Disallowed PALs increase basis when estate distributes the activity.

• Author: Schooley, Rita L.
• Position: Passive activity losses - Brief Article

Passive activities held by estates are subject to the passive activity loss (PAL) limitation rules. Estates may accumulate disallowed PALS during the period of administration. As with any taxpayer subject to the passive activity rules, estates may be limited in the amount of losses created by those activities when there is not sufficient passive activity income. Losses not allowed are treated as a deduction in the next year. However, there is special treatment of the disallowed losses when the estate distributes that activity to a beneficiary of the estate.

First, the estate's basis in the activity must be determined. Generally, under Sec. 1014, the basis is equal to fair market value at the date of death. Any disallowed PALS may be used on the decedent's final individual income tax return to the extent they exceed the amount by which the basis in the interest is increased under Sec. 1014. For example, if an individual dies...