Question 1

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.

Accepted Answer

The answer of Jed spends 32 hours a week, 50...

Question 2

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

The at-risk amount is reduced by any current year losses from the activity. Therefore, Vic's at-risk amount is now $120,000 ($200,000 - $80,000). Since he had no passive activity income during the year, his passive activity loss of $80,000 is suspended and can be carried forward to future years.

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

The answer of Rita earns a salary of $150,000, and...

Question 4

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

The answer of Judy incurred $58,500 of interest expense this...

Question 5

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 activity loss limitations:

Accepted Answer

All three of the ventures are considered active and not subject to the passive activity loss limitations because Ethan materially participates in all three ventures.

Question 6

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.

Accepted Answer

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

Question 7

Art's at-risk amount in a passive activity was $60,000 at the beginning of 2016. His loss from the activity in 2016 is $80,000, and he had no passive activity income during the year. Art had $20,000 of passive activity income from the activity in 2017. Under the passive activity loss rules, Art's suspended loss at the end of 2017 is:

Accepted Answer

The answer of Art's at-risk amount in a passive activity...

Question 8

Pablo, who is single, has $95,000 of salary, $10,000 of income from a limited partnership, and a $27,000 passive activity 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?

Accepted Answer

The answer of Pablo, who is single, has $95,000 of...

Question 9

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

The answer of Jenny spends 32 hours a week, 50...

Question 10

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.

Accepted Answer

The answer of Jon owns an apartment building in which...

Question 11

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?

Accepted Answer

Wes has a loss of $25,000 suspended under the passive activity loss rules because his at-risk amount is only $25,000. He does not have an at-risk amount in the activity of $0 because his at-risk amount is still $25,000. He also does not have a loss of $10,000 suspended under the at-risk rules because his current loss exceeds his at-risk amount. Therefore, option D is incorrect because it suggests that the full loss of $35,000 is suspended under passive activity loss rules, while in reality, it is only $25,000.

Question 12

Josie, an unmarried taxpayer, has $155,000 in salary, $10,000 in income from a limited partnership, and a $26,000 passive activity 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?

Accepted Answer

The answer of Josie, an unmarried taxpayer, has $155,000 in...

Question 13

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 activity loss with respect to these activities at the end of the current year?

Accepted Answer

Passive activity losses from Activity B can offset only passive activity income, so the $100,000 loss from Activity B can only offset the $60,000 income from Activity A. The remaining $40,000 of the loss from Activity B is suspended and carried forward indefinitely, and it is available to offset future passive income. Therefore, Josh's suspended passive activity loss at the end of the current year is $40,000.

Question 14

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.

Accepted Answer

The answer of Identify from the list below the type...

Question 15

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 investment interest deduction cannot exceed net investment income, which is the sum of investment income ($18,000) and net capital gains ($4,500) minus investment expenses (which includes the investment interest expense of $95,000 and any other expenses related to producing investment income).

Therefore, Raul's net investment income is $18,000 + $4,500 - $95,000, which equals -$72,500 (a negative number because the investment expenses exceed the investment income).

Since the net investment income is negative, Raul's investment interest deduction is limited to the amount of investment income generated for the year, in this case, $18,000. However, because Raul is subject to the phase-out rules for investment interest expense, his maximum investment interest deduction for the year is limited to 30% of his adjusted gross income, which is not provided in the question.

So, the correct answer is C) $17,500, which is the lesser of the two limits.

Question 16

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.

Accepted Answer

The answer of Caroyl made a gift to Tim of...

Question 17

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.

Accepted Answer

The answer of Sarah purchased for $100,000 a 10% interest...

Question 18

In 2017, Emily invests $120,000 in a limited partnership that is not a passive activity. During 2017, her share of the partnership loss is $90,000. In 2018, her share of the partnership loss is $50,000. How much can Emily deduct in 2017 and 2018?

Accepted Answer

The answer of In 2017, Emily invests $120,000 in a...

Question 19

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

Leigh can offset the $40,000 loss from the sporting goods store against the $75,000 of income from the office supply store, as she is still a material participant in the office supply store. The fact that she retired from the sporting goods store does not affect her ability to deduct the loss.

Question 20

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

When the passive activity was profitable in the previous years, Sandra's at-risk amount was $300,000. Last year, the passive activity produced a loss of $100,000, which exceeds Sandra's at-risk amount. Therefore, she had to suspend the excess loss of $100,000.

In the current year, the passive activity produced a loss of $50,000. Since Sandra's at-risk amount from the previous year was $300,000, she can use up to $250,000 of losses in the current year ($300,000 at-risk amount minus $50,000 current year loss).

Therefore, Sandra's suspended passive activity loss is $100,000 (excess loss from last year that was suspended) plus $50,000 (loss from the current year that cannot be currently used) for a total suspended loss of $150,000.

Choice B is the correct answer because it correctly adds the suspended loss of $100,000 from last year and the $50,000 loss from the current year.

Quiz 11: Investor Losses