Example.
Example. An individual has a $5,000 passive activity loss for a taxable year, all of which is disallowed under paragraph (a)(1) of this section. All of the disallowed loss is allocated under paragraph (f) of this section to activities that are trades or businesses (within the meaning of section 1402(c)). Such loss is not taken into account for the taxable year in computing the taxpayer's taxable income subject to tax under section 1. In addition, under this paragraph (d)(3), such loss is not taken into account for the taxable year in computing the taxpayer's net earnings from self-employment subject to tax under section 1401.
Example. A partnership is a trader of stocks, bonds, and other securities (within the meaning of section 1236(c)). The capital employed by the partnership in the trading activity consists of amounts contributed by the partners in exchange for their partnership interests, and funds borrowed by the partnership. The partnership derives gross income from the activity in the form of interest, dividends, and capital gains. Under these facts, the partnership is treated as conducting an activity of trading personal property for the account of its partners. Accordingly, under this paragraph (e)(6), the activity is not a passive activity.
A | B | C | Total | |
Gross income | $7,000 | $4,000 | $12,000 | $23,000 |
Deductions | (16,000) | (20,000) | (8,000) | (44,000) |
Net income (loss) | ($9,000) | ($16,000) | $4,000 | ($21,000) |
The taxpayer's $21,000 passive activity loss for the taxable year is disallowed under paragraph (a)(1)(i) of this section. Therefore, a ratable portion of the losses from activities A and B is disallowed. The disallowed portion of each loss is determined as follows:
A: $21,000 * $9,000/$25,000 | $7,560 |
B: $21,000 * $16,000/$25,000 | $13,440 |
Total | $21,000 |
An individual holds interests in four passive activities, A, B, C, and D. The results of operations of these activities for the taxable year are as follows:
A | B | C | D | Total | |
Gross income | 15,000 | 5,000 | 10,000 | 10,000 | 40,000 |
Deductions | (5,000) | (10,000) | (20,000) | (8,000) | (43,000) |
Net income (loss) | 10,000 | (5,000) | (10,000) | 2,000 | (3,000) |
Activities A and B are significant participation passive activities (within the meaning of § 1.469-2T(f)(2)(ii) ). The gross income from these activities for the taxable year ($20,000) exceeds the passive activity deductions from those activities for the taxable year ($15,000) by $5,000 and, under § 1.469-2T(f)(2) , $5,000 of gross income from those activities is treated as not from a passive activity. Therefore, solely for purposes of applying this paragraph (f)(2)(i) for the taxable year, activities A and B are treated as a single activity that does not have a loss for the taxable year. Under § 1.469-2T(b) , the taxpayer's passive activity loss for the taxable year is $8,000 ($43,000 of passive activity deductions minus $35,000 of passive activity gross income). The results of treating activities A and B as a single activity that does not have a loss for the taxable year is that none of the $8,000 passive activity loss is allocated under this paragraph (f)(2)(i) to activity B for the taxable year, even though the taxpayer incurred a loss in that activity for the taxable year.
Gross income: | |
Rents | $60,000 |
Gross income from business | 100,000 |
Portfolio income | 35,000 |
Total | $195,000 |
Deductions: | |
Rental deductions | ($100,000) |
Business deductions (80,000) | |
Interest expense allocable to portfolio expenditures under § 1.163-8T | (10,000) |
Deductions (other than interest expense) clearly and directly allocable to portfolio income | (5,000) |
Total | ($195,000) |
Gross income | $195,000 | ||
Amounts not taken into account in computing net active income: | |||
Rents (see paragraph (g)(4)(ii)(A) of this section) | $60,000 | ||
Portfolio income (see paragraph (g)(4)(ii)(C) of this section) | $35,000 | ||
$95,000 | ($95,000) | ||
Gross income taken into account in computing net active income | $100,000 | $100,000 | |
Deductions | ($195,000) | ||
Amounts not taken into account in computing net active income: | |||
Rental deductions (see paragraph (g)(4)(ii)(B) of this section) | ($100,000) | ||
Interest expense allocated to portfolio expenditures (see paragraph (g)(4)(ii)(G) of this section) | ($10,000) | ||
Other deductions clearly and directly allocable to portfolio income (see paragraph (g)(4)(ii)(F) of this section) | ($5,000) | ||
($115,000) | $115,000 | ||
Deductions taken into account in computing net active income | ($80,000) | ($80,000) | |
Net active income | $20,000 |
Gross income | $195,000 | |
Deductions: | ||
Total deductions | ($195,000) | |
Passive activity loss | $20,000 | |
Allowable deductions | ($175,000) | ($175,000) |
Taxable income | $20,000 |
Net active income before NOL carryback | $20,000 |
NOL carryback | ($15,000) |
Net active income | $5,000 |
Gross income | $195,000 | |
Deductions: | ||
Total deductions | ($210,000) | |
Passive activity loss | $35,000 | |
Allowable deductions | ($175,000) | ($175,000) |
Taxable income | $20,000 |
Thus, taking the NOL carryback into account in computing net active income for 1987 does not affect X's taxable income for 1987, but increases the deductions treated under paragraph (f)(4) as deductions from X's rental activity for 1988 and decreases X's NOL carryover to years other than 1987.
then the passive activity deductions and credits allocable to such individual's activities for the taxable year under paragraph (f)(4) of this section shall be determined by taking into account the items of deduction and credit attributable to such individual's interests in passive activities for the immediately preceding taxable year. See paragraph (j)(2)(i) of this section.
26 C.F.R. §1.469-1T