What this line means
The portion of your suspended passive activity losses and credit carryovers that is reduced because you excluded canceled debt from income. Passive activity losses are reduced dollar-for-dollar. This is the sixth attribute in the Section 108(b)(2) reduction order — after NOLs, credits, capital losses, and property basis have been reduced first.
Does this apply to you?
- You excluded canceled debt from income and still have remaining excluded debt after reducing attributes on lines 4 through 8
- You have suspended passive activity losses from rental properties or limited partnerships
- You have passive activity credit carryovers that you could not use because of the passive activity rules
- You did not elect to reduce depreciable property basis first on line 10b
Easy to overlook
Suspended passive losses from rental real estate are common targets Most individual filers with passive losses have them from rental properties where the $25,000 special allowance phased out due to high income. These accumulated suspended losses were supposed to offset income when the property was sold. A debt cancellation that reaches line 9 erases those suspended losses, eliminating the tax benefit you expected at disposition. 1 IRS Form 982 Instructions — Line 9
Passive activity credits are reduced at 33.33 cents per dollar, not dollar-for-dollar While passive activity losses are reduced dollar-for-dollar, passive activity credit carryovers follow the same 33.33 cents per dollar rate as other credits on lines 5 and 6. The Form 982 instructions distinguish between the two. If you have both suspended passive losses and passive credits, apply the loss reduction first, then the credit reduction at the reduced rate. 2 IRS Publication 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments
Watch out for this
Assuming your passive losses are safe because basis reduction on line 8 will absorb everything. If your property basis is small or has already been fully reduced, the remaining excluded debt flows to line 9 and hits your passive losses. Filers with heavily depreciated rental properties often have low basis but large suspended passive losses, making this line surprisingly significant.
Footnotes
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IRS Form 982 Instructions, Line 9. https://www.irs.gov/instructions/i982 ↩
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IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, Chapter 1. https://www.irs.gov/pub/irs-pdf/p4681.pdf ↩