Question 1

Choose the correct statement.Passive losses

Accepted Answer

Passive losses often result from the rental of real estate, such as when expenses related to owning and managing rental properties exceed the rental income earned. Additionally, passive losses may only be used to offset passive income, which means they cannot be used to offset other types of income such as portfolio income (Option B) or active income. Lastly, passive losses may be carried forward to offset future passive income, but if unused, they may not be used to offset any other types of income and are therefore lost forever (Option D).

Question 2

Thelma works at a liquor store in 2013 and makes $45,000.She also has dividend income of $12,000 and interest income of $1,000.She owns a beach house that gives her $11,000 in rental income and she owns a stake in a limited partnership that generates a $15,000 loss.What is her adjusted gross income in 2013?

Accepted Answer

Thelma's adjusted gross income (AGI) is calculated by adding her salary, dividend income, interest income, and rental income, then subtracting the partnership loss: $45,000 + $12,000 + $1,000 + $11,000 - $15,000 = $54,000.

Question 3

Bill is the owner of a house with two identical apartments.He resides in one apartment and rents the other apartment to a tenant.The tenant made timely monthly rental payments of $500 per month for the months of January through December,2013.The following expenses were incurred on the entire building: $\begin{array}{lr}
\text { Utilities } & \$ 3,600 \
\text { Maintenance and repairs } & \$ 800 \
\text { Insurance on building } & \$ 600
\end{array}$ In addition,depreciation allocable to the rented apartment is $1,500.What amount should Bill report as net rental income for 2013?

Accepted Answer

The net rental income is calculated as total rental income minus expenses related to the rented apartment. Rental income is $500 x 12 = $6,000. Expenses for the rented apartment are half of the total building expenses: Utilities $1,800, Maintenance $400, Insurance $300, plus Depreciation $1,500. Total expenses = $4,000. Net rental income = $6,000 - $4,000 = $2,000.

Question 4

Arnold purchased interests in two limited partnerships 6 years ago.During 2013,Arnold had income of $22,000 from one of the partnerships.He had a loss from the other partnership of $32,000,salary income of $35,000,and dividend income of $2,000.What is the amount of net passive losses that Arnold may deduct for 2013?

Accepted Answer

The net passive loss is the total passive losses minus the total passive income. Arnold's total passive losses are $32,000, and his total passive income is $22,000. Therefore, his net passive loss is $10,000. However, the maximum amount of net passive loss that Arnold can deduct is $25,000, which is the amount of his passive income. Therefore, Arnold's net passive loss deduction for 2013 is $0.

Question 5

In a distribution rollover from an IRA,the recipient must contribute 80 percent of the distributed amount to the new trustee in order for the rollover to be tax free.

Accepted Answer

The recipient must contribute 100% of the distributed amount to the new trustee in order for the rollover to be tax free.

Question 6

Ned has active modified adjusted gross income before passive losses of $170,000.He has a loss of $15,000 on rental property he actively manages.How much of the loss is he allowed to deduct against his other income?

Accepted Answer

Ned's income exceeds the $150,000 threshold for the passive activity loss deduction, so he cannot deduct any of the rental property loss against his other income.

Question 7

Warren invested in a limited partnership tax shelter in 2000.During 2013,his losses from the partnership amount to $100,000.If Warren has no passive income,what is the amount of Warren's deduction for passive losses for 2013?

Accepted Answer

Warren cannot deduct passive losses against non-passive income. Since he has no passive income, his deduction for passive losses is $0.

Question 8

If an employer makes a contribution to a qualified retirement plan on behalf of an employee,the amount is currently deductible by the employer,and the employee must include the amount in gross income at the time the contribution is made.

Accepted Answer

Employer contributions to a qualified retirement plan are currently deductible by the employer, but they are not included in the employee's gross income at the time the contribution is made. Instead, these contributions and their earnings are taxed upon distribution.

Question 9

Under a defined contribution plan,the contribution made on behalf of the employee is determined using a formula dependent on the employee's current compensation.

Accepted Answer

Under a defined contribution plan, the contribution made on behalf of the employee is determined using a formula that is dependent on the employee's current compensation or salary.

Question 10

If a Section 401k)plan allows an employee to choose between a direct payment of compensation in cash or a contribution to the retirement plan,the plan is not a "qualified" plan.

Accepted Answer

A Section 401(k) plan can still be a qualified plan even if it allows employees to choose between receiving cash or contributing to the retirement plan. As long as the plan meets certain requirements outlined in the Internal Revenue Code, it can maintain its qualified status.

Question 11

Norm is a real estate professional with a real estate trade or business as defined in the tax law.He has $150,000 of business income and $50,000 of losses from actively managed real estate rentals.How much of the $50,000 in losses is he allowed to claim on his tax return?

Accepted Answer

As Norm has a real estate trade or business, he is not subject to the passive activity rules that limit the deduction of losses from rental real estate activities. Therefore, he is allowed to claim the full $50,000 of losses on his tax return against his business income.

Question 12

Patrick owns a home on the beach in Daytona.He lives in the house for most of the year but leaves town during the big motor sports race that comes through every year.During that time,he rents his home out for 3 weeks to race fans for $5,000.Which of the following is true?

Accepted Answer

Because Patrick rented the home for more than 14 days, he must report the income. He is also allowed to deduct a percentage of expenses such as utilities and depreciation to the extent of the income. This is because the home is considered a rental property during the time it is being rented out and therefore, expenses related to the rental can be deducted.

Question 13

Nancy has active modified adjusted gross income before passive losses of $125,000.She has a loss of $10,000 on a rental property she actively manages.How much of the loss is she allowed to deduct against the $125,000 of other income?

Accepted Answer

The answer of Nancy has active modified adjusted gross income...

Question 14

Lester rents his vacation home for 6 months and lives in the home during the other 6 months of 2013.The gross rental income from the home is $4,500.For the entire year,real estate taxes are $800,interest is $3,000,utilities and maintenance expenses are $2,200,and depreciation expense on the entire home would be $4,000.What is Lester's allowable net loss from renting his vacation home?

Accepted Answer

The answer of Lester rents his vacation home for 6...

Question 15

Carey,a single taxpayer,purchased a rental house in 2013,which he actively manages.During 2013,Carey had a loss of $14,000 from the rental house.If Carey's adjusted gross income for 2013 is $140,000 before the rental loss,what is the amount of Carey's allowable deduction for the rental activity for 2013?

Accepted Answer

The answer of Carey,a single taxpayer,purchased a rental house in...

Question 16

Arnold purchased two rental properties 6 years ago.He actively participates in their management.During 2013,Arnold had income of $22,000 from one of the rentals.He had a loss from the other rental of $32,000,as well as salary income of $35,000,and dividend income of $2,000.What is Arnold's net passive income or loss deduction?

Accepted Answer

Arnold has a net loss from his rental properties of ($32,000-$22,000) = $10,000. This is classified as a passive loss because he actively participates in the management of the properties. Since his salary income and dividend income are not passive, they cannot be used to offset the passive loss. Therefore, Arnold has a net passive loss deduction of $10,000.

Question 17

The expenses associated with the rental of a residence used for both personal and rental purposes are subject to three possible tax treatments.Which of the following is not included as one of the three?

Accepted Answer

The three tax treatments for expenses associated with a residence used for both personal and rental purposes are: 
1) If the residence is rented for fewer than 15 days during the year the rental period is disregarded and the residence is regarded as a personal residence for tax purposes.
2) If the residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, the residence is treated as rental property.
3) If the residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, the residence is treated as a personal residence for tax purposes. 
Option C is not one of the three treatments, as it is identical to the second treatment. Option C can be eliminated. Option A, B, and D are correct treatments.

Question 18

Donald owns a two-family home.He rents out the first floor and resides on the second floor.The following expenses attributable to the total building were incurred by Donald for the year ended December 31,2013: $\begin{array}{lc}
\text { Real estate taxes } & \$ 1,800 \
\text { Mortgage interest } & \$ 1,200 \
\text { Utilities } & \$ 1,000 \
\text { Repairs (first floor) } & \$ 300 \
\text { Painting (second floor) } & \$ 400
\end{array}$ In addition,the depreciation attributable to the entire building would be $2,000.What is the total amount of the expenses that Donald can deduct on Schedule E of Form 1040 before any limitations)?

Accepted Answer

The total amount of the expenses that Donald can deduct on Schedule E of Form 1040 before any limitations is $3,300. This includes the real estate taxes, mortgage interest, utilities, and repairs for the first floor. The painting for the second floor is not deductible because it is a personal expense.

Question 19

Mort is the owner of an apartment building containing ten identical apartments.Mort resides in one apartment and rents out the remaining units.For 2013,the following information is available: $\begin{array}{ll}
\text { Gross rents } & \$ 21,600 \
\text { Utilities for total building } & \$ 2,500 \
\text { Maintenance and repairs (rental apartments only) } & \$ 1,200 \
\text { Advertising for vacant apartments } & \$ 300 \
\text { Depreciation of building (all ten units) } & \$ 5,000
\end{array}$ What amount should Mort report as net rental income for 2013?

Accepted Answer

To calculate net rental income, subtract the expenses related to the rental units from the gross rents. Expenses include utilities (90% of $2,500 = $2,250), maintenance and repairs ($1,200), advertising ($300), and depreciation (90% of $5,000 = $4,500). Net rental income = $21,600 - ($2,250 + $1,200 + $300 + $4,500) = $13,350.

Question 20

In order for a pension plan to be considered a "qualified" retirement plan,the plan must satisfy certain minimum vesting requirements.

Accepted Answer

This is true. In order for a retirement plan to be considered "qualified," it must meet a number of requirements, including minimum vesting standards. The vesting requirements vary depending on the type of plan, but essentially determine when employees have a non-forfeitable right to their employer's contributions to the plan.

Quiz 4: Business Income and Expenses, Part II