Knowledge Base

11138: 4797 - Passive Activity Adjustment

1040 Individual

I have a figure on line 2 of my 4797 with the description “Passive Activity Adj.” Where does that amount come from?

Line 2 of Form 4797, Sales of Business Property has a "PASSIVE ACTIVITY ADJ." This adjustment is required because the total allowed loss for line 2 (calculated on Form 8582, Part VI and Part VII) differs from the total current-year loss, which is calculated and printed on Form 4797, line 2. See the instructions for Form 8582 for details. The adjusted amount may include prior-year suspended losses that are allowed this year.

The difference that generates the note may result from a variety of sources. Common sources include:

  • the field Prior unallowed passive 4797 Pt 1…
    • on screen E,
    • or on a screen K1P, K1F, or K1S marked with an Activity Type of A - Active rental real estate - flows to 8582, line 1
  • the field Net 1231 gain or loss on a screen K1P or K1S
  • a calculated passive loss limitation

Review Wks 85826 (worksheet 6), and Wks 85827 (worksheet 7, if necessary).For more information, see "Part I" in the Instructions for Form 8582.


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