What this line means
Your share of nonpassive loss from estates and trusts — losses from activities in which you materially participate or that are classified as nonpassive by the nature of the activity. A nonpassive loss can offset any type of income on your return, including wages, interest, and capital gains. The loss is still limited by your basis in the estate or trust interest.
Does this apply to you?
- You materially participate in a business operated through a trust and the business had a loss
- An estate distributed a loss from a nonpassive trade or business to you
- You are the beneficiary of a grantor trust with a business that generated a loss this year
- Your basis in the trust or estate interest is sufficient to absorb the loss
Easy to overlook
Basis in a trust interest limits the deductible loss Your deductible loss from an estate or trust cannot exceed your basis in the interest. For beneficiaries, basis is generally the amount you paid for the interest (if purchased) or the fair market value at the date of death (if inherited). Beneficiaries who inherited a trust interest often do not know their basis because it was never formally determined. Establish your basis before claiming a loss. 1 IRS Schedule K-1 (Form 1041) instructions — Nonpassive loss reporting
Excess business loss limitations may apply Even nonpassive losses are subject to the excess business loss limitation under Section 461(l). For 2025, excess business losses above $305,000 ($610,000 for married filing jointly) are not deductible in the current year and convert to a net operating loss carryforward. A large nonpassive loss from a trust combined with other business losses can trigger this cap. 2 IRS Schedule E instructions — Line 36
Watch out for this
Confusing a distribution of trust corpus (principal) with a nonpassive loss. A trust can distribute principal to you without it being a loss or income event. Only losses from the trust’s trade or business activities appear on the K-1 as deductible losses. Principal distributions are not reported on Schedule E.
Footnotes
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IRS Schedule K-1 (Form 1041) Instructions, Beneficiary Basis. https://www.irs.gov/instructions/i1041sk1 ↩
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IRS Publication 536, Net Operating Losses, Excess Business Losses. https://www.irs.gov/pub/irs-pdf/p536.pdf ↩