Saturday, February 25, 2012


I've had several inquiries of late on what to do when you discover your suspended passive activities seem to be overstated. Passive activities can be rental properties, investments, and even an endeavor where you don't meet the material participation rules. Usually it has been my experience that overstated losses occur when an incorrect method of depreciation was used, or someone inadvertently depreciated the cost of a property which included the land.

The "official" answer is of course, to amend past tax returns to ascertain the correct amount of a suspended passive activity.  I prefer a more practical method. If an activity is truly completely suspended, and no change will result in taxable income, I prepare a worksheet to show what the suspended loss should have been, and simply enter the corrected amount on Form 8582 (Passive Activity Loss Limitations) pertaining to the current year.

In my view, the IRS and or state taxing agency is not impacted as the taxable income does not change; I win as I don't have to spend valuable time amended prior returns that result in no change to taxable income; and my clients win as they don't have to pay me additional fees. Of course many practitioners would disagree with me as they want to generate additional fees.

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