On January 1, X9, Gerald received his 50 percent profits and capital interest in High Air, LLC, in exchange for $3,200 in cash and real property with a $4,200 tax basis secured by a $3,200 nonrecourse mortgage. High Air reported a $16,200 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?

Question

Quizplus · Accepted Answer

Gerald's initial tax basis in High Air, LLC, is the sum of his cash contribution ($3,200) and the tax basis of the real property contributed ($4,200), totaling $7,400. However, since the property is secured by a $3,200 nonrecourse mortgage, which Gerald is not personally liable for, this amount does not increase his at-risk amount but does count towards his basis for loss deduction purposes. Therefore, his initial basis for deducting losses is $7,400. The loss from High Air ($16,200) exceeds Gerald's basis, so he can only deduct losses up to his basis amount of $7,400, leaving $8,800 ($16,200 - $7,400) of the loss to be suspended due to the basis limitation. None of the provided choices accurately reflect this calculation.

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