Disposition of K-1 Activity

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Disposition of Activity

When a K-1 activity has been disposed of in a taxable sale, all losses suspended in a prior year by the passive loss limitations are freed up. If the activity is sold on an installment sale, the prior year passive losses are allowed prorata over the life of the note. In some cases, it may be beneficial to elect out of the installment method so all prior unallowed losses are allowed in full. How the sale of the activity is reported on Form 8582 "Passive Activity Loss Limitation" depends upon whether or not the activity has an overall gain or an overall loss. Add up the current year income/loss from the activity, suspended passive losses from prior year, and gain/loss from disposition of the activity. If the result is an overall gain, then the activity will be reported on Form 8582 so the income is available to free up losses from other activities. If it is an overall loss, then it should not be included on Form 8582. (See Form 8582 instructions for more information)

Changing ownership of a passive activity through a gift does not trigger the allowance of the prior unallowed passive losses. The prior year unallowed losses increase the basis of the gifted property. If a passive activity changes ownership because of a divorce decree, that is considered a gift, so again the prior unallowed passive losses are not allowed in full.

The allowance of losses suspended in a prior year by at-risk limits is not as clear, but proposed regulation 1.465-66 does specify that losses suspended by at-risk may be allowed in full in the year of disposition.

There does not appear to be any provision for allowing losses suspended by the basis limitations upon disposition of the activity

2005 1065 K-1 instructions

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