1. Limitations on the Deduction of Allocated Losses  3 Provisions limit the deductibility of partnership losses Sec 704(d) - partners may deduct losses only to the extent of their partnership basis Sec. 465 - partners may not deduct losses in excess of his/her at risk amount Sec. 469 - prohibits individuals and closely held corporations from deducting PALs in excess of PAI

2. Section 704(d)  A partners deduction cannot exceed his/her total investment including share of debt.  If allocated share of partnership losses exceeds his/her basis in the partnership interest - excess does not reduce basis, but is carried forward indefinitely and may be deducted when the partner has basis.  For purposes of this limitation - any distributions made to the partner during the year are accounted for before the application of the basis limitation  The allocation of loss is the last adjustment to basis to be applied.

3. At Risk Limitations  Differs from Sec. 704(d) because most non-recourse debts are not considered At Risk.  Partners are generally at risk for their investment in the partnership + their portion of recourse debt or qualified non-recourse debt.  Therefore, losses may be disallowed even though no Sec. 704(d) limitation exists.  Qualified non-recourse debt - nonrecourse debt secured by real estate, which are obtained from a bank, S&L, or other commercial lender. Excludes seller financed loans, and non-real estate non recourse loans

4. At Risk Limitations Continued  Sec. 704(d) and Sec. 465 limitations are applied sequentially  Only losses allowed by Sec. 704(d) can be limited by Sec. 465.  Where basis and at risk are the same, losses will be disallowed under Sec. 704(d) only.  Where basis and at risk differ, losses can be disallowed under both sections  Sec. 465(e) discusses at risk recapture, when at risk basis is negative (excess distributions or debt reduction), amount taken into income is typically ordinary income rather than capital under Sec. 731

5. Sec 469 - Passive Activity Loss Limitations  At Risk Rules and Sec. 704(d) rules are applied on a partnership by partnership basis.  If a partner cannot take a loss because of the above limitations, the passive activity loss rules cannot be applied until the above limitations are lifted.  General rule - passive activity losses are disallowed to the extent the passive activity losses exceed passive activity income.  Net disallowed PALs are carried forward to tax years when PAI is available.  Passive Activities are aggregated to determine the limitation.

6. Sec. 469 (continued)  Passive Activity TP does not materially participate in the activity Partner is a limited partner Partnership is engaged in a rental activity (2 exceptions, real estate professionals and general partners who actively participate but make less than $150,000)  Passive losses disallowed must be allocated to all passive activities on a pro-rata basis. You cannot choose which passive activities you want to take the losses from, etc.  Suspended passive losses can be taken in the year the passive activity is disposed by the taxpayer.