Question 1

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 statement is true according to the IRS rules for real estate rental activities. The $25,000 limit is subject to certain income limitations and qualifications.

Question 2

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

The answer of Tom participates for 100 hours in Activity...

Question 3

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 rental exception allows taxpayers to deduct up to $25,000 of passive rental real estate losses if they actively participate, not necessarily as a material participant. Active participation is a less stringent standard than material participation.

Question 4

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.

Accepted Answer

The answer of From January through November, Vern participated for...

Question 5

Mary Jane participates for 100 hours during the year in an activity she owns.She has no employees and is the only participant in the activity.The activity is a significant participation activity.

Accepted Answer

For an activity to be considered a significant participation activity, the taxpayer must participate for more than 100 hours during the tax year. Since Mary Jane participates for exactly 100 hours, it does not meet the threshold for a significant participation activity.

Question 6

In the current year, Louise invests $50,000 for a 20% 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 from the activity this year is suspended for use in a future year.

Accepted Answer

Per the IRS, if an individual has only one passive activity and incurs a loss, that loss is suspended and can be carried forward to offset future passive income or gains from the same activity. Therefore, the $10,000 loss from Louise's passive activity this year will be suspended for use in a future year.

Question 7

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 or less, she can deduct $25,000 of the loss.

Accepted Answer

This is in accordance with the IRS rules for deducting losses from a real estate rental activity, known as the "passive activity loss rules." If certain criteria are met, a taxpayer may be able to deduct up to $25,000 of passive losses in a given tax year. Kelly's 10% ownership and active participation in the rental activity, along with her modified AGI being $100,000 or less, would qualify her for this deduction.

Question 8

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 rules, if an owner materially participates for more than 500 hours in an activity, it is considered an active activity. Therefore, any loss from that activity can offset active income.

Question 9

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 a rental activity is generally considered passive for tax purposes, even if the taxpayer is a real estate professional. There are certain exceptions to this rule, such as if the taxpayer materially participates in the rental activity.

Question 10

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

According to the IRS guidelines, a material participant is someone who participates in an activity for more than 500 hours per year or who substantially participates in a significant activity in which they own an interest. Since Joyce participates for 100 hours and her spouse participates for 450 hours, their combined participation exceeds the 500-hour threshold, making Joyce a material participant.

Question 11

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 regulations, services performed by an employee are considered as related to a real estate trade or business if the employee has more than a 5% ownership interest in the employer.

Question 12

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

Accepted Answer

Since Tomas participated in both activities for more than 500 hours in total and both activities are active, he meets the material participation test for these businesses according to IRS guidelines.

Question 13

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

Accepted Answer

According to IRS rules, participation by an owner's spouse generally counts towards determining whether an individual is a material participant.

Question 14

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

Accepted Answer

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

Question 15

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 is true according to IRS rules. However, the deduction amount decreases as AGI increases and is completely phased out at an AGI of $150,000.

Question 16

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 active participants in a rental real estate activity 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 17

Roger owns and actively participates in the operations of an apartment building that 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 18

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

Accepted Answer

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

Question 19

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

The suspended passive activity losses can generally be deducted in full in the year of the taxpayer's death, but they are deducted on the estate's income tax return, not on the decedent's final income tax return.

Question 20

A taxpayer is considered to be a material participant in a significant participation activity if he or she spends at least 400 hours in the activity.

Accepted Answer

A taxpayer is considered a material participant in a significant participation activity if they participate for more than 100 hours during the tax year, and their participation is not less than the participation of any other individual. The 400-hour threshold specifically applies to the criterion for qualifying as a material participant in any activity, not just significant participation activities.

Quiz 6: Losses and Loss Limitations