Exam 11: Investor Losses

When a taxpayer disposes of a passive activity by gift, what happens to any unused passive activity losses?

Joyce owns an activity (not real estate) in which she participates for 100 hours a year; her husband participates for 450 hours. Joyce qualifies as a material participant.

During the current year, Ethan performs personal services as follows: 800 hours in his information technology consulting practice, 625 hours in a real estate development business, and 510 hours in a condominium leasing operation. He expects that losses will be realized from the two real estate ventures while his consulting practice will show a profit. Ethan files a joint return with his wife whose salary is $125,000. The income and losses from the following ventures is considered active and not subject to the passive activity loss limitations:

Match the term with the correct response. More than one response may be correct. a.Taxpayer devotes time aggregating more than 500 hours in all significant participation activities during the year. b.Participates in making management decisions in a significant and bonafide sense. c.One in which the individual's participation equals more than 100 hours during the year. d.Taxpayer devotes time in the activity which constitutes substantially all of the participation in the activity of all individuals. e.Both options a. and d. are correct. f.No correct choice is given. -Material participation.

Eric makes an installment sale of a passive activity having suspended losses of $40,000. He collects 25% of the sales price in the current year, and will collect 25% in each of the next three years. Eric can deduct $10,000 of the passive activity loss this 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?

Raul is married and files a joint tax return. His current investment interest expense of $95,000 is related to a loan used to purchase a parcel of unimproved land. Income from investments [dividends (not qualified) and interest] total $18,000. Raul paid $5,000 of real estate taxes on the unimproved land. He also has a $4,500 net long-term capital gain from the sale of another parcel of unimproved land. Raul's maximum investment interest deduction for the year is:

Match the treatment for the following types of transactions. a.The losses are allowed in the years in which gain is recognized. b.Suspended losses are allowed to offset the income from the activity, other passive activities, or active income. c.Suspended losses are allowed to the taxpayer to the extent they exceed the amount, if any, of the step-up in basis allowed. d.Any suspended losses may be used in the current year. e.The suspended losses are added to the basis of the property. f.No correct choice is given. -Treatment of a sale of a passive activity where all of the realized gain or loss is recognized currently.

Describe the types of activities and taxpayers that are subject to the at-risk rules.

A taxpayer is considered to be a material participant in a significant participation activity if he or she spends at least 400 hours in the activity.

Tom participates for 300 hours in Activity A and 250 hours in Activity B, both of which are nonrental businesses. Both activities are active.

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. a.The losses are allowed in the years in which gain is recognized. b.Suspended losses are allowed to offset the income from the activity, other passive activities, or active income. c.Suspended losses are allowed to the taxpayer to the extent they exceed the amount, if any, of the step-up in basis allowed. d.Any suspended losses may be used in the current year. e.The suspended losses are added to the basis of the property. f.No correct choice is given. -Treatment of a disposition of a passive activity at death.

Bob realized a long-term capital gain of $8,000. In calculating his net investment income, Bob may elect to include the gain in investment income.

White Corporation, a closely held personal service corporation, has $150,000 of passive activity losses, $120,000 of active business income, and $30,000 of portfolio income. How much of the passive activity loss can White Corporation deduct?

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

Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive activity loss of $44,000. The activity was sold at a loss and Kelly has no other passive activities. The suspended loss is not deductible.

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.

Charles owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Charles participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both departments.