Anna owns a passive activity that has a basis of $30,000 and a suspended loss of $7,000. Anna gifts the passive activity to her daughter Patricia when the property has a fair market value of $42,000.
I.Anna will report an ordinary loss of $7,000.
II.Patricia's basis in the passive activity is $30,000.

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

Question

Anna owns a passive activity that has a basis of $30,000 and a suspended loss of $7,000. Anna gifts the passive activity to her daughter Patricia when the property has a fair market value of $42,000.
I.Anna will report an ordinary loss of $7,000.
II.Patricia's basis in the passive activity is $30,000.
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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

Anna will not report an ordinary loss of $7,000 because suspended losses from a passive activity cannot be claimed until the activity is disposed of in a fully taxable transaction with an unrelated party. Gifting does not meet this criterion. Patricia's basis in the passive activity for determining gain is the fair market value at the time of the gift ($42,000), but for loss, it would be the donor's adjusted basis plus or minus any adjustment required by the time of the gift. Since the fair market value is higher than the basis, Patricia's basis for determining loss would be Anna's basis ($30,000), but this does not directly relate to the suspended loss or change the initial premise.

Anna Owns a Passive Activity That Has a Basis of $30,000