Exam 11: Investor Losses

Individuals with modified AGI of $100,000 can deduct against active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.

Jed spends 32 hours a week,50 weeks a year,operating a DVD rental store that he owns.He also owns a music store in another city that is operated by a full-time employee.He elects not to group them together as a single activity under the "appropriate economic unit" standard.Jed spends 40 hours per year working at the music store.

All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss.

Carmen,a single taxpayer,has $80,000 in salary,$10,000 in income from a limited partnership,and a $30,000 passive loss from a real estate rental activity in which she actively participates.Her modified adjusted gross income is $80,000.Of the $30,000 loss,Carmen may deduct:

Barb borrowed $100,000 to acquire a parcel of land to be held for investment purposes and paid interest of $11,000 on the loan.She has AGI of $75,000 for the year.Other items related to Barb's investments include the following: Barb is unmarried and elects to itemize her deductions.She has no miscellaneous itemized deductions other than the investment counsel fees.

Bruce owns a small apartment building that produces a $25,000 loss during the year.His AGI before considering the rental loss is $85,000.Bruce must be an active participant with respect to the rental activity in order to deduct the $25,000 loss under the real estate rental exception.

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 loss this year.

Identify from the list below the type of disposition of a passive activity where the taxpayer keeps the suspended losses of the disposed activity and utilizes them on a subsequent taxable disposition.

Orange Corporation,a closely held (non-personal service)C corporation,earns active income of $300,000 in the current year.The corporation also receives $35,000 in dividends during the year.In addition,Orange incurs a loss of $50,000 from an investment in a passive activity.What is Orange's income for the year after considering the passive investment?

Carl,a physician,earns $200,000 from his medical practice in the current year.He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity.In addition,he incurs a loss of $50,000 from an investment in a passive activity.What is Carl's AGI for the current year after considering the passive investment?

Josh has investments in two passive activities.Activity A (acquired three years ago)produces income of $30,000 this year,while Activity B (acquired two years ago)produces a loss of $50,000.What is the amount of Josh's suspended loss for the year?

In the current year,Louise invests $50,000 for a 10% interest in a passive activity.Her share of the loss this year is $10,000.If this is her only passive activity,the $10,000 loss is suspended for use in a future year.

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

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 loss with respect to these activities at the end of the current year?

Pat sells a passive activity for $100,000 that has an adjusted basis of $55,000.During the years of her ownership,$60,000 of losses have been incurred that were suspended under the passive activity loss rules.In addition,the passive activity generated tax credits of $10,000 that were not utilized and suspended.Determine the tax treatment to Pat on the disposition of the property.

In the current year,Rich has a $40,000 loss from a business he owns.His at-risk amount at the end of the year,prior to considering the current year loss,is $24,000.He will be allowed to deduct the $40,000 loss this year if he is a material participant in the business.

In 2010,Cindy invested $100,000 for a 25% interest in a limited liability company (LLC)involved in an activity in which she is a material participant.The LLC reported losses of $340,000 in 2010 and $180,000 in 2011 with Cindy's share being $85,000 in 2010 and $45,000 in 2011.How much of the losses can Cindy deduct?

Identify how the passive loss rules broadly classify various types of income and losses.Provide examples of each category.

From January through November,Vern participated for 420 hours as a salesman in a partnership in which he owns a 50% interest.The partnership has four full-time employees.During December,Vern spends 110 hours cleaning the store and painting the walls in order to meet the material participation standards.Vern qualifies as a material participant.

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