IRS Form 8582 is completed by noncorporate taxpayers to report their passive activity income and losses. Passive activity losses can generally only be offset against other passive activity income.

If a taxpayer has prioryear unallowed losses related to a passive activity, those losses will be allowed when the taxpayer makes a complete disposition of that passive activity. The prioryear passive activity losses are reclassified to nonpassive losses allowed and can offset other nonpassive income.

In this example, we have a taxpayer with three Schedule K1s. Two Schedule K1s are from passive activities, and the third Schedule K1 is from a business where the taxpayer materially participates in the operations. One of the passive activity Schedule K1s is marked final because the taxpayer redeemed out of the investment during 2023. Because the redemption qualifies as a complete disposition, the prior year's unallowed losses related to that investment are released.

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