Question 1

Judy incurred $58,500 of interest expense this year related to her investments.Her investment income includes $15,000 of interest,$9,000 of qualified dividends,and a $22,500 net capital gain on the sale of securities.The maximum amount of Judy's investment interest expense deduction for the year is:

Accepted Answer

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Question 2

Raul is married and files a joint tax return.His current investment interest expense of $95,000 is related to a loan used to purchase a parcel of unimproved land.Income from investments [dividends (not qualified) and interest] total $18,000.Raul paid $5,000 of real estate taxes on the unimproved land.He also has a $4,500 net long-term capital gain from the sale of another parcel of unimproved land.Raul's maximum investment interest deduction for the year is:

Accepted Answer

The maximum investment interest deduction that Raul can take is the lesser of his investment income ($18,000) or his investment interest expense ($95,000) reduced by any investment expenses not deductible elsewhere (which are not given in the question). Therefore, the maximum investment interest deduction for Raul is $17,500 ($95,000 - $5,000 - $4,500 - $68,000).

Question 3

During the current year,Ethan performs personal services as follows: 800 hours in his information technology consulting practice,625 hours in a real estate development business,and 510 hours in a condominium leasing operation.He expects that losses will be realized from the two real estate ventures while his consulting practice will show a profit.Ethan files a joint return with his wife whose salary is $125,000.The income and losses from the following ventures is considered active and not subject to the passive loss limitations:

Accepted Answer

The information technology consulting practice is considered active because Ethan performs personal services in the business. The real estate development business and the condominium leasing operation are also considered active because Ethan materially participates in both businesses.

Question 4

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

As Leigh was a material participant in the sporting goods store for the last fifteen years, she can use the loss from the store to offset the income from the office supply store, as long as she meets the material participation rules for the office supply store. Therefore, choice B is correct. Choices A, C, D are incorrect as they are not applicable in this scenario.

Question 5

Wes's at-risk amount in a passive activity is $25,000 at the beginning of the current year.His current loss from the activity is $35,000 and he has no passive activity income.At the end of the current year,which of the following statements is incorrect?

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Question 6

Sarah purchased for $100,000 a 10% interest in a business venture that is not subject to the passive activity rules.During the first year,her share of the entity's loss was $120,000.At the beginning of the second year,the entity obtained $800,000 of recourse financing.During the second year,Sarah withdrew cash of $20,000,and her share of the entity's loss was $25,000.Calculate the amount of loss that Sarah may claim in each of the two years and determine her at-risk amount at the end of each year.

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Question 7

In 2015,Emily invests $120,000 in a limited partnership that is not a passive activity.During 2015,her share of the partnership loss is $90,000.In 2016,her share of the partnership loss is $50,000.How much can Emily deduct in 2015 and 2016?

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Question 8

Jon owns an apartment building in which he is a material participant and 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.

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Question 9

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

Rita's loss is limited by both the passive activity loss rules and the at-risk rules. She can only deduct losses up to her at-risk amount, which is $40,000. Therefore, $40,000 is suspended under the passive loss rules, and the remaining $10,000 is suspended under the at-risk rules.

Question 10

Identify from the list below the type of disposition of a passive activity where the taxpayer keeps the suspended losses of the disposed activity and utilizes them on a subsequent taxable disposition.

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Question 11

Art's at-risk amount in a passive activity was $60,000 at the beginning of 2014.His loss from the activity in 2014 is $80,000,and he had no passive activity income during the year.Art had $20,000 of passive income from the activity in 2015.Under the passive loss rules,Art's suspended loss at the end of 2015 is:

Accepted Answer

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Question 12

Pablo,who is single,has $95,000 of salary,$10,000 of income from a limited partnership,and a $27,000 passive loss from a real estate rental activity in which he actively participates.His modified adjusted gross income is $95,000.Of the $27,000 loss,how much is deductible?

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Question 13

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 income in the current or prior years,her suspended passive loss from the activity is:

Accepted Answer

When an activity produces a loss, the at-risk amount is reduced by the amount of the loss. Therefore, Sandra's at-risk amount was reduced to $200,000 after last year's loss. The suspended loss from last year is the amount by which the loss exceeds the at-risk amount, which is $100,000. The current year's loss of $50,000 is also suspended because Sandra has not received any passive income to offset it. Therefore, the total suspended passive loss is $100,000 from last year and $50,000 from the current year, which is option B.

Question 14

Caroyl made a gift to Tim of a passive activity (adjusted basis of $50,000,suspended losses of $20,000,and a fair market value of $80,000).No gift tax resulted from the transfer.

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Question 15

Josie,an unmarried taxpayer,has $155,000 in salary,$10,000 in income from a limited partnership,and a $26,000 passive loss from a real estate rental activity in which she actively participates.If her modified adjusted gross income is $155,000,how much of the $26,000 loss is deductible?

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Question 16

Kate dies owning a passive activity with an adjusted basis of $100,000.Its fair market value at that date is $130,000.Suspended losses relating to the property were $45,000.

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Question 17

Jed spends 32 hours a week,50 weeks a year,operating a bicycle rental store that he owns at a resort community.He also owns a music store in another city that is operated by a full-time employee.He elects not to group them together as a single activity under the "appropriate economic unit" standard.Jed spends 40 hours per year working at the music store.

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Question 18

Josh has investments in two passive activities.Activity A,acquired three years ago,produces income in the current year of $60,000.Activity B,acquired last year,produces a loss of $100,000 in the current year.At the beginning of this year,Josh's at-risk amounts in Activities A and B are $10,000 and $100,000,respectively.What is the amount of Josh's suspended passive loss with respect to these activities at the end of the current year?

Accepted Answer

Josh's at-risk amount in Activity A is $10,000, which means that he can only deduct up to $10,000 of losses from Activity A. Since Activity A produced income of $60,000, there is no loss to suspend.

However, in Activity B, there is a loss of $100,000, which exceeds Josh's at-risk amount of $100,000. Therefore, only $40,000 of the loss can be currently deducted. The remaining $60,000 is suspended and carried forward to future years as a suspended passive loss.

Thus, the amount of Josh's suspended passive loss with respect to these activities at the end of the current year is $60,000 - $20,000 (the excess of the loss over the at-risk amount) = $40,000.

Therefore, the correct answer is (C) $40,000.

Question 19

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.

Accepted Answer

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Question 20

Vic's at-risk amount in a passive activity is $200,000 at the beginning of the current year.His current loss from the activity is $80,000.Vic had no passive activity income during the year.At the end of the current year:

Accepted Answer

Vic's at-risk amount is reduced by the current loss of $80,000, leaving an at-risk amount of $120,000. Since he had no passive activity income during the year, the $80,000 loss is suspended and carried forward to future years. Therefore, the correct answer is A.

Quiz 11: Investor Losses