1040-US: Installment sale and passive suspended losses (PALs)

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Question

My client has passive income from other activities and/or has not used their entire special allowance for rental real estate. The client disposed of a passive activity on the installment basis, but the suspended losses are not being completely allowed. Why?

Answer

The rules for disposition of a passive activity on the installment basis are discussed in the instructions for Form 8582. If the activity is disposed on the installment basis and it has an overall loss recognized in the current year, the carryover losses are only allowed to the ratio of gain recognized in the current year, divided by the unrecognized gain at the beginning of the year.

Indicate on the activities main screen that the disposal was under the installment method by entering code 2 in the Disposition of activity field. Enter in the asset module the installment sale of the assets, or use Screen Sale for sales of partnership or S Corporation stock.

If the activity has overall income recognized in the current year, all of the losses are released.

Related topic: Passive loss information FAQs (1040)

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