Exam 11: Investor Losses

Investment income can include gross income from interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business? income from a passive activity? and income from a real estate activity in which the taxpayer actively participates.

Leigh, who owns a 50% interest in a sporting goods store, was a material participant in the activity for the last fifteen years. She retired from the sporting goods store at the end of last year and will not participate in the activity in the future. However, she continues to be a material participant in an office supply store in which she is a 50% partner. The operations of the sporting goods store resulted in a loss for the current year and Leigh's share of the loss is $40,000. Leigh's share of the income from the office supply store is $75,000. She does not own interests in any other activities.

Melinda earns wages of $80,000, income from a limited partnership of $10,000, and a $30,000 passive activity 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, Melinda may deduct:

Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk. If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible.

Purple Corporation, a personal service corporation, earns active income of $600,000. The corporation receives $60,000 in dividends and incurs a loss of $100,000 from an investment in a passive activity acquired three years ago. What is Purple's income after considering the passive investment?

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.

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.

Last year, Wanda gave her daughter a passive activity (adjusted basis of $80,000? fair market value of $160,000) with suspended losses of $20,000. In the current year, her daughter realizes income of $10,000 from the activity. What are the tax effects to Wanda and her daughter?

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.

Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer.

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.

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?

Paula owns four separate activities. She elects not to group them together as a single activity under the "appropriate economic unit" standard. Paula participates for 130 hours in Activity A, 115 hours in Activity B, 260 hours in Activity C, and 100 hours in Activity D. She has one employee, who works 125 hours in Activity D. Which of the following statements is correct?

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. -At-risk amount.

Wolf Corporation has active income of $55,000 and a passive activity loss of $33,000 in the current year. Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.

Jennifer gave her interest in a passive activity (fair market value of $75,000 and basis of $60,000) to Harrison. Associated with the interest is a suspended passive activity loss of $8,000. Upon making the gift, the suspended passive activity loss is not deductible to Jennifer, but it will benefit Harrison.

Which of the following decreases a taxpayer's at-risk amount?

Jared earned investment income of $22,000 and incurred investment interest expense of $14,000 during the year. He incurred other investment expenses of $7,000 during the year. Jared may deduct $14,000 of investment interest in the current year.

In 2018, 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?

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: a. Determine Barb's current investment interest deduction, assuming she does not make any special election regarding the computation of investment income. b. Discuss the treatment of Barb's investment interest that is disallowed in the current year. c. What election could Barb make to increase the amount of her current investment interest deduction?