¶2980.11.A. Business or Rental Use of a Personal Residence
If an activity involves the use of the taxpayer's personal residence and deductions attributable to such use are limited under the rules for business use of a home or rental of vacation homes, any gain, loss, income or deduction allocable to the use of the personal residence is not taken into account for purposes of applying the passive loss rules. 530
530 §469(j)(10). See discussion of §280A in ¶2460.
¶2980.11.B. Investment Interest Limitation
A taxpayer's deductions for investment interest are generally limited to the taxpayer's net investment income.531 The investment interest limitation does not apply to any interest that is
taken into account in determining whether there is passive activity income or loss.532 However,
during the phase-in period discussed in ¶2980.12.E, below, the allowance of certain PALs under the transitional rule may reduce net investment income.
531 See discussion of §163(d) in ¶2330. 532 §163(d)(3)(B)(ii).
An elective transition rule is available for investment interest that (1) was disallowed under the investment interest limitation rule in pre-1987 taxable years, (2) can be carried forward to the first taxable year beginning after 1986 and (3) is allocable to a passive activity.533 Under this rule, a taxpayer may elect to treat the carryover investment interest deduction as a PAD subject to the passive loss rules rather than the investment interest limitation rules in the first post-1986 year.534
The general passive loss phase-in rules do not apply to this amount.
533 TAMRA §1005(c)(11).
534 See Notice 89-36, 1989-1 C.B. 677, which provides guidance for making the election.
¶2980.11.C. State and Local Tax Deductions
A taxpayer's deductions for state and local taxes are subject to the passive loss rules if incurred in a passive activity.535 State and local income taxes, however, are never treated as passive.536
535 See Conf. Rep. 99-841 at II-139.
536 Regs. §1.469-2T(c)(7)(iii) and Regs. §1.469-2T(d)(2)(vi).
¶2980.11.D. Partnership and S Corporation Basis Rules
limitation rule, a ratable share of the partner's or shareholder's share of each item of deduction or loss of the partnership or S corporation is disallowed for the taxable year under the passive loss rules.537
537 Regs. §1.469-2T(d)(6)(ii). These rules are discussed in more detail in ¶2980.06.C.4.b and c, above.
¶2980.11.E. At-Risk Rules
The determination of a whether a loss is not allowed in a taxable year under the at-risk rules (discussed in ¶2970) is made before the application of the passive loss rules.538 If a loss is disallowed under the at-risk rules, a ratable portion of each deduction from the activity as defined for at-risk purposes is deemed to have been disallowed.539 When a loss is allowed under the
at-risk rules, it then becomes subject to the passive loss rules if incurred in a passive activity. The character of the activity is determined at that time.540
538 Regs. §1.469-2T(d)(6)(i). This rule is discussed in more detail in ¶2980.06.C.4.d, above. 539 Regs. §1.469-2T(d)(6)(iii).
540 Regs. §1.469-2T(d)(8).
¶2980.11.F. Capital Loss Limitation
The capital loss limitation rule (discussed in ¶1610) limits deductions for capital losses to the amount of capital gains, plus $3,000 for individuals. The capital loss limitation is applied after the application of the passive loss rules.541
541 Regs. §1.469-1(d)(2).
Example (148)—Capital Loss Limitation
A has a capital loss of $20,000 incurred in a rental activity in 1990. A has no other items of gain or loss from the rental activity and has a $20,000 capital gain from a disposition of property not used in a passive activity in 1990. The $20,000 loss is disallowed under the passive loss rules in 1990.
In 1992, A completely disposes of his interest in the passive activity for a $10,000 gain and has no other items subject to the passive loss or capital loss limitation rules. A's $20,000 loss from 1990 is allowed in full under the passive loss rules. However, under the capital loss limitation rules, only $13,000 of A's loss is allowable in 1992. The remaining loss of $7,000 is available as a carryover to later years.
¶2980.11.G. Net Operating Loss Deduction
Any PAL that is allowable in a taxable year by reason of a complete disposition becomes a net operating loss in that year if the loss exceeds the taxpayer's nonpassive income. The passive loss rules do not again limit this loss in any subsequent year.542 As discussed in ¶2980.12.A, below,
net operating losses carried over from years beginning before January 1, 1987 are not limited under the passive loss rules.543
543 1986 TRA §501(c)(2).
¶2980.11.H. Alternative Minimum Tax
The passive loss rules apply in determining alternative minimum taxable income (AMTI) and generally apply in the same way for alternative minimum tax (AMT) as for regular tax purposes. Thus, in computing the AMT, a taxpayer must determine which items of income, loss or credit as determined for AMT purposes must be characterized as PAGI, PADs and PACs. The use of PALs is then limited for AMT purposes as it is for regular tax purposes. However, because the items described above may differ in amount for AMT and regular tax purposes, a taxpayer's regular tax PAL and his AMT PAL may differ. Thus, it is necessary for taxpayers to compute PALs for both regular and minimum tax purposes each year.
In addition, the passive loss rules are applied differently for AMT purposes in two respects. The passive loss phase-in rules, discussed in ¶2980.12.E, below, do not apply for AMT purposes and therefore no passive losses are allowable against nonpassive AMTI.544 Secondly, the loss
disallowed under the passive loss rules as applied for AMT purposes is reduced by the amount by which the taxpayer is insolvent as of the close of the taxable year.545
544 §58(b).
545 §58(c)(1). A taxpayer is insolvent by the amount that the taxpayer's liabilities exceed the fair market value of his assets.
Once AMT adjustments and preference items relating to a PAL have been accounted for in computing a PAL for AMT purposes, the losses and preference items should not be accounted for again on other lines of the AMT form.546
546 See Form 6251 for individuals, Form 4626 for corporations, Form 8656 for fiduciaries (for years beginning before 1992) and Form 1041 Schedule H for fiduciaries (for years beginning after 1991).
Example (149)—AMT Calculation of PAL Items
A uses a PAL of $8000 from a rental activity to offset passive income of $8000. The PAL must be recomputed for AMT purposes. For regular tax purposes, A claims accelerated depreciation of $20,000 on a building used in the rental activity. In recomputing the PAL for AMT purposes, A claims $12,000 under the straight-line method of depreciation. This effectively reduces A's PAL by $8,000 for AMT purposes. If no other items affect A's PAL from the rental activity for AMT purposes, the PAL is reduced to zero. Thus, the $8,000 of passive income will not be offset for AMT purposes and will therefore be subject to AMT.