Partial Disposition of a Passive Activity

Posted by Lee Reams Sr., BSME, EA on

Any gain or loss from the disposition of a passive activity is generally also passive. However, special rules apply to dispositions.

Total disposition - presumes the disposition is a fully taxable event. Gains are taxed, and any previously suspended losses are allowed. A special rule accomplishes this.

Overall Gain. If all aspects of the activity are aggregated (current year income/loss, previous suspended losses, gain/loss from disposition) and the aggregate is an overall gain, the overall gain is passive.

Overall loss. If there is an overall loss, the loss shall be allowed. §469 accomplishes this by RECHARACTERIZING the activity as NONPASSIVE. This allows Form 8582 to be bypassed.

Partial recognitions - if only part of the total realized gain is recognized (as with installment sales or tax-deferred exchanges), the gain/loss must be pro-rated. If, for instance, 20% of the total gain is currently recognized, then at least 20% of the overall losses will be allowed.

Partial disposition election — Reg. Sec. 1.168(i)-8(d)

As part of the Cap & Repair regulations that came out in 2014, a taxpayer may make an election under this provision to report the gain or loss on the replacement, retirement or other disposition of a partial asset. However, if the taxpayer makes this election the taxpayer must:

  1. Capitalize the replacement portion under the same asset class as the disposed portion, and
  2. The asset must be within the asset classes 00.11 through 00.4 of Rev. Proc. 87-56 (described below). This election does not apply to betterments or an adaptation of the asset to a new or different

What does a partial disposition election accomplish? – It allows taxpayers to elect gain or loss on the replacement, retirement or other disposition of a partial asset. A good example of that would be replacing the roof on a building that is not completely depreciated. Prior to the release of the 2014 regulations the old roof would have to remain on the books as part of the whole asset and if not already depreciated to zero, continue to be depreciated.

Rev. Proc. 87-56 asset classes:

00.11 – Office furniture, fixtures and equipment

00.12 – Information systems (computers and peripheral equipment)

00.13 – Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment

00.21 – Airplanes (not used in commercial or contract carrying of passengers or freight) and helicopters

00.22 – Automobiles, taxis

00.23 – Buses

00.241 – Light general-purpose trucks

00.242 – Heavy general-purpose trucks

00.25 – Railroad cars and locomotives

00.26 – Tractor units for use over-the-road

00.27 – Trailers and trailer-mounted-containers

00.28 – Vessels, barges, tugs and similar water transportation equipment

00.3 – Land improvements (sidewalks, roads, canals, waterways, drainage facilities, sewers, wharves/docks, bridges, fences landscaping shrubbery, radio/televisions transmitting towers)

00.4 – Industrial steam and electric generation and/or distribution systems