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Exam 11: Investor Losses

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Question 41

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Last year, Ted invested $100,000 for a 50% interest in a partnership in which he was a material participant. The partnership incurred a loss, and Ted's share was $150,000. Which of the following statements is incorrect?

A) Ted's nondeductible loss of $50,000 can be carried over and used in the future subject to the at-risk provisions) .
B) If Ted has taxable income of $50,000 from the partnership in the current year and no other transactions that affect his at-risk amount, he can use all of the $50,000 loss carried over.
C) Since Ted has only $100,000 of capital at risk, he cannot deduct more than $100,000 against his other income.
D) None of the above is incorrect.

E) A) and B)
F) B) and C)

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Question 42

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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.

A) True
B) False

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Question 43

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Carlos receives a gift of a passive activity from his father whose basis was $60,000. Suspended losses related to the activity are $18,000. Carlos will be allowed to offset the $18,000 suspended losses against future passive activity income.

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.

Pablo, who is single, has $95,000 of salary, $10,000 of income from a limited partnership, and a $27,000 passive activity loss from a real estate rental activity in which he actively participates. His modified adjusted gross income is $95,000. Of the $27,000 loss, how much is deductible?

Joyce, an architect, earns $100,000 from her practice in the current year. In addition, she receives $35,000 in dividends, capital gains, and annuity income during the year. Further, she incurs a loss of $35,000 from an investment in a passive activity. Joyce's AGI for the year after considering the passive investment is $100,000.

Rick, a computer consultant, owns a separate business not real estate) in which he participates. He has one employee who works part-time in the business.

From January through November, Vern participated for 420 hours as a salesman in a partnership in which he owns a 50% interest. The partnership has four full-time employees. During December, Vern spends 110 hours cleaning the store and painting the walls in order to meet the material participation standards. Vern qualifies as a material participant.

Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive activity loss of $44,000. The activity was sold at a loss and Kelly has no other passive activities. The suspended loss is not deductible.

Oriole Corporation has active income of $45,000 and a passive activity loss of $23,000 in the current year. Under an exception, Oriole can deduct the $23,000 loss if it is a personal service corporation.

Tess owns a building in which she rents apartments to tenants and operates a restaurant. Which of the following statements is incorrect?

Caroyl made a gift to Tim of a passive activity adjusted basis of $50,000, suspended losses of $20,000, and a fair market value of $80,000) . No gift tax resulted from the transfer.

Art's at-risk amount in a passive activity was $60,000 at the beginning of 2017. His loss from the activity in 2017 is $80,000, and he had no passive activity income during the year. Art had $20,000 of passive activity income from the activity in 2018. Under the passive activity loss rules, Art's suspended loss at the end of 2018 is:

Wolf Corporation has active income of $55,000 and a passive activity loss of $33,000 in the current year. Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation.

Kate dies owning a passive activity with an adjusted basis of $100,000. Its fair market value at that date is $130,000. Suspended losses relating to the property were $45,000.

Jack owns a 10% interest in a partnership not real estate) in which his at-risk amount is $42,000 at the beginning of the year. During the year, the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations. Jack's at-risk amount at the end of the year is $44,000.

Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit?

Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit?

Anita owns Activity A which produces active income and Activity B which produces losses. From a tax planning perspective, Anita will be better off if Activity B is a passive activity.

Several years ago, Joy acquired a passive activity. Until 2016, the activity was profitable. Joy's at-risk amount at the beginning of 2016 was $250,000. The activity produced losses of $100,000 in 2016, $80,000 in 2017, and $90,000 in 2018. During the same period, no passive activity income was recognized. How much is suspended under the at-risk rules and the passive activity loss rules at the beginning of 2019? $\begin{array}{lr}\underline {\text { At-risk }}&\underline {\text { Passive activity loss }}\\a.\$ 0 & \$ 270,000 . \\ b.\$ 20,000 . & \$ 250,000 . \\c. \$ 30,000 . & \$ 240,000 . \\d. \$ 260,000 . & \$ 10,000 .\end{array}$