J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

10.13 Suspended Losses Allowed on Disposition of Your Interest

Losses and credits that may not be claimed in one year because of the passive activity limitations are suspended and carried forward to later years. The carryover lasts indefinitely, until you have passive income against which to claim the losses and credits. No carryback is allowed. What if you have suspended losses and later materially participate in the business in which the loss was realized? The losses remain passive losses but since you now materially participate, the suspended losses may offset nonpassive income of that activity.

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Caution

$3,000 Capital Loss Limit

Capital losses incurred on a disposition of a passive interest are also subject to the general $3,000 loss limitation ($1,500 if married filing separately) (5.4).

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EXAMPLE

In 2011, Nick Milo was not a material participant in a business activity and his share of losses was $10,000, which was suspended because he had no passive income. In 2012, he becomes a material participant in the business and his share of income is $1,000. The $1,000 is treated as nonpassive income, and he may apply $1,000 of the suspended loss to offset that income.

Allocation of suspended loss.

If your suspended loss is incurred from several activities, you allocate the loss among the activities using the worksheets accompanying ...