Passive Asset Disposition - John R. Dundon II, Enrolled Agent
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Passive Asset Disposition

Passive Asset Disposition

There are two distinct issues to evaluate when disposing of a passive  asset:

  1. Is the disposition considered to be a qualifying disposition under reg 1.469 making the losses deductible?

  2. Is the gain on the sale truly passive income and entered on IRS form 8582 triggering deductibility of unrelated passive losses?

Current and suspended losses are deducted in a ‘qualified disposition’ if:

  1. The disposition is in its entirety.

  2. The disposition is to an unrelated party.

  3. The transaction with buyer is fully taxable.

A ‘related party’ for tax purposes is:

* Mother or Father

* Son or Daughter

* Partnership or Corporation that taxpayer owned more than 50%

A disposition of an asset is considered not fully taxable if it is:

* Converted to personal use.

* Given as a gift or charitable contribution

* A like/kind exchange of real estate

* An installment sale

* In bankruptcy

Upon death of a taxpayer his/her suspended losses in an activity are allowed only to the extent losses exceed transferee’s basis.

If taxpayer materially participates in the operations of an activity that he/she owns, income is not passive and should not be reported on IRS form 8582.

If after applying current and suspended losses against the net gain on the disposition of the activity, neither loss nor gain goes on form 8582.  Losses generally go on schedule ‘E’ and gains go on IRS form 4797 and or Schedule ‘D’ of the 1040