Question 1

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 IRS rules for installment sales, a portion of the suspended losses can be deducted in the year of sale based on the percentage of the sale price collected in that year. In this case, Eric collected 25% ($10,000) of the sales price in the current year, so he can deduct $10,000 of the suspended losses. He will be able to deduct an additional 25% ($10,000) in each of the next three years when he collects the remaining sale price installments.

Question 2

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 3

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 4

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 5

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

According to the tax code, a material participant is someone who participates in an activity for more than 500 hours per year or who substantially participates in the activity and has participated for more than 100 hours in the current year. In this case, Joyce participates for 100 hours and therefore meets the second test for material participation.

Question 6

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 7

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 true according to the IRS rules for deducting losses from rental real estate activities. Individuals with a modified adjusted gross income (AGI) of $100,000 or less can deduct up to $25,000 in losses against active or portfolio income from rental real estate activities in which they actively participate. However, this deduction is phased out for individuals with a modified AGI between $100,000 and $150,000.

Question 8

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 9

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's investment in the partnership qualifies as a passive activity, since he is not actively participating in the business. This means that under the passive activity loss provisions, Arnold can only deduct losses up to the amount of income he receives from the partnership, which is zero in this case. The remaining $100,000 loss cannot be deducted in 2017 or any future year, unless Arnold has other passive income or disposes of his interest in the partnership. Therefore, statement D is incorrect. Statements A, B, and C are correct.

Question 10

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

This is true based on the IRS rules. If an individual is an active participant in a real estate rental activity and their modified AGI is less than $150,000, they can deduct up to $25,000 of losses from that activity. In this case, Kelly meets both of those criteria and therefore can deduct $25,000 of the $35,000 loss.

Question 11

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 included in the definition of investment income for tax purposes, so Bob may elect to include the $8,000 gain in his net investment income.

Question 12

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 13

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 14

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 IRS guidelines. However, this deduction may be phased out for individuals with higher incomes.

Question 15

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 16

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 IRS rules, if an owner participates for more than 500 hours in a rental activity located at a beach resort, the loss from that activity is treated as an active loss that can offset active income.

Question 17

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 can only treat income or loss from a rental activity as active if they meet certain requirements such as materially participating in the rental activity. Income or loss from other real estate ventures may be treated as active.

Question 18

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 19

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

Harry can deduct investment interest expense up to the amount of his investment income, which is $18,500. Therefore, he can deduct $9,500 of investment interest expense this year and carry forward the remaining $6,000 to future years. The other investment expenses of $9,000 may also be deductible, depending on the type and nature of the expenses.

Question 20

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

Accepted Answer

According to IRS rules, participation by an owner's spouse is generally counted when determining whether an individual is a material participant in a business or activity.

Quiz 11: Investor Losses