Question 1

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.

Accepted Answer

A) True 
 B)False  True

Question 2

Discuss the treatment given to suspended passive activity losses and credits. What happens to an activity's unused losses and credits when the activity is sold?

Accepted Answer

In general, passive activity losses are deductible to the extent of passive activity income from all of the taxpayer's current-year passive activities. Passive credits can be utilized only against regular tax attributable to passive activity income. If passive activity losses or credits are not used in the current year, they are carried over indefinitely for potential use in the succeeding years to offset passive income or regular tax attributable to passive activity income) in those years. An activity's unused or suspended) passive activity losses that exist when a taxpayer sells the passive activity may be used to reduce the gain from the sale, or increase the recognized loss. Thus, the suspended passive activity losses are fully utilized in the year of disposition. In contrast, passive credits are allowed on dispositions only when there is sufficient tax on passive activity income to absorb them.

Question 3

Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity. Operations of the activity result in a loss of $250,000, of which Rita's share is $50,000. How is her loss characterized?

Accepted Answer

A)   $40,000 is suspended under the passive activity loss rules and $10,000 is suspended under the at-risk rules.
B)   $40,000 is suspended under the at-risk rules and $10,000 is suspended under the passive activity loss rules.
C)   $50,000 is suspended under the passive activity loss rules.
D)   $50,000 is suspended under the at-risk rules.
E)   None of the above. A

Question 4

Tom participates for 100 hours in Activity A and 450 hours in Activity B, both of which are nonrental businesses. Both activities are active.

Accepted Answer

A) True 
 B)False

Question 5

Sandra acquired a passive activity three years ago. Until last year, the activity was profitable and her at-risk amount was $300,000. Last year, the activity produced a loss of $100,000, and in the current year, the loss is $50,000. Assuming Sandra has received no passive activity income in the current or prior years, her suspended passive activity loss from the activity is:

Accepted Answer

A)   $90,000 from last year and $50,000 from the current year.
B)   $100,000 from last year and $50,000 from the current year.
C)   $0 from last year and $0 from the current year.
D)   $50,000 from the current year.
E)   None of the above.

Question 6

In 2017, 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 2018, Kelly's share of the loss from the partnership is $15,000. How much of the loss from the partnership can Kelly deduct?

Accepted Answer

The answer of In 2017, Kelly earns a salary of...

Question 7

Kim dies owning a passive activity with a basis of $75,000, a fair market value of $140,000, and suspended losses of
$80,000. All of the $80,000 passive activity loss can be deducted on Kim's final income tax return.

Accepted Answer

A) True 
 B)False

Question 8

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.

Accepted Answer

A)   Leigh cannot deduct the $40,000 loss from the sporting goods store because she is not a material participant.
B)   Leigh can offset the $40,000 loss from the sporting goods store against the $75,000 of income from the office supply store.
C)   Leigh will not be able to deduct any losses from the sporting goods store until future years.
D)   Leigh will not be able to deduct any losses from the sporting goods store until she has been retired for at least four years.
E)   None of the above.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Harry earned investment income of $18,500, incurred investment interest expense of $15,500, and other investment expenses of $9,000 during the current year. Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years.

Accepted Answer

A) True 
 B)False

Question 11

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?

Accepted Answer

A)   $0
B)   $30,000
C)   $120,000
D)   $150,000
E)   None of the above

Question 12

Faye dies owning an interest in a passive activity property adjusted basis of $150,000, suspended losses of $52,000, and a fair market value of $180,000). What, if any, can be deducted on her final income tax return?

Accepted Answer

A)   $52,000.
B)   $30,000.
C)   $22,000.
D)   $0.
E)   None of the above.

Question 13

Dena owns interests in five businesses and has full-time employees in each business. She participates for 100 hours in Activity A, 120 hours in Activity B, 130 hours in Activity C, 140 hours in Activity D, and 125 hours in Activity E.

Accepted Answer

A)   All five of Dena's activities are significant participation activities.
B)   Dena is a material participant with respect to all five activities.
C)   Dena is not a material participant in any of the activities.
D)   Dena is a material participant with respect to Activities B, C, D, and E.
E)   None of the above.

Question 14

Rachel acquired a passive activity several years ago. Until 2015, the activity was profitable, and Rachel's at-risk amount at the beginning of 2015 was $300,000. The activity produced losses of $80,000 in 2015, $50,000 in 2016, and $70,000 in 2017. In 2018, the activity produced income of $90,000. How much is Rachel's suspended passive activity loss at the beginning of 2019?

Accepted Answer

A)   $150,000.
B)   $110,000.
C)   $60,000.
D)   $0.
E)   None of the above.

Question 15

Green Corporation earns active income of $50,000 and receives $40,000 in dividends during the year. In addition, Green incurs a loss of $70,000 from an investment in a passive activity acquired several years ago. Consider the following two statements: 1) Green's current deduction for passive activity losses is $50,000 if it is a closely held C corporation that is not a personal service corporation.
2) Green's current deduction for passive activity losses is $0 if it is a personal service corporation.
Which of the following answers is correct?

Accepted Answer

A)   Only statement 1.
B)   Only statement 2.
C)   Both statements 1 and 2.
D)   Neither statement 1 or 2.
E)   None of the above.

Question 16

Roger owns and actively participates in the operations of an apartment building which produces a $40,000 loss during the year. He has AGI of $150,000 from an active business. He may deduct $25,000 of the loss.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A)   Cash and the adjusted basis of property contributed to the activity.
B)   Amounts borrowed for use in the activity for which the taxpayer is personally liable or has pledged as security property not used in the activity.
C)   Taxpayer's share of amounts borrowed for use in the activity that is qualified nonrecourse financing.
D)   Taxpayer's share of the activity's income.
E)   None of the above.

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Stuart is the sole owner and a material participant in a business in which he has $50,000 at risk. If the business incurs a loss of $80,000 from operations, Stuart will be allowed the full amount as a deduction.

Accepted Answer

A) True 
 B)False

Exam 11: Investor Losses

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.

Discuss the treatment given to suspended passive activity losses and credits. What happens to an activity's unused losses and credits when the activity is sold?

Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity. Operations of the activity result in a loss of $250,000, of which Rita's share is $50,000. How is her loss characterized?

Tom participates for 100 hours in Activity A and 450 hours in Activity B, both of which are nonrental businesses. Both activities are active.

Kim dies owning a passive activity with a basis of $75,000, a fair market value of $140,000, and suspended losses of $80,000. All of the $80,000 passive activity loss can be deducted on Kim's final income tax return.

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

Harry earned investment income of $18,500, incurred investment interest expense of $15,500, and other investment expenses of $9,000 during the current year. Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years.

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?

Faye dies owning an interest in a passive activity property adjusted basis of $150,000, suspended losses of $52,000, and a fair market value of $180,000) . What, if any, can be deducted on her final income tax return?

Dena owns interests in five businesses and has full-time employees in each business. She participates for 100 hours in Activity A, 120 hours in Activity B, 130 hours in Activity C, 140 hours in Activity D, and 125 hours in Activity E.

Roger owns and actively participates in the operations of an apartment building which produces a $40,000 loss during the year. He has AGI of $150,000 from an active business. He may deduct $25,000 of the loss.

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

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

Stuart is the sole owner and a material participant in a business in which he has $50,000 at risk. If the business incurs a loss of $80,000 from operations, Stuart will be allowed the full amount as a deduction.