Question 1

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...

Question 2

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 3

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. Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years.

Accepted Answer

This is because the investment interest expense deduction is limited to the amount of investment income earned for the current year. In this case, Harry earned $18,500 in investment income and incurred $15,500 in investment interest expense, allowing him to deduct $9,500 of interest expense. The remaining $6,000 can be carried forward to future years. The other investment expenses are not relevant to the deduction of investment interest expense.

Question 4

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 statement is true. The IRS allows individuals with a modified adjusted gross income (AGI) of $100,000 or less to deduct up to $25,000 in real estate rental activity losses against active or portfolio income if they actively participate in the activity. However, this deduction begins to phase out for individuals with modified AGI between $100,000 and $150,000.

Question 5

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

Under the IRS rules for real estate rental activities, if an individual is an active participant and their modified adjusted gross income (MAGI) is less than $100,000, they can deduct up to $25,000 of losses from real estate rental activities in which they own at least 10%. In this scenario, Kelly meets both criteria and therefore can deduct $25,000 of the $35,000 loss.

Question 6

In 2017, 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

Arnold is a material participant, so the passive activity loss provisions do not apply to him. Therefore, statement D is incorrect.

Question 7

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

Accepted Answer

According to the IRS, the participation of an owner's spouse in a business generally counts towards determining material participation.

Question 8

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 9

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 10

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 bicycle rental activity located at a beach resort, any loss from that activity is treated as an active loss that can offset active income. This is known as the "500-hour rule."

Question 11

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 regulations, services performed by an employee are considered related to a real estate trade or business if the employee has a more than 5% ownership interest in the employer.

Question 12

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 13

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 14

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

According to the rules of the passive activity loss rules, when an installment sale is made, any suspended losses are deductible in proportion to the percentage of the installment payment received each year. Therefore, Eric can deduct $10,000 (25% of $40,000) of the suspended loss in the current year when he receives 25% of the sales price. He can also deduct another $10,000 in each of the next three years when he receives 25% of the sales price in each of those years.

Question 15

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 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

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 under IRS rules for real estate rental activities in which the taxpayer is considered an active participant. However, the deduction begins to phase out at certain income levels and is not available for passive real estate activities.

Question 18

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 may only treat income or loss from a rental activity as active if they meet certain requirements, such as material participation in the operation of the rental activity.

Question 19

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 considered investment income and may be included in the calculation of net investment income. However, Bob has the option to exclude it if he wishes to do so.

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 satisfies the material participation test, which states that an individual must participate for at least 500 hours in the activity during the tax year. Even though her participation is only 100 hours, her husband's participation of 450 hours can also count towards the 500-hour requirement if they file a joint tax return. Therefore, Joyce qualifies as a material participant in the activity.

Quiz 11: Investor Losses