Question 1

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

This statement is correct according to the rules for deducting investment interest expense. The deduction is limited to the amount of investment income earned in the current year, which in this case is $18,500. However, any excess interest expense can be carried forward to future years, and in this case, the carryforward amount is $6,000. Therefore, Harry can deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years.

Question 2

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

This is true according to the IRS. However, if the individual's adjusted gross income exceeds a certain amount, the $25,000 deduction may be reduced or phased out completely.

Question 3

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 loss can be deducted on Kim's final income tax return.

Accepted Answer

The answer of Kim dies owning a passive activity with...

Question 4

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.

Accepted Answer

This statement is true. The IRS allows individuals with a modified adjusted gross income (AGI) of $100,000 or less to deduct up to $25,000 in losses from real estate rental activities in which they actively participate. It is important to note that this deduction is phased out for individuals with modified AGI between $100,000 and $150,000.

Question 5

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.

Accepted Answer

Long-term capital gains are often considered investment income and can be included in the calculation of net investment income. Bob has the option to include the $8,000 gain in his investment income for this purpose.

Question 6

Chris receives a gift of a passive activity from his father whose basis was $60,000. Suspended losses related to the activity are $18,000. Chris will be allowed to offset the $18,000 suspended losses against future passive income.

Accepted Answer

The answer of Chris receives a gift of a passive...

Question 7

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

The answer of Roger owns and actively participates in the...

Question 8

In 2014, Arnold 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 Arnold's share. Which of the following statements is incorrect?

Accepted Answer

Statements a. ,b. ,and c.are correct.The passive loss provisions do not apply because Arnold is a material participant.

Question 9

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.

Accepted Answer

Joyce qualifies as a material participant because she participates in the activity for at least 100 hours per year, which meets the IRS definition of material participation. The fact that her husband participates for more hours does not affect Joyce's status as a material participant.

Question 10

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 loss.

Accepted Answer

The answer of Lucy owns and actively participates in the...

Question 11

In the current year, Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner. If she is an active participant and if her modified AGI is $100,000, she can deduct $25,000 of the loss.

Accepted Answer

According to IRS rules, if an individual is an active participant in a real estate rental activity, they can deduct up to $25,000 of the loss if their modified AGI is less than $100,000. Kelly meets both these criteria, so she can deduct $25,000 of the $35,000 loss.

Question 12

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

According to IRS guidelines, services performed by an employee with more than a 5% ownership interest in their employer are considered related to a real estate trade or business.

Question 13

If an owner participates for more than 500 hours in a bicycle rental activity located at a beach resort, any loss from that activity is treated as an active loss that can offset active income.

Accepted Answer

According to IRS Publication 925, if an owner participates in a rental activity for more than 500 hours during the tax year, the rental activity is considered as a "material participation" and any losses can offset active income.

Question 14

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.

Accepted Answer

When an installment sale is made for a passive activity with suspended losses, the seller can deduct the portion of the suspended losses that is proportional to the amount of the gain recognized in each year. In this case, Eric collects 25% of the sales price in the current year, so he can deduct 25% of the suspended losses, or $10,000. Therefore, the statement is true.

Question 15

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 a material participant with respect to the rental activity in order to deduct the $25,000 loss under the real estate rental exception.

Accepted Answer

The real estate professional exception allows for the deduction of rental real estate losses without the need for material participation, but rather requires that the taxpayer performs more than half of their personal services in real property businesses in which they are materially participating, and performs more than 750 hours of services during the tax year in these real property trades or businesses. Material participation is not a requirement for the deduction under the passive activity loss rules if the taxpayer qualifies as a real estate professional. However, for non-real estate professionals, passive activity loss rules generally limit the deduction of rental losses against other types of income, with an exception for active participants in rental real estate activities, allowing a deduction of up to $25,000 against non-passive income, which phases out starting at an AGI of $100,000 and is completely phased out at $150,000.

Question 16

A qualified real estate professional is allowed to treat income or loss from any real estate venture as active except for income or loss from a rental activity.

Accepted Answer

Income or loss from rental activity is generally considered passive under tax regulations, regardless of whether the real estate professional is actively involved.

Question 17

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.

Accepted Answer

The answer of Investment income can include gross income from...

Question 18

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.

Accepted Answer

Wayne cannot deduct the full $45,000 loss because the IRS limits the loss deduction for rental real estate activities for active participants to $25,000, which phases out starting at an AGI of $100,000 and is completely phased out at $150,000. Since Wayne's AGI is $85,000, he can deduct up to $25,000 of the loss, not the full $45,000.

Question 19

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.

Accepted Answer

The answer of David earned investment income of $20,000, incurred...

Question 20

When determining whether an individual is a material participant, participation by an owner's spouse generally counts.

Accepted Answer

According to the IRS, when determining material participation of an individual in a business, participation by the individual's spouse is generally considered. This is because spouses are often closely tied to each other's financial interests and activities.

Quiz 11: Investor Losses