Dispositions

Disposition of an Entire Interest If you disposed of your entire interest in a passive activity or a former passive activity to an unrelated person in a fully taxable transaction during the tax year, your losses allocable to the activity for the year aren’t limited by the PAL rules.

A fully taxable transaction is a disposition in which you recognize all realized gain or loss.

If you’re using the installment method to report this kind of disposition, figure the loss for the current year that isn’t limited by the PAL rules by multiplying your overall loss (which doesn’t include losses allowed in prior years) by the following fraction:

Gain recognized in the current year

Unrecognized gain as of the beginning of the current

year

A partner in a PTP isn’t treated as having disposed of an entire interest in an activity of a PTP until there’s an entire disposition of the partner's interest in the PTP.

Reporting an Entire Disposition on Form 4797 or Form 8949 If you completely dispose of your entire interest in a passive activity or a former passive activity, you may have to report net income or loss and prior-year unallowed losses from the activity. All the net income and losses are reported on the forms and schedules normally used.

Combine all income and losses (including any prior-year unallowed losses) from the activity for the tax year to see if you have an overall gain or loss.

If you have an overall gain, report the income, losses, and prior-year unallowed losses in Part IV or V.

If you have an overall gain and this is a former passive activity, report all income and losses (including any prior-year unallowed losses) on the forms and schedules normally used and don’t use Form 8582.

If you have an overall loss when you combine the income and losses, don’t use Form 8582 for the activity. All losses (including prior-year unallowed losses) are allowed in full. Report the income and losses on the forms and schedules normally used.

An overall loss from an entire disposition of a passive activity is a nonpassive loss if you have an aggregate loss

from all other passive activities. When figuring your modified adjusted gross income for Part II, line 6, of Form 8582, be sure to take into account the overall loss from the disposition of the activity.

Example 1. Activity with overall gain. You sell your entire interest in a rental real estate activity in which you actively participated for a gain of $15,525. $7,300 of the gain is section 1231 gain reported on Form 4797, Part I, and $8,225 is ordinary recapture income reported on Form 4797, Part II. On line 22 of Schedule E (Form 1040), you report a total loss of $15,450, which includes a current year $2,800 net loss and a $12,650 prior-year unallowed loss. You have an overall gain from the disposition ($15,525 – $15,450 = $75).

Because you had an overall gain, you make the following entries in Part IV. You enter the $15,525 gain on the disposition in column (a), the current year loss of $2,800 in column (b), and the prior-year unallowed loss of $12,650 in column (c).

Example 2. Activity with overall loss. You sell your entire interest in an oil and gas limited partnership that was your only passive activity for a gain of $2,000. You have a current year Schedule E loss of $3,330 and a Schedule E prior-year unallowed loss of $1,115.

Because you have an overall loss of $2,445 after combining the gain and losses, none of the amounts are entered on Form 8582.

You enter the net loss plus the prior-year unallowed loss ($3,330 + $1,115 = $4,445) on Schedule E, Part II, column (i), and the $2,000 gain on the sale on Form 8949, in either Part I or Part II, depending on how long you held the partnership interest.

Disposition of Less Than an Entire Interest Gains and losses from the disposition of less than an entire interest in an activity are treated as part of the net income or net loss from the activity for the current year.

Caution: A disposition of less than substantially all of an entire interest doesn’t trigger the allowance of prior-year unallowed losses.

Disposition of Substantially All of an Activity You may treat the disposition of substantially all of an activity as a separate activity if you can prove with reasonable certainty:

1. The prior-year unallowed losses, if any, allocable to the part of the activity disposed of; and

2. The net income or loss for the year of disposition allocable to the part of the activity disposed of.