What this line means
Your share of net loss from partnerships and S corporations in which you do not materially participate. Passive losses can only offset passive income — they cannot reduce wages, salaries, or other nonpassive income. If your passive losses exceed your passive income for the year, the excess is suspended and carried forward to future years. The deductible amount is determined on Form 8582.
Does this apply to you?
- You received a Schedule K-1 showing a loss from a partnership where you are a limited partner
- You have a passive investment in a real estate syndication that generated a loss
- You own S corporation shares but do not materially participate in the business, and the entity reported a loss
- You have suspended passive losses from prior years that you are carrying forward
Easy to overlook
Disposition of the entire interest releases all suspended losses When you sell or otherwise dispose of your entire interest in a passive activity in a fully taxable transaction, all suspended passive losses from that activity become deductible in the year of disposition. A partnership investment that generated $40,000 in suspended losses over five years releases all $40,000 when you sell your interest, even if you have no passive income that year. 1 IRS Publication 925 — Passive Activity and At-Risk Rules
Basis and at-risk limitations apply before passive activity rules A passive loss from a partnership is first limited by your tax basis in the partnership. If the loss exceeds your basis, the excess is suspended at the basis level regardless of passive activity rules. Only losses that pass the basis and at-risk tests reach the passive activity limitation on Form 8582. Losses suspended at different levels are tracked separately and released under different rules. 2 IRS Form 8582 instructions — Passive losses from partnerships
Watch out for this
Deducting a passive loss against wages or self-employment income. Passive losses offset passive income only. They do not reduce your W-2 wages, Schedule C business income, or investment income (interest and dividends). The only exception is the $25,000 rental real estate allowance on Schedule E Part I — and that applies only to rental real estate, not to passive losses from partnerships reported here in Part II.
Footnotes
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IRS Publication 925, Passive Activity and At-Risk Rules, Dispositions. https://www.irs.gov/pub/irs-pdf/p925.pdf ↩
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IRS Form 8582 Instructions, Worksheet 1. https://www.irs.gov/instructions/i8582 ↩