What this line means
Your share of passive loss from estates and trusts — losses from activities in which you do not materially participate. Like passive losses from partnerships, these losses can only offset passive income from other sources. If your total passive losses exceed total passive income for the year, the excess is suspended and carried forward. The deductible amount is calculated on Form 8582.
Does this apply to you?
- You received a K-1 (Form 1041) showing a loss from a trust’s passive activity
- An estate distributed a loss from rental property or a passive business to you
- You have passive income from other sources that can absorb trust passive losses
- You have suspended passive losses from prior-year trust distributions
Easy to overlook
Termination of an estate releases accumulated suspended losses When an estate completes administration and distributes its final assets, any suspended passive losses from that estate become deductible on the beneficiary’s return in the year of final distribution. This mirrors the rule for disposing of a passive activity interest — full release of all accumulated suspended losses. 1 IRS Publication 925 — Passive Activity and At-Risk Rules
Trust passive losses flow through with their character intact A loss from a rental activity within a trust retains its rental character when distributed to you. This means it is subject to both the passive activity rules and the rental real estate loss rules. If you also have rental losses from Schedule E Part I, the combined rental losses are subject to the same $25,000 active participation allowance. The trust’s rental loss does not get a separate $25,000 allowance. 2 IRS Form 8582 instructions — Estate and trust passive losses
Watch out for this
Deducting a passive loss from a trust against your wages or business income. The passive activity rules apply to beneficiaries the same way they apply to individuals with direct investments. A passive loss from a trust cannot offset nonpassive income unless you have passive income from another source to absorb it or you dispose of the entire interest in the activity.
Footnotes
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IRS Publication 925, Passive Activity and At-Risk Rules, Estate Termination. https://www.irs.gov/pub/irs-pdf/p925.pdf ↩
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IRS Form 8582 Instructions, Rental Activities from Estates and Trusts. https://www.irs.gov/instructions/i8582 ↩