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Exam 11: Investor Losses

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Question 51

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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.

A) True
B) False

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Question 52

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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.

A) True
B) False

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Question 53

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Describe the general rules that limit the deduction of investment interest expense.

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.He does not itemize his personal deductions.Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years.

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?

Oriole Corporation has active income of $45,000 and a passive activity loss of $23,000 in the current year.Under an exception,Oriole can deduct the $23,000 loss if it is a personal service corporation.

What special passive activity loss treatment is available to real estate activities?

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,and the remaining $25,000 is a suspended passive activity loss.

Ken has a $40,000 loss from an investment in a partnership in which he does not materially participate.He paid $30,000 for his interest.How much of the loss is disallowed by the at-risk rules? How much is disallowed by the passive activity loss rules?

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.

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

Jenny spends 32 hours a week,50 weeks a year,operating a bicycle rental store that she owns at a resort community.She also owns a music store in another city that is operated by a full-time employee.Jenny spends 140 hours per year working at the music store.She elects not to group them together as a single activity under the "appropriate economic unit" standard.

Jon owns an apartment building in which he is a material participant and also owns a computer consulting business.Of the 2,000 hours he spends on these activities during the year,55% of the time is spent operating the apartment building and 45% of the time is spent in the computer consulting business.

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.

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.

David earned investment income of $20,000,incurred investment interest expense of $12,000,and other investment expenses of $9,000 during the current year.David can deduct $12,000 of investment interest for this year.

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

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 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.

In 2015,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 2016,Kelly's share of the loss from the partnership is $15,000.How much of the loss from the partnership can Kelly deduct?