Exam 11: Investor Losses

Carol made a gift to Tim of a passive activity (adjusted basis of $50,000, suspended losses of $20,000, and a fair market value of $80,000). No gift tax resulted from the transfer.

When determining whether an individual is a material participant, participation by an owner's spouse generally counts.

George, an ophthalmologist, owns a separate business (not real estate) in which he participates. He has one employee who works part-time in the business. Which of the following statements is correct?

In the current year, Don has a $55,000 loss from a business he owns. His at-risk amount at the end of the year, prior to considering the current-year loss, is $36,000. He will be allowed to deduct the $55,000 loss this year if he is a material participant in the business.

Wayne owns a small apartment building that produces a $45,000 loss during the year. His AGI before considering the rental loss is $85,000. Because Wayne is an active participant with respect to the rental activity, he may deduct the $45,000 loss.

Match the treatment for the following types of transactions. -Treatment of a disposition of a passive activity by gift.

A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity.

In 2019, Wang invests $80,000 for a 20% interest in a partnership in which he is a material participant. The partnership incurs a loss with $100,000 being Wang's share. Which of the following statements is incorrect?

Art's at-risk amount in a passive activity was $60,000 at the beginning of 2018. His loss from the activity in 2018 is $80,000, and he had no passive activity income during the year. Art had $20,000 of passive activity income from the activity in 2019. Under the passive activity loss rules, Art's suspended loss at the end of 2019 is:

In 2018, Kelly earns a salary of $200,000 and invests $40,000 for a 20% interest in a partnership not subject to the passive activity loss rules. Through the use of $800,000 of nonrecourse financing, the partnership acquires assets worth $1 million. The activity produces a loss of $150,000 of which Kelly's share is $30,000. In 2019, Kelly's share of the loss from the partnership is $15,000. How much of the loss from the partnership can Kelly deduct?

Jack owns a 10% interest in a partnership (not real estate) in which his at-risk amount is $42,000 at the beginning of the year. During the year, the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations. Jack's at-risk amount at the end of the year is $44,000.

Anita owns Activity A, which produces active income, and Activity B, which produces losses. From a tax planning perspective, Anita will be better off if Activity B is a passive activity.

Vail owns interests in a beauty salon, a natural foods store, and a tanning salon. Several full-time employees work at each of the enterprises. As of the end of November of the current year, Vail has worked 180 hours in the beauty salon, 220 hours at the natural foods store, and 80 hours at the tanning salon. These three ventures collectively will produce income. Vail also owns one other passive activity that is producing a loss (a limited partnership in which she has reported no participation). How should Vail plan her activities for the remainder of the year?

Josh has investments in two passive activities. Activity A, acquired three years ago, produces income in the current year of $60,000. Activity B, acquired last year, produces a loss of $100,000 in the current year. At the beginning of this year, Josh's at-risk amounts in Activities A and B are $10,000 and $100,000, respectively. What is the amount of Josh's suspended passive activity loss with respect to these activities at the end of the current year?

Matt has three passive activities and has at-risk amounts in excess of $100,000 for each. During the year, the activities produced the following income (losses). Activity A (\ 60,000) Activity B (40,000) Activity C Net passive activity loss Matt's suspended losses are as follows: A) $25,000 is allocated to C; $0 to A and B. B) $12,500 is allocated to A; $12,500 to B. C) $15,000 is allocated to A; $10,000 to B. D) $8,333 is allocated to A, B and C. E) None of these.

List the taxpayers that are subject to the passive activity loss rules and summarize the general impact of these rules on these taxpayers.

Linda owns investments that produce portfolio income and Activity A that produces losses. From a tax perspective, Linda will be better off if Activity A is not passive.

Maria, who owns a 50% interest in a restaurant, has been a material participant in the restaurant activity for the last 20 years. She retired from the restaurant at the end of last year and will not participate in the restaurant activity in the future. However, she continues to be a material participant in a retail store in which she is a 50% partner. The restaurant operations produce a loss for the current year, and Maria's share of the loss is $80,000. Her share of the income from the retail store is $150,000. She does not own interests in any other activities.

Mary Jane participates for 100 hours during the year in an activity she owns. She has no employees and is the only participant in the activity. The activity is a significant participation activity.

Lucy owns and actively participates in the operations of an apartment complex that produces a $50,000 loss during the year. Her modified AGI is $125,000 from an active business. Disregarding any at-risk amount limitation, she may deduct $25,000 of the loss this year, and the remaining $25,000 is a suspended passive activity loss.