Sarah owns a passive activity that has a suspended loss of $18,000. The activity has a fair market value of $35,000 and her adjusted basis in the activity is $20,000.
I.If Sarah sells the activity, she is allowed to deduct the $18,000 suspended loss.
II.If Sarah gifts the activity, she is only be allowed to deduct $15,000 of the suspended loss.

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

Question

Sarah owns a passive activity that has a suspended loss of $18,000. The activity has a fair market value of $35,000 and her adjusted basis in the activity is $20,000.
I.If Sarah sells the activity, she is allowed to deduct the $18,000 suspended loss.
II.If Sarah gifts the activity, she is only be allowed to deduct $15,000 of the suspended loss.
​
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 Sarah sells the passive activity, the entire amount of the suspended loss ($18,000) becomes deductible. Gifting the activity does not allow for the deduction of the suspended loss; the suspended loss essentially disappears in the case of a gift, making statement II incorrect.

Sarah Owns a Passive Activity That Has a Suspended Loss