Salvador owns a passive activity that has a basis of $44,000 and a suspended loss of $18,000. Salvador's taxable income from active and portfolio income is $55,000. If Salvador's sells the passive activity for $56,000 how will he report the transaction on his tax return?
I.Salvador will report an ordinary loss of $18,000.
II.Salvador will report a capital gain of $12,000.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Salvador owns a passive activity that has a basis of $44,000 and a suspended loss of $18,000. Salvador's taxable income from active and portfolio income is $55,000. If Salvador's sells the passive activity for $56,000 how will he report the transaction on his tax return?
I.Salvador will report an ordinary loss of $18,000.
II.Salvador will report a capital gain of $12,000.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

When Salvador sells the passive activity, the suspended loss of $18,000 can be fully recognized as an ordinary loss. Additionally, the sale of the passive activity for $56,000, when its basis is $44,000, results in a capital gain of $12,000 ($56,000 sale price - $44,000 basis). Therefore, both statements are correct.

Salvador Owns a Passive Activity That Has a Basis of $44,000