Question 1

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 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

This is true according to the IRS rules for installment sales of passive activities. Eric can deduct a proportionate amount of his suspended losses each year based on the percentage of the sales price collected that year. In this case, he can deduct $10,000 in the current year since he collected 25% of the sales price. He will be able to deduct additional portions of the suspended losses in each of the next three years as he collects more of the sales price.

Question 3

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

A qualified real estate professional is allowed to treat income or loss from any real estate venture as active, including income or loss from a rental activity, as long as they meet certain criteria such as participating in the activity for a certain amount of time and meeting certain ownership requirements.

Question 4

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 the tax code, but there are some limitations and requirements to meet in order to qualify for this deduction. It is always best to consult with a tax professional for specific advice on your individual situation.

Question 5

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 generally included in investment income for the purpose of calculating net investment income. Therefore, Bob may elect to include the $8,000 gain in his investment income calculation.

Question 6

Harry earned investment income of $18,500,incurred investment interest expense of $15,500,and other investment expenses of $9,000 during the current year.He does not itemize his personal deductions.Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years.

Accepted Answer

The maximum amount of investment interest expense that can be deducted in a given year is limited to the amount of investment income earned during that year, which in this case is $18,500. However, since Harry incurred $15,500 in investment interest expense, he can deduct up to that amount. The remaining $3,000 can be carried forward to future years. Additionally, he may deduct up to $9,000 in other investment expenses. Since he does not itemize his personal deductions, he cannot deduct any other expenses. Therefore, the total amount of investment interest expense that Harry can deduct this year is $9,500, and he can carry forward $6,000 for future years.

Question 7

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,she can deduct $25,000 of the loss.

Accepted Answer

As an active participant in a real estate rental activity, Kelly can deduct up to $25,000 of the rental real estate loss from her modified AGI of $100,000. Since she is a 10% owner, her share of the loss would be $3,500 ($35,000 x 10%), which is less than the allowed deduction of $25,000. Therefore, she can deduct the entire $3,500 loss.

Question 8

In 2016,Arnold invests $80,000 for a 20% interest in a partnership in which he is a material participant.The partnership incurs a loss with $100,000 being Arnold's share.Which of the following statements is incorrect?

Accepted Answer

Since Arnold is a material participant in the partnership, he is not subject to the passive activity loss provisions. However, the $100,000 loss is nondeductible in 2016 and 2017 because Arnold's at-risk amount is only $80,000, and he cannot claim a deduction for more than his investment in the partnership. Choices A, B, and C are correct.

Question 9

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

According to IRS guidelines, if an employee performing services has more than a 5% ownership interest in the employer, those services are considered related to a real estate trade or business.

Question 10

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

Accepted Answer

The answer of David earned investment income of $20,000,incurred investment...

Question 11

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 12

Roger owns and actively participates in the operations of an apartment building which 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 answer of Roger owns and actively participates in the...

Question 13

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 a true statement about the tax code. However, the $25,000 deduction limit starts to phase out for modified AGIs above $100,000 and completely phases out once the modified AGI reaches $150,000.

Question 14

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 the IRS, if an owner participates for more than 500 hours in a rental activity located at a beach resort, they are considered a "material participant," and any loss from that activity is treated as an active loss that can offset active income. Therefore, the statement is true.

Question 15

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 16

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 17

When determining whether an individual is a material participant,participation by an owner's spouse generally counts.

Accepted Answer

According to the IRS, for purposes of determining material participation, participation by an individual's spouse counts as participation by the individual. So, an owner's spouse's participation is generally considered when determining whether an individual is a material participant.

Question 18

Chris receives a gift of a passive activity from his father whose basis was $60,000.Suspended losses related to the activity are $18,000.Chris will be allowed to offset the $18,000 suspended losses against future passive activity income.

Accepted Answer

The answer of Chris receives a gift of a passive...

Question 19

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,and the remaining $25,000 is a suspended passive activity loss.

Accepted Answer

The answer of Lucy owns and actively participates in the...

Question 20

Joyce owns an activity (not real estate)in which she participates for 100 hours a year;her husband participates for 450 hours.Joyce qualifies as a material participant.

Accepted Answer

Joyce qualifies as a material participant because she participates in the activity for more than 100 hours per year. Her husband's participation is irrelevant for her classification as a material participant.

Quiz 11: Investor Losses