Dispositions

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.

Note. A disposition of less than substantially all of an entire interest does

• If the activity has a net loss for the current year, enter the prior year unallowed loss (but not the current year loss) on Form 8810 and the applicable worksheets.

• State, local, and foreign income tax refunds.

Passive activity deductions do not include the following.

• Any reimbursement of a casualty or theft loss included in income as recovery of all or part of a prior year loss deduction, if the deduction for the loss was not treated as a passive activity deduction.

Passive Activity Deductions Passive activity deductions include all deductions from activities that are passive activities for the current tax year and all deductions from passive activities that were disallowed under the PAL rules in prior tax years and carried forward to the current tax year under section 469(b).

Passive activity deductions include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than an entire interest in a passive activity. See Dispositions, later, for the treatment of losses upon certain dispositions of an entire interest in an activity.

• Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income.

• Dividends-received deductions for dividends not included in passive activity gross income.

• Interest expense, other than interest expense properly allocable under Temporary Regulations section 1.163-8T to passive activities or self-charged

• Cancellation of debt income to the extent that at the time the debt was discharged it was not properly allocable under Temporary Regulations section 1.163-8T to passive activities.

6 Instructions for Form 8810 (2025)

not trigger the allowance of prior year unallowed losses.

Disposition of an Entire Interest If the corporation disposed of its entire interest in a passive activity or a former passive activity to an unrelated party in a fully taxable transaction during the tax year, the losses allocable to the activity for the year are not limited by the PAL rules. A fully taxable transaction is a transaction in which all the realized gain or loss is recognized.

If the corporation is using the installment method to report this kind of disposition, figure the loss for the current year that is not limited by the PAL rules by multiplying the corporation's overall loss (which does not 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

Unallowed passive activity credits, unlike unallowed PALs, are not allowable when the corporation disposes of its interest in an activity. However, the corporation can elect to increase the basis of the credit property by the amount of the original basis reduction of the property to the extent that the credit has not been allowed under the passive activity rules. Unallowed passive activity credits that are not used to increase the basis of the credit property are carried forward until they are allowed. To make the election, complete Part III of Form 8810. No basis adjustment can be elected on a partial disposition of the corporation's interest in a passive activity.

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

See Dispositions in Pub. 925 for additional information about dispositions, including rules for dispositions by gift or death.

Reporting an Entire Disposition When the corporation completely disposes of an entire interest in a passive activity or a former passive activity, there may be net income or loss and prior year unallowed losses from the activity. Combine all income, gains, deductions, and losses (including any prior year unallowed losses) from the activity for the tax year to see if the corporation has an overall gain or loss.

If the corporation has an overall gain from a passive activity and also has other passive activities to report on Form 8810,

Worksheet 1—Computation of Income,

Gains, Deductions, and Losses for

Worksheet 2 Keep for Your Records

include the income, gains, deductions, and losses (including prior year unallowed losses) on Worksheet 1. If this is the corporation's only passive activity or a former passive activity, report the income, gains, deductions, and losses (including prior year unallowed losses) on the forms and schedules normally used, but do not enter them on the worksheets or on Form 8810.

If the corporation has an overall loss when combining all income, gains, deductions, and losses (including any prior year unallowed losses) from the activity, report all the income, gains, deductions, and losses on the forms and schedules normally used, but do not enter them on the worksheets or on Form 8810.

Note. Members of a consolidated group, see Regulations section 1.469-1(h)(6) and

Temporary Regulations sections 1.469-1T(h)(7) and (8) for rules on applying the PAL rules to dispositions of property and other intercompany transactions.