Limitation on Losses

If you report a loss from rental real estate or royalties in Part I, a loss from a partnership or S corporation in Part II, or a loss from an estate or trust in Part III, your loss may be reduced or not allowed this year. You must apply the following rules to your loss.

• Basis rules apply to losses from a partnership or S corporation. See Basis rules for partnerships and Basis rules for S corporations, later, in Part II.

• At-risk rules apply to losses from rental real estate or royalties. They also apply to losses from a partnership, S corporation, estate, or trust. See At-Risk Rules , later, in the General Instructions . If the loss is from a partnership or S corporation, also see At-risk rules, later, in Part II.

• Passive activity loss rules apply to losses from rental real estate. They also apply to losses from a partnership, S

corporation, estate, or trust. See Passive Activity Loss Rules , later, in the General Instructions . If the loss is from a partnership or S corporation, also see Passive activity loss rules, later, in Part II.

• Excess business loss rules apply to losses from all noncorporate trades or businesses. This loss limitation is figured using Form 461 after you complete your Schedule E. Any limitation to your loss resulting from these rules will not be reflected on your Schedule E. Instead, it will be included as income on Schedule 1 (Form 1040), line 8p, and treated as a net operating loss that must be carried forward and deducted in a subsequent year. These rules also apply to losses from a partnership or S corporation.