-CR, PAGE 1 of 2
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8582-CR

Date

Revised proofs
requested

OMB No. 1545-1034

2006

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Signature

O.K. to print

Passive Activity Credit Limitations

Department of the Treasury
Internal Revenue Service

Part I

Action

©

See separate instructions.

Attachment
Sequence No.

Attach to Form 1040 or 1041.

89

Identifying number

2006 Passive Activity Credits

Caution: If you have credits from a publicly traded partnership, see Publicly Traded Partnerships (PTPs) on page 15
of the instructions.
Credits From Rental Real Estate Activities With Active Participation (Other Than Rehabilitation
Credits and Low-Income Housing Credits) (See Lines 1a through 1c on page 9.)
1a Credits from Worksheet 1, column (a)

1a

b Prior year unallowed credits from Worksheet 1, column (b)

1b

c Add lines 1a and 1b
Rehabilitation Credits From Rental Real Estate Activities (See Lines 2a through 2c on page 9.)
2a Credits from Worksheet 2, column (a)

2a

b Prior year unallowed credits from Worksheet 2, column (b)

2b

c Add lines 2a and 2b
Low-Income Housing Credits (See Lines 3a through 3c on page 9.)

2c

3a
Credits from Worksheet 3, column (a)
3b
Prior year unallowed credits from Worksheet 3, column (b)
Add lines 3a and 3b
Other Passive Activity Credits (See Lines 4a through 4c on page 9.)
4a
4a Credits from Worksheet 4, column (a)
4b
b Prior year unallowed credits from Worksheet 4, column (b)
c Add lines 4a and 4b
3a
b
c
All

3c

5 Add lines 1c, 2c, 3c, and 4c
6 Enter the tax attributable to net passive income (see page 9)
7 Subtract line 6 from line 5. If line 6 is more than or equal to line 5, enter -0- and see page 10
Note: If your filing status is married filing separately and you lived with your spouse at any time
during the year, do not complete Part II, III, or IV. Instead, go to line 37.

Part II

1c

4c
5
6
7

Special Allowance for Rental Real Estate Activities With Active Participation
Note: Complete this part only if you have an amount on line 1c. Otherwise, go to Part IIl.

8
9

Enter the smaller of line 1c or line 7
Enter $150,000. If married filing separately, see page 10

Enter modified adjusted gross income, but not less than zero (see
page 10). If line 10 is equal to or more than line 9, skip lines 11 through
15 and enter -0- on line 16
11 Subtract line 10 from line 9
12 Multiply line 11 by 50% (.50). Do not enter more than $25,000. If
married filing separately, see page 11
13a Enter the amount, if any, from line 10 of
13a
Form 8582

8
9

10

b Enter the amount, if any, from line 14 of
Form 8582
c Add lines 13a and 13b

10
11
12

13b

14
15

Subtract line 13c from line 12
Enter the tax attributable to the amount on line 14 (see page 11)

16

Enter the smaller of line 8 or line 15

For Paperwork Reduction Act Notice, see page 16 of the instructions.

13c
14
15
16
Cat. No. 64641R

Form

8582-CR

(2006)

2
I.R.S. SPECIFICATIONS
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FORM 8582-CR, PAGE 2 of 2
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Form 8582-CR (2006)

Part III

Page

2

Special Allowance for Rehabilitation Credits From Rental Real Estate Activities

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Note: Complete this part only if you have an amount on line 2c. Otherwise, go to Part IV.
17 Enter the amount from line 7
18 Enter the amount from line 16
19 Subtract line 18 from line 17. If zero, enter -0- here and on lines 30 and 36, and then go to
Part V
20 Enter the smaller of line 2c or line 19
21 Enter $250,000. If married filing separately, see page 12. (See page 12
21
to find out if you can skip lines 21 through 26.)
22 Enter modified adjusted gross income, but not less than zero. (See
instructions for line 10 on page 10.) If line 22 is equal to or more than
line 21, skip lines 23 through 29 and enter -0- on line 30
23 Subtract line 22 from line 21
24 Multiply line 23 by 50% (.50). Do not enter more than $25,000. If married
filing separately, see page 12
25a Enter the amount, if any, from line 10 of
25a
Form 8582
b Enter the amount, if any, from line 14 of
25b
Form 8582
26
27
28
29

c Add lines 25a and 25b
Subtract line 25c from line 24
Enter the tax attributable to the amount on line 26 (see page 12)
Enter the amount, if any, from line 18
Subtract line 28 from line 27

19
20

22
23
24

25c
26
27
28

29

30 Enter the smaller of line 20 or line 29

Part IV

17
18

30

Special Allowance for Low-Income Housing Credits
Note: Complete this part only if you have an amount on line 3c. Otherwise, go to Part V.

31
32
33
34
35

If you completed Part III, enter the amount from line 19. Otherwise, subtract line 16 from line 7
Enter the amount from line 30
Subtract line 32 from line 31. If zero, enter -0- here and on line 36
Enter the smaller of line 3c or line 33
Tax attributable to the remaining special allowance (see page 12)

36 Enter the smaller of line 34 or line 35

Part V

36

Passive Activity Credit Allowed

37 Passive Activity Credit Allowed. Add lines 6, 16, 30, and 36. See page 12 to find out how to
report the allowed credit on your tax return and how to allocate allowed and unallowed credits if
you have more than one credit or credits from more than one activity. If you have any credits from
a publicly traded partnership, see Publicly Traded Partnerships (PTPs) on page 15

Part VI

31
32
33
34
35

37

Election To Increase Basis of Credit Property

38 If you disposed of your entire interest in a passive activity or former passive activity in a fully taxable transaction, and you
elect to increase your basis in credit property used in that activity by the unallowed credit that reduced your basis in the
©
property, check this box. See page 16
39 Name of passive activity disposed of ©
40 Description of the credit property for which the election is being made ©
41 Amount of unallowed credit that reduced your basis in the property
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Form

8582-CR

(2006)

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Page 1 of 16

Instructions for Form 8582-CR

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2005

Department of the Treasury
Internal Revenue Service

Instructions for Form
8582-CR
Passive Activity Credit Limitations

General Instructions
Section references are to the Internal
Revenue Code unless otherwise
noted.

Purpose of Form
Form 8582-CR is used by
noncorporate taxpayers to figure the
amount of any passive activity credit
(PAC) for the current tax year
(including any prior year unallowed
credits) and the amount of credit
allowed for the current year. It also is
used to make the election to increase
the basis of credit property when a
taxpayer disposes of his or her
interest in an activity.
PACs that are not allowed in the
current year are carried forward until
they are allowed against the tax on
either net passive income or the
special allowance, if applicable.
Different rules apply to your
activities and the related credit,
depending on the type of activity.
Generally, passive activities include:
• Trade or business activities in
which you did not materially
participate for the tax year.
• Rental activities, regardless of your
participation.
See Trade or Business Activities
on page 3 and Rental Activities on
page 2.
For more information, see Pub.
925, Passive Activity and At-Risk
Rules.
Note. Corporations subject to the
passive activity rules must use Form
8810, Corporate Passive Activity
Loss and Credit Limitations.

Who Must File
Form 8582-CR is filed by individuals,
estates, and trusts with any of the
following credits from passive
activities.
• Investment credit (including the
rehabilitation credit and energy
credit).
• Work opportunity credit.
• Welfare-to-work credit.
• Credit for alcohol used as fuel.

• Credit for increasing research

activities.
• Low-income housing credit.
• Enhanced oil recovery credit.
• Disabled access credit.
• Renewable electricity, refined coal,
and Indian coal production credit.
• Empowerment zone and renewal
community employment credit.
• Indian employment credit.
• Credit for employer social security
and Medicare taxes paid on certain
employee tips.
• Orphan drug credit.
• Credit for small employer pension
plan startup costs.
• Credit for employer-provided child
care facilities and services.
• Nonconventional source fuel credit.
• Qualified electric vehicle credit.
• Railroad track maintenance credit.
• Biodiesel fuels credit.
• Low sulfur diesel fuel production
credit.
• Distilled spirits credit.
• Energy efficient home credit.
• Alternative motor vehicle credit.
• Alternative fuel vehicle refueling
property credit.
• Hurricane Katrina employee
retention credit.
• General credits from electing large
partnerships.

Overview of Form
The form contains six parts. The
Specific Instructions, starting on page
9, include, at the beginning of the
instructions for each part, a brief
explanation of the purpose or use of
that part. These explanations give a
general overview of how the form
works.
Also, as you read the instructions
that follow, see Example of How To
Complete Form 8582-CR, beginning
on page 5. The example goes
through a six-step analysis of how the
form and worksheets are completed
for a partner in a limited partnership
that has a low-income housing credit.
Cat. No. 64649B

Activities That Are Not
Passive Activities
The following are not passive
activities.
1. Trade or business activities in
which you materially participated for
the tax year.
2. Any rental real estate activity in
which you materially participated if
you were a “real estate professional”
for the tax year. You were a real
estate professional only if:
a. More than half of the personal
services you performed in trades or
businesses during the tax year were
performed in real property trades or
businesses in which you materially
participated, and
b. You performed more than 750
hours of services during the tax year
in real property trades or businesses
in which you materially participated.
For purposes of item (2), each
interest in rental real estate is a
separate activity unless you elect to
treat all interests in rental real estate
as one activity.
If you are married filing jointly, one
spouse must separately meet both
(2)(a) and (2)(b) without taking into
account services performed by the
other spouse.
A real property trade or business is
any real property development,
redevelopment, construction,
reconstruction, acquisition,
conversion, rental, operation,
management, leasing, or brokerage
trade or business.
Services you performed as an
employee are not treated as
performed in a real property trade or
business unless you owned more
than 5% of the stock (or more than
5% of the capital or profits interest) in
the employer.
3. A working interest in an oil or
gas well. Your working interest must
be held directly or through an entity
that does not limit your liability (such
as a general partner interest in a
partnership). In this case, it does not
matter whether you materially

Page 2 of 16

Instructions for Form 8582-CR

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participated in the activity for the tax
year.
If, however, 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), some of
your income and losses from the
working interest may be treated as
passive activity gross income and
passive activity deductions. See
Temporary Regulations section
1.469-1T(e)(4)(ii).
4. The rental of a dwelling unit you
used as a residence if section
280A(c)(5) applies. This section
applies if you rented out a dwelling
unit that you also used as a home
during the year for a number of days
that exceeds the greater of 14 days
or 10% of the number of days during
the year that the home was rented at
a fair rental.
5. An activity of trading personal
property for the account of owners of
interests in the activity. For purposes
of this rule, personal property means
property that is actively traded, such
as stocks, bonds, and other
securities. See Temporary
Regulations section 1.469-1T(e)(6).
Generally, credits from these
activities are not entered on Form
8582-CR. However, credits from
these activities may be subject to
limitations other than the passive
credit limitation rules.

Rental Activities
A rental activity is a passive activity
even if you materially participated in
the activity (unless it is a rental real
estate activity in which you materially
participated and you were a real
estate professional).
However, if you meet any of the
five exceptions listed below, the
rental of the property is not treated as
a rental activity. See Reporting
Credits From the Activities on this
page if you meet any of the
exceptions.
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. It does not matter whether
the use is under a lease, a service
contract, or some other arrangement.

Exceptions
An activity is not a rental activity if
any of the following exceptions are
met.

1. The average period of customer
use is:
a. 7 days or less, or
b. 30 days or less and significant
personal services (see below) were
provided in making the rental property
available for customer use.
Figure the average period of
customer use for a class of property
by dividing the total number of days in
all rental periods by the number of
rentals during the tax year. If the
activity involves renting more than
one class of property, multiply the
average period of customer use of
each class by the ratio of the gross
rental income from that class to the
activity’s total gross rental income.
The activity’s average period of
customer use equals the sum of
these class-by-class average periods
weighted by gross income. See
Regulations section 1.469-1(e)(3)(iii).
Significant personal services
include only services performed by
individuals. To determine if personal
services are significant, all relevant
facts and circumstances are
considered. Facts and circumstances
include 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.
2. Extraordinary personal services
were provided in making the rental
property available for customer use.
This applies only if the services are
performed by individuals and the
customers’ use of the rental property
is incidental to their receipt of the
services.
3. Rental of the property is
incidental to a nonrental activity.
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 is less than 2%
of the smaller of the unadjusted basis
or the fair market value (FMV) of the
property.
Unadjusted basis is the cost of the
property without regard to
depreciation deductions or any other
basis adjustment described in section
1016.
The rental of property is incidental
to a trade or business activity if:
a. You own an interest in the trade
or business activity during the tax
year,
b. The rental property was mainly
used in the trade or business activity
during the tax year or during at least
2 of the 5 preceding tax years, and
c. The gross rental income from
the property is less than 2% of the
-2-

smaller of the unadjusted basis or the
FMV of the property.
Lodging provided for the
employer’s convenience to an
employee or the employee’s spouse
or dependents is incidental to the
activity or activities in which the
employee performs services.
4. You customarily make the
rental property available during
defined business hours for
nonexclusive use by various
customers.
5. You provide property for use in
a nonrental activity of a partnership, S
corporation, or joint venture in your
capacity as an owner of an interest in
the partnership, S corporation, or joint
venture.

Reporting Credits
From the Activities
If an activity meets any of the five
exceptions listed above, it is not a
rental activity. You must then
determine:
1. Whether your rental of the
property is a trade or business activity
(see Trade or Business Activities on
page 3) and, if so,
2. Whether you materially
participated in the activity for the tax
year (see Material Participation
beginning on page 3).

• If the activity is a trade or business

activity in which you did not materially
participate, enter the credits from the
activity on Worksheet 4 on page 11.
• If the activity is a trade or business
activity in which you did materially
participate, report the credits from the
activity on the forms you normally
use.
If the rental activity did not meet
any of the five exceptions, it is
generally a passive activity. Special
rules apply if you conduct the rental
activity through a publicly traded
partnership (PTP). See Publicly
Traded Partnerships (PTPs) on page
15.
If the rental activity is not
conducted through a PTP, the
passive rental activity is entered in
Worksheet 1, 2, 3, or 4 on pages 10
and 11.
Worksheet 1 is for credits (other
than rehabilitation credits and
low-income housing credits) from
passive rental real estate activities in
which you actively participated. See
Special Allowance for Rental Real
Estate Activities on page 3.
Worksheet 2 is for rehabilitation
credits from passive rental real estate
activities and low-income housing
credits for property placed in service

Page 3 of 16

Instructions for Form 8582-CR

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before 1990. This worksheet is also
used for low-income housing credits
from a partnership, S corporation, or
other pass-through entity if your
interest in the pass-through entity
was acquired before 1990, regardless
of the date the property was placed in
service.
Worksheet 3 is for low-income
housing credits for property placed in
service after 1989 (unless held
through a pass-through entity in
which you acquired your interest
before 1990).
Worksheet 4 is for credits from
passive trade or business activities in
which you did not materially
participate and passive rental real
estate activities in which you did not
actively participate (but not
rehabilitation credits from passive
rental real estate activities or
low-income housing credits).

Special Allowance for
Rental Real Estate Activities
If you actively participated in a
passive rental real estate activity, you
may be able to claim credits from the
activity for the tax attributable to a
special allowance of up to $25,000,
reduced by any passive losses,
including the commercial
revitalization deduction, allowed
under this exception on Form 8582,
Passive Activity Loss Limitations.
The special allowance also applies
to low-income housing credits and
rehabilitation credits from a rental real
estate activity, even if you did not
actively participate in the activity. The
credits allowed under the special
allowance are in addition to the
credits allowed for the tax attributable
to net passive income.
The special allowance is not
available if you were married at the
end of the year, are filing a separate
return for the year, and lived with your
spouse at any time during the year.
Only an individual, a qualifying
estate, or a qualified revocable trust
that made an election to treat the
trust as part of the decedent’s estate
may actively participate in a rental
real estate activity. Unless future
regulations provide an exception,
limited partners are not treated as
actively participating in a
partnership’s rental real estate
activity.
A qualifying estate is the estate of
a decedent for tax years ending less
than 2 years after the date of the
decedent’s death if the decedent
would have satisfied the active
participation requirements for the
rental real estate activity for the tax
year the decedent died.

A qualified revocable trust may
elect to be treated as part of a
decedent’s estate for purposes of the
special allowance for active
participation in rental real estate
activities. The election must be made
by both the executor (if any) of the
decedent’s estate and the trustee of
the revocable trust. For details, see
Regulations section 1.645-1.
You are not considered to actively
participate in a rental real estate
activity if at any time during the tax
year your interest (including your
spouse’s interest) in the activity was
less than 10% (by value) of all
interests in the activity.
Active participation is a less
stringent requirement than material
participation (see Material
Participation on this page). You may
be treated as actively participating if,
for example, you participated in
making management decisions or
arranging for others to provide
services (such as repairs) in a
significant and bona fide sense.
Management decisions that may
count as active participation include:
• Approving new tenants,
• Deciding on rental terms,
• Approving capital or repair
expenditures, and
• Other similar decisions.
The maximum special allowance
is:
• $25,000 for single individuals and
married individuals filing a joint return
for the tax year.
• $12,500 for married individuals
who file separate returns for the tax
year and who lived apart from their
spouses at all times during the tax
year.
• $25,000 for a qualifying estate
reduced by the special allowance for
which the surviving spouse qualified.
Modified adjusted gross income
limitation. If your modified adjusted
gross income (defined in the
instructions for line 10 beginning on
page 10) is $100,000 or less
($50,000 or less if married filing
separately), figure your credits based
on the amount of the maximum
special allowance referred to in the
preceding paragraph.
If your modified adjusted gross
income is more than $100,000
($50,000 if married filing separately)
but less than $150,000 ($75,000 if
married filing separately), your
special allowance is limited to 50% of
the difference between $150,000
($75,000 if married filing separately)
and your modified adjusted gross
income.
Generally, if your modified
adjusted gross income is $150,000 or
-3-

more ($75,000 or more if married
filing separately), there is no special
allowance.
However, for low-income housing
credits for property placed in service
before 1990 and for rehabilitation
credits, the limits on modified
adjusted gross income are increased.
If your modified adjusted gross
income is more than $200,000
($100,000 if married filing separately)
but less than $250,000 ($125,000 if
married filing separately), your
special allowance is limited to 50% of
the difference between $250,000
($125,000 if married filing separately)
and your modified adjusted gross
income.
If your modified adjusted gross
income is $250,000 or more
($125,000 or more if married filing
separately), there is no special
allowance.
No modified adjusted gross
income limitation applies when
figuring the special allowance for
low-income housing credits for
property placed in service after 1989
(other than from a pass-through entity
in which you acquired your interest
before 1990).

Trade or Business
Activities
A trade or business activity is an
activity (other than a rental activity or
an activity treated as incidental to an
activity of holding property for
investment) that:
1. Involves the conduct of a trade
or business (within the meaning of
section 162),
2. Is conducted in anticipation of
starting a trade or business, or
3. Involves research or
experimental expenditures deductible
under section 174 (or that would be if
you chose to deduct rather than
capitalize them).

Reporting Credits
From the Activities
Trade or business activities with
material participation. If you
materially participated in a trade or
business activity, the activity is not a
passive activity. Report the credits
from the activity on the forms you
normally use.
Trade or business activities
without material participation. If
you did not materially participate in a
trade or business activity, the activity
is a passive activity. Generally, you
must use Worksheet 4 on page 11 to
figure the amount to enter on Form
8582-CR for each trade or business

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Instructions for Form 8582-CR

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activity in which you did not materially
participate. However, if you held the
activity through a PTP, special rules
apply. See Publicly Traded
Partnerships (PTPs) on page 15.

Material Participation
For the material participation tests
that follow, participation generally
includes any work done in connection
with an activity if you owned an
interest in the activity at the time you
did the work. The capacity in which
you did the work does not matter.
However, work is not participation if:
• It is not work that an owner would
customarily do in the same type of
activity, and
• One of your main reasons for doing
the work was to avoid the
disallowance of losses or credits from
the activity under the passive activity
rules.
Proof of participation. You may
prove your participation in an activity
by any reasonable means. You do
not have to maintain
contemporaneous daily time reports,
logs, or similar documents if you can
establish your participation by other
reasonable means. For this purpose,
reasonable means include, but are
not limited to, identifying services
performed over a period of time and
the approximate number of hours
spent performing the services during
that period, based on appointment
books, calendars, or narrative
summaries.
Tests for individuals. You
materially participated for the tax year
in an activity if you satisfy at least one
of the following tests.
1. You participated in the activity
for more than 500 hours.
2. Your participation in the activity
for the tax year was substantially all
of the participation in the activity of all
individuals (including individuals who
did not own any interest in the
activity) for the year.
3. 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.
4. The activity is a significant
participation activity for the tax year,
and you participated in all significant
participation activities during the year
for more than 500 hours.
A significant participation activity
is any trade or business activity in
which you participated for more than
100 hours during the year and in
which you did not materially
participate under any of the material

participation tests (other than this
fourth test).
5. You materially participated in
the activity for any 5 (whether or not
consecutive) of the 10 immediately
preceding tax years.
6. The activity is a personal
service activity in which you
materially participated for any 3
(whether or not consecutive)
preceding tax years.
An activity is a personal service
activity if it involves the performance
of personal services in the fields of
health, law, engineering, architecture,
accounting, actuarial science,
performing arts, consulting, or in any
other trade or business in which
capital is not a material incomeproducing factor.
7. Based on all the facts and
circumstances, you participated in the
activity on a regular, continuous, and
substantial basis during the tax year.
You did not materially participate in
the activity under this seventh test,
however, if you participated in the
activity for 100 hours or less during
the tax year.
Your participation in managing the
activity does not count in determining
whether you materially participated
under this test if:
a. Any person (except you)
received compensation for performing
services in the management of the
activity, or
b. Any individual spent more
hours during the tax year performing
services in the management of the
activity than you did (regardless of
whether the individual was
compensated for the management
services).
Test for a spouse. Participation by
your spouse during the tax year in an
activity you own may be counted as
your participation in the activity, even
if your spouse did not own an interest
in the activity and whether or not you
and your spouse file a joint return for
the tax year.
Test for investors. Work done as an
investor in an activity is not treated as
participation unless you were directly
involved in the day-to-day
management or operations of the
activity. For purposes of this test,
work done as an investor includes:
1. Studying and reviewing
financial statements or reports on
operations of the activity,
2. Preparing or compiling
summaries or analyses of the
finances or operations of the activity
for your own use, and
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3. Monitoring the finances or
operations of the activity in a
nonmanagerial capacity.
Special rules for limited partners.
If you were a limited partner in an
activity, you generally did not
materially participate in the activity.
You did materially participate in the
activity, however, if you met material
participation test 1, 5, or 6 (see Tests
for individuals) for the tax year.
However, for purposes of the
material participation tests, you are
not treated as a limited partner 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 the portion of the partnership’s
tax year in which you directly or
indirectly owned your limited partner
interest).
A limited partner’s share of an
electing large partnership’s taxable
income or loss from all trade or
business and rental activities is
treated as income or loss from the
conduct of a single passive trade or
business activity.
Special rules for certain retired or
disabled farmers and surviving
spouses of farmers. Certain retired
or disabled farmers and surviving
spouses of farmers 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.
See Temporary Regulations section
1.469-5T(h)(2).
Estates and trusts. The PAC
limitations apply to an estate or trust.
See Temporary Regulations sections
1.469-1T(b)(2) and (3). The rules for
determining material participation for
this purpose have not yet been
issued.

Grouping of Activities
Generally, one or more trade or
business activities or rental activities
may be treated as a single activity if
the activities make up an appropriate
economic unit for the measurement of
gain or loss under the passive activity
rules.
Whether activities make up an
appropriate economic unit depends
on all the relevant facts and
circumstances. The factors given the
greatest weight in determining
whether activities make up an
appropriate economic unit are:
1. Similarities and differences in
types of trades or businesses,
2. The extent of common control,

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Instructions for Form 8582-CR

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

3. The extent of common
ownership,
4. Geographical location, and
5. Interdependencies between or
among the activities.
Example. You have a significant
ownership interest in a bakery and a
movie theater in Baltimore and in a
bakery and a movie theater in
Philadelphia. Depending on all the
relevant facts and circumstances,
there may be more than one
reasonable method for grouping your
activities. For instance, the following
groupings may or may not be
permissible.
• A single activity.
• A movie theater activity and a
bakery activity.
• A Baltimore activity and a
Philadelphia activity.
• Four separate activities.
Once you choose a grouping
under these rules, you must continue
using that grouping in later tax years
unless a material change in the facts
and circumstances makes it clearly
inappropriate.
The IRS may regroup your
activities if your grouping fails to
reflect one or more appropriate
economic units and one of the
primary purposes of your grouping is
to avoid the passive activity
limitations.
Limitation on grouping certain
activities. The following activities
may not be grouped together.
1. A rental activity with a trade or
business activity unless the activities
being grouped together make up an
appropriate economic unit and:
a. The rental activity is
insubstantial relative to the trade or
business activity or vice versa, or
b. Each owner of the trade or
business activity has the same

proportionate ownership interest in
the rental activity. If so, the portion of
the rental activity involving the rental
of property used in the trade or
business activity may be grouped
with the trade or business activity.
2. An activity involving the rental
of real property with an activity
involving the rental of personal
property (except personal property
provided in connection with the real
property or vice versa).
3. Any activity with another activity
in a different type of business and in
which you hold an interest as a
limited partner or as a limited
entrepreneur (as defined in section
464(e)(2)), if that other activity
engages in holding, producing, or
distributing motion picture films or
videotapes; farming; leasing section
1245 property; or exploring for (or
exploiting) oil and gas resources or
geothermal deposits.
Activities conducted through
partnerships, S corporations, and
C corporations subject to section
469. Once a partnership or
corporation determines its activities
under these rules, a partner or
shareholder may use these rules to
group those activities with:
• Each other,
• Activities conducted directly by the
partner or shareholder, or
• Activities conducted through other
partnerships and corporations.
A partner or shareholder may not
treat as separate activities those
activities grouped together by the
partnership or corporation.
Partial disposition of an activity.
You may treat the disposition of
substantially all of an activity as a
separate activity if you can prove with
reasonable certainty:

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1. The prior year unallowed
losses, if any, allocable to the part of
the activity disposed of, and
2. The net income or loss for the
year of disposition allocable to the
part of the activity disposed of.

Dispositions
Unallowed PACs, unlike unallowed
passive activity losses, are not
allowed when you dispose of your
interest in an activity. However, you
may elect to increase the basis of the
credit property by the amount of the
original basis reduction of the
property to the extent that the credit
has not been allowed under the
passive activity rules. Unallowed
PACs that are not used to increase
the basis of the credit property are
carried forward until they are allowed.
To make the election, complete Form
8582-CR, Part VI. No basis
adjustment may be elected on a
partial disposition of your interest in a
passive activity.

Example of How To
Complete Form 8582-CR
In 2005, John Jones purchased an
interest as a limited partner in
Partnership A. Mr. Jones is married
and files a joint return. During 2005,
the partnership placed in service a
residential rental building that
qualified for the low-income housing
credit.
• Mr. Jones received a Schedule K-1
from the partnership. The low-income
housing credit ($12,000) is shown on
Schedule K-1 (Form 1065), box 15,
with code B.
• Mr. Jones’ net passive income for
2005 is zero.