Question 1

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 2

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

The statement is true. However, the deduction of rental real estate losses is subject to certain limitations and requirements that should be carefully considered.

Question 3

Seth had interest income of $31,000, investment expenses of $28,000, and a long-term capital gain of $8,000 on an investment. In calculating his net investment income, Seth may deduct a maximum of $11,000 investment interest.

Accepted Answer

Seth can deduct up to $11,000 of investment interest, which would leave him with a net investment income of $20,000 ($31,000 interest income - $11,000 investment interest deduction + $8,000 long-term capital gain - $28,000 investment expenses).

Question 4

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

Since Eric made an installment sale of a passive activity with suspended losses of $40,000 and can deduct $10,000 of the passive loss this year, it is true that he collected 25% of the sales price in the current year, and will collect 25% in each of the next three years. Therefore, option A is correct.

Question 5

In 2012, 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

Arnold is a material participant, so the passive loss provisions do not apply to him. Therefore, his $100,000 loss is not nondeductible under these provisions.

Question 6

Gail exchanges passive Activity A, which has suspended losses of $15,000, for passive Activity B in a nontaxable exchange.The new owner of passive Activity A can offset the $15,000 suspended losses against passive income in the future.

Accepted Answer

Suspended passive activity losses are personal to the taxpayer who incurred them and cannot be transferred to another taxpayer in a nontaxable exchange.

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

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 9

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

According to IRS rules, investment interest expenses are deductible up to the amount of investment income earned in that year. Any excess interest expense can be carried forward to future years. In this case, Harry earned $18,500 of investment income and incurred $15,500 of investment interest expense. Therefore, he can deduct the full $15,500 of interest expense and carry forward the remaining $6,000 to future years. The other investment expenses of $9,000 are also deductible in the current year if they exceed 2% of Harry's adjusted gross income.

Question 10

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

Accepted Answer

To deduct a rental loss under the real estate rental exception, the taxpayer must be an active participant with respect to the rental activity. If Bruce meets this requirement, he can deduct the $25,000 loss against his AGI of $85,000, subject to limitations.

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 the individual is an active participant in the real estate activity and if their modified AGI (adjusted gross income) is below $100,000, then they can deduct up to $25,000 of the loss. Since Kelly is an active participant and her modified AGI is $100,000, she is eligible for the deduction.

Question 12

Kathy is a full-time educator, but she owns an apartment building and devotes 550 hours to managing the activity. All losses from the rental activity will be considered nonpassive and deductible against active income because she is a real estate professional.

Accepted Answer

To be considered a real estate professional, Kathy must spend more than 750 hours and over half of her working time in real estate activities. Simply managing 550 hours does not meet the criteria.

Question 13

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 14

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 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.

Question 15

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

According to the IRS, for non-real estate activities, material participation requires participation of more than 100 hours per year and that participation must be substantially all of the participation by non-owners.  Joyce participates for 100 hours, which is considered material participation, while her husband's 450 hours also qualifies him as a material participant.

Question 16

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 17

In the current year, Kenny has a $35,000 loss from a real estate rental activity.Kenny provides 1,000 hours of service to that activity, which is more than half of his working hours for the year.Kenny can deduct the $35,000 loss.

Accepted Answer

According to the IRS, if a taxpayer "actively participates" in a rental real estate activity in which he or she owns at least 10% of the property, and if the taxpayer's "adjusted gross income" is less than $150,000, then the taxpayer can deduct up to $25,000 in losses from that activity. However, the taxpayer must provide "significant services" to the activity, and the taxpayer's participation in the activity must be "regular, continuous, and substantial." Kenny providing 1,000 hours of service to the rental activity satisfies this requirement, and since the loss is $35,000 (less than $25,000), he can deduct the entire loss.

Question 18

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

Accepted Answer

The IRS considers the participation of an owner's spouse as material participation in most cases.

Question 19

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 Internal Revenue Service (IRS) rules for passive activity losses. However, there are certain limitations and requirements that must be met in order to qualify for this deduction.

Question 20

Bonnie owns and actively participates in the operations of an apartment building that produces a $40,000 loss during the year.In addition, she has AGI of $100,000 from an active business.Her at-risk amount in the apartment building is $200,000.She may deduct $25,000 of the loss in the current year, while the remaining $15,000 is a suspended passive loss.

Accepted Answer

Bonnie is allowed to deduct up to $25,000 of her passive losses from her nonpassive income since her AGI is less than $100,000. The remaining $15,000 is a suspended passive loss that can be carried forward to future years when she has passive income or if she sells the rental property. Her at-risk amount of $200,000 means that she has enough personal financial exposure in the activity to qualify for the at-risk rules.

Quiz 11: Investor Losses