As you may know, the tax law provides that you may not use any passive losses to offset any nonpassive income.
There is, however, an exception for rental real estate activities in which you actively participate. (This kind of activity is known as "Active Participation Real Estate," or just "APRE" among the tax cognoscenti--a group to which you can now claim membership.) Up to $25,000 of losses from APRE may be used to offset nonpassive income. This amount is called the "special allowance".
If you do not have any APRE, you don't need Worksheet #1 at all. Also, if you are married filing separately and you and your spouse lived together at all during the year, you are not entitled to the special allowance.
Worksheet #1 lists, for each APRE:
This year's gain or loss;
The unallowed loss from prior years; and
Overall gain or loss (which is this year's gain or loss combined with the unallowed loss).
In completing column (c), you can find the numbers you need on Worksheet #5, column (c), of last year's Form 8582. Enter only those losses from activities which were APRE both in the year they arose and this year. If your APRE doesn't meet this test, enter the unallowed loss on Worksheet #3 instead.
The totals in columns (a), (b) and (c) are carried to lines 1a , 1b and 1c, respectively, of Form 8582.
The totals in columns (d) and (e) are not carried to Form 8582, but are used when Form 8582 is completed to figure the loss allowed for the current year.