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How to Document Your Passive Income Before Buying Tax Credits
Quick answer
Before buying a credit, an individual should document net passive income: Schedule K-1s, Schedule E, prior-year Form 8582 and Form 8582-CR carryovers, and participation logs. The credit is limited to tax attributable to passive income, so a CPA estimates that figure first. Portfolio income such as dividends and interest does not count as passive.
Published October 28, 2026. An individual's purchased credit is generally limited to tax attributable to passive income. A CPA will want proof of that income before you commit cash.
Step 1: Identify the passive income
Passive income comes from trades or businesses in which you do not materially participate and from most rental activities (§469(c)). Interest, dividends, royalties and gains on investment property are portfolio income, not passive (§469(e)(1)).
Step 2: Gather the documents
| Source | Document |
|---|---|
| Partnerships, S corporations | Schedule K-1 and the activity description; your participation record |
| Rentals | Schedule E, lease and expense records, and any grouping election |
| Prior losses | Prior-year Form 8582 and carryforward schedule by activity |
| Prior credits | Form 8582-CR and passive activity credit carryovers |
| Participation | Hours logs supporting the material participation position |
Step 3: Estimate the tax on passive income
The limit is tax attributable to passive income, not the income itself. Your CPA computes it on Form 8582-CR. A rough sizing, for planning only: passive income net of passive losses, times your marginal rate, then adjusted for other items.
Step 4: Test the plan
- Does a loss from another passive activity cancel the income?
- Would a 2027 sale release suspended losses and reduce passive income?
- Is any of the income subject to NIIT, which credits do not reduce?
Try the eligibility quiz and the savings calculator. Related reading: can active losses offset passive income? and real estate professional status.
Frequently asked questions
What documents show my passive income?
Schedule K-1s, Schedule E, prior-year Forms 8582 and 8582-CR, and hours logs that support your participation position.
Is stock dividend income passive?
No. Dividends, interest, royalties and gains on investment property are portfolio income under §469(e)(1).
Who computes the limit?
Your CPA, using Form 8582-CR for the passive activity credit limitation.
Can passive losses reduce room for a purchased credit?
Yes. Passive losses first offset passive income, which lowers the tax on passive income available for the credit.
- 26 U.S.C. §469, Passive activity losses and credits limited (Cornell LII)
- IRS: About Form 8582-CR, Passive Activity Credit Limitations
- IRS Publication 925, Passive Activity and At-Risk Rules
- 26 CFR §1.469-5T, Material participation (temporary)
- IRS: Elective pay and transferability FAQs, Transferability (Q4-Q15)
Owe $50k or more in federal tax?
Tell us your estimated liability and timing. We will show you what transferable credits are available and walk your CPA through the diligence.
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