On January 1, X9, Gerald received his 50% profits and capital interest in High Air, LLC in exchange for $2,000 in cash and real property with a $3,000 tax basis secured by a $2,000 nonrecourse mortgage. High Air reported a $15,000 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, $4,000.
B) $0, $7,500.
C) $0, $15,000.
D) $4,000, $0.
E) None of the choices are correct.

Question

Quizplus · Accepted Answer

Gerald's initial tax basis is $4,000 [$2,000 + $3,000 - $2,000 + (50% × $2,000)]. Gerald would be allocated 50% of the $15,000 X9 loss, or $7,500. The amount Gerald could deduct currently is limited to his basis in High Air. Thus, Gerald could deduct $4,000 currently, and the remaining $3,500 loss would be suspended and carried forward indefinitely.

On January 1, X9, Gerald Received His 50% Profits and Capital