Question 1

Regardless of a taxpayer's involvement in the management of their rental property, individual taxpayers may deduct up to $25,000 of rental real estate losses against other income, provided their income does not exceed certain limits.

Accepted Answer

The answer of Regardless of a taxpayer's involvement in the...

Question 2

Arnold purchased two rental properties 6 years ago.He actively participates in their management.During 2018, 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 passive loss of $10,000 for the year.

The $22,000 income from one rental property is offset by the $32,000 loss from the other rental property, resulting in a net loss of $10,000.

Since Arnold actively participates in managing the rental properties, he can deduct up to $25,000 of net passive losses against his other income.

Therefore, the answer is (B) $10,000 net loss, which is within the limit of $25,000 that Arnold can deduct from his other income.

Question 3

Christian, a single taxpayer, acquired a rental house in 2005.The rental house, which Christian actively manages, generated a $15,000 loss in 2018.In addition, Christian owns a limited partnership interest which he acquired in 2010.His share of the partnership loss for 2018 is $10,000.Christian has modified adjusted gross income, before the rental loss and partnership loss, of $134,000.What is the amount of these losses that Christian may deduct in 2018?

Accepted Answer

The answer of Christian, a single taxpayer, acquired a rental...

Question 4

For purposes of the passive loss rules, income is classified into three separate categories.What are the three categories of individual income? Give an example of each.(1)(2)(3)

Accepted Answer

The answer of For purposes of the passive loss rules,...

Question 5

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

Active real estate professionals can deduct up to $25,000 of rental losses against their ordinary income if their modified adjusted gross income is under $150,000. However, if the taxpayer has a business income which pushes their modified adjusted gross income above $150,000, they are then allowed to deduct all rental losses against their ordinary income. Therefore, Norm can deduct the full $50,000 of rental losses against his business income.

Question 6

Karen has a net operating loss in 2018.If she does not make any special elections, what is the first year to which Karen can carry the net operating loss?

Accepted Answer

A net operating loss (NOL) can be carried back 2 years and forward 20 years. Since 2018 is the current year, the first year to which Karen can carry the NOL is 2019.

Question 7

Nancy has active modified adjusted gross income before passive losses of $125,000.She has a loss of $15,000 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

Nancy can deduct up to $25,000 in net rental losses if she actively manages the rental property and if her adjusted gross income is $100,000 or less. However, since her income is $125,000, she must reduce her rental loss deduction by $10 for every $1,000 her income exceeds $100,000. So, $125,000 - $100,000 = $25,000 excess income divided by $1,000 gives $25 reduction per $1,000 of excess income. Then, $15,000 loss divided by $1,000 and multiplied by $25 gives $375. Therefore, $15,000 loss minus $375 is $14,625, which is the amount she is allowed to deduct against the $125,000 of other income. $14,625 is approximately $12,500.

Question 8

Patrick has a business net operating loss of $70,000 in 2018.Patrick's business generated significant taxable profits in 2016 and in 2017.Which of the following is true?Patrick may elect to offset the income he generated in 2017 with 2018's net operating loss.The remaining net operating loss (if any)can be used to offset future taxable income.

Accepted Answer

The answer of Patrick has a business net operating loss...

Question 9

Thelma works at a liquor store in 2018 and makes $44,000.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 net rental income and she owns a stake in a limited partnership that generates a $15,000 loss.What is her adjusted gross income in 2018?

Accepted Answer

The answer of Thelma works at a liquor store in...

Question 10

Choose the correct statement.Passive losses

Accepted Answer

Passive losses often result from the rental of real estate.

Question 11

Warren invested in a limited partnership tax shelter in 2011.During 2018, 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 2018?

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 12

Net operating losses in 2018 may be carried forward indefinitely.

Accepted Answer

The Tax Cuts and Jobs Act (TCJA) changed the rules for Net Operating Losses (NOL) incurred after 2017. Under the TCJA, NOLs can be carried forward indefinitely but the deduction is limited to 80% of taxable income in any given year. Therefore, the statement is true.

Question 13

The net operating loss (NOL)provisions of the Internal Revenue Code

Accepted Answer

The net operating loss provisions of the Internal Revenue Code are primarily designed to provide relief for trade or business losses. They allow businesses to carryback or carryover losses to offset taxable income in other years, providing a way to smooth out income fluctuations and avoid double taxation on losses. They do not apply only to individuals with wages and itemized deductions, do not require a 2-year carryback in all cases, do not allow the deduction for home mortgage interest to create an NOL, and would still be necessary even with progressive tax rates.

Question 14

Wages are considered "active income."

Accepted Answer

Wages are earned by actively performing work and therefore are considered active income.

Question 15

Carey, a single taxpayer, purchased a rental house in 2018, which he actively manages.During 2018, Carey had a loss of $14,000 from the rental house.If Carey's adjusted gross income for 2018 is $138,000 before the rental loss, what is the amount of Carey's allowable deduction for the rental activity for 2018?

Accepted Answer

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

Question 16

Ned has active modified adjusted gross income before passive losses of $160,000.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

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

Question 17

For the current year, Robert, a single taxpayer, earned wages of $235,000 from Big Shot Corporation.He also received interest income of $1,000 from Little Credit Union.Robert had a $9,000 loss from his rental property which he actively manages.$2,000 of income was also reported on his Schedule K-1 from ABC Limited Partnership.Neither the rental property nor the partnership investment has passive losses carried over from prior years.Since Robert is not an active participant in a retirement plan, he decides to contribute $5,500 to his IRA.
a.Calculate Robert's adjusted gross income using the above information.
b.How much is Robert's unallowed loss from his passive investments?
c.What happens to the unallowed passive loss?
d.Calculate Robert's adjusted gross income assuming his wages were only $35,000.

Accepted Answer

The answer of For the current year, Robert, a single...

Question 18

Dividend income is considered "passive income."

Accepted Answer

The answer of Dividend income is considered "passive income."...

Question 19

Arnold purchased interests in two limited partnerships 6 years ago.During 2018, 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 2018?

Accepted Answer

Arnold's net passive losses are $10,000 ($32,000 loss from the partnership minus $22,000 income from the other partnership). However, the passive loss deduction is limited to the amount of passive income, which is $2,000. Therefore, Arnold's net passive losses that he may deduct for 2018 are $2,000.

Question 20

Which of the following can be used to offset a passive loss?

Accepted Answer

Passive losses can generally only be offset against passive income, such as income from a limited partnership.

Quiz 4: Additional Income Part 2