On January 1, X9, Gerald received his 50 percent profits and capital interest in High Air, LLC, in exchange for $3,000 in cash and real property with a $4,000 tax basis secured by a $3,000 nonrecourse mortgage. High Air reported a $16,000 loss for its X9 calendar year. How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation?
A)$0, $5,500
B)$0, $8,000
C)$0, $16,000
D)$5,500, $0
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

Gerald's initial tax basis in High Air, LLC, would be the sum of his cash contribution ($3,000) and the tax basis of the real property he contributed ($4,000), totaling $7,000. However, since the real property was secured by a $3,000 nonrecourse mortgage, which High Air, LLC, would assume, Gerald's basis would be reduced by this amount. Thus, his adjusted basis for considering loss deductions would be $4,000 ($7,000 - $3,000). Given that High Air reported a $16,000 loss for the year, and considering only the tax basis loss limitation, Gerald would be able to deduct losses only up to his adjusted basis of $4,000. The remaining loss of $12,000 ($16,000 - $4,000) would have to be suspended until he has sufficient basis in the future to deduct it. None of the provided choices accurately reflect this calculation.

On January 1, X9, Gerald Received His 50 Percent Profits