Question 1

Stuart is the sole owner and a material participant in a business in which he has $50,000 at risk.If the business incurs a loss of $80,000 from operations, Stuart will be allowed the full amount as a deduction.

Accepted Answer

Stuart can only deduct up to the amount he has at risk, which is $50,000, not the full $80,000 loss from operations.

Question 2

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 activity loss this year.

Accepted Answer

According to the rules of the passive activity loss rules, when an installment sale is made, any suspended losses are deductible in proportion to the percentage of the installment payment received each year. Therefore, Eric can deduct $10,000 (25% of $40,000) of the suspended loss in the current year when he receives 25% of the sales price. He can also deduct another $10,000 in each of the next three years when he receives 25% of the sales price in each of those years.

Question 3

Bob realized a long-term capital gain of $8,000.In calculating his net investment income, Bob may elect to include the gain in investment income.

Accepted Answer

Long-term capital gains are considered investment income, and Bob has the option to include it in his net investment income calculation.

Question 4

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

Lucy actively participates in the rental activity, so the $25,000 special allowance for rental real estate losses applies. However, her modified AGI exceeds $100,000, reducing the allowance by 50% of the excess, resulting in a reduced deductible loss.

Question 5

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 rental real estate activities for active participants 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 6

During the current year, David earned investment income of $20,000.In addition, he incurred investment interest expense of $12,000 and other investment expenses of $9,000.David can deduct $12,000 of investment interest expense for this year.

Accepted Answer

The answer of During the current year, David earned investment...

Question 7

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 IRS rules, for an activity to be considered a material participation activity, one must participate for more than 500 hours in a year. As Joyce participates for 100 hours only, she does not meet this threshold. However, since her spouse participates for 450 hours, they may claim the activity as a qualified joint venture and both be treated as material participants.

Question 8

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 9

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 IRS rules on the passive activity loss rules for real estate rental activities. However, there are some limitations and qualifications to this deduction.

Question 10

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 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

This is stated in IRS Revenue Procedure 2019-38, which provides guidance on the qualified business income deduction for taxpayers with income from a real estate trade or business.

Question 12

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

Upon death, the basis of the passive activity is stepped up to its fair market value, and the suspended losses are lost if not previously deducted. They do not become fully deductible on the decedent's final income tax return.

Question 13

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 rental activities is generally classified as passive unless the taxpayer meets certain criteria to be considered a real estate professional or qualifies for an exception.

Question 14

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 a correct statement based on the IRS rules for deducting losses from real estate rental activities. As an active participant with a modified AGI of $100,000 or less, Kelly can deduct up to $25,000 of the loss in the current year.

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 for real estate rental activities. However, the $25,000 limit is reduced by $1 for every $2 of modified AGI over $100,000 and completely phases out at $150,000.

Question 16

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 passive activity loss rules limit the deduction of losses from passive activities, such as rental real estate, unless the taxpayer actively participates and has an AGI of $100,000 or less. Since Roger's AGI is $150,000, he cannot deduct the $25,000 loss.

Question 17

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 professional exception allows for the deduction of rental real estate losses without the need for material participation, but rather requires that the taxpayer performs more than half of their personal services in real property businesses in which they are materially participating, and performs more than 750 hours of services during the tax year in these real property trades or businesses. Material participation is not a requirement for the deduction under the passive activity loss rules if the taxpayer qualifies as a real estate professional. However, for non-real estate professionals, passive activity loss rules generally limit the deduction of rental losses against other types of income, with an exception for active participants in rental real estate activities, allowing a deduction of up to $25,000 against non-passive income, which phases out starting at an AGI of $100,000 and is completely phased out at $150,000.

Question 18

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 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.

Question 19

During the current year, Harry earned investment income of $18,500.In addition, he incurred investment interest expense of $15,500 and other investment expenses of $9,000.Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years.

Accepted Answer

Harry may deduct up to the amount of his investment income ($18,500) plus $1,000, which is $19,500. Since he is only deducting $9,500 this year, he may carry forward the remaining $6,000 to future years.

Question 20

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 when determining whether an individual is a material participant in a business.

Quiz 11: Investor Losses