Darien owns a passive activity that has a basis of $36,000 and a suspended loss of $22,000. If Darien dies during the year when the passive activity has a fair market value of $52,000, how will the information be presented on his tax return?
I.Darien will report an ordinary loss of $6,000.
II.Darien will report a capital gain of $16,000.

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

Question

Darien owns a passive activity that has a basis of $36,000 and a suspended loss of $22,000. If Darien dies during the year when the passive activity has a fair market value of $52,000, how will the information be presented on his tax return?
I.Darien will report an ordinary loss of $6,000.
II.Darien will report a capital gain of $16,000.
​
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 a taxpayer dies, the suspended passive activity losses are deductible on the final tax return to the extent they exceed the step-up in basis. The step-up in basis is $16,000 ($52,000 FMV - $36,000 basis), so the deductible loss is $6,000 ($22,000 suspended loss - $16,000 step-up).

Darien Owns a Passive Activity That Has a Basis of $36,000