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Exam 6: Losses and Loss Limitations

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Question 51

True/False

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Dick participates in an activity for 90 hours during the year.He has no employees and there are no other participants.Dick is a material participant.

A) True
B) False

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Question 52

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Losses on rental property are classified as deductions for AGI.

A) True
B) False

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Question 53

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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.

Jed is an electrician.He and his wife are accrual basis taxpayers and file a joint return.Jed wired a new house for Alison and billed her $15,000.Alison paid Jed $10,000 and refused to pay the remainder of the bill, claiming the fee to be exorbitant.Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgement.Jed was able to collect the judgement but not the remainder of the bill from Alison.What amount of loss may Jed deduct in the current year?

A taxpayer is considered to be a material participant in a significant participation activity if he or she spends at least 400 hours in the activity.

Individuals can deduct from active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate.

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.

Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2019.The car's adjusted basis at the time of the accident was $13,000.Its fair market value was $10,000.The car was covered by a $2,000 deductible insurance policy.Norm did not file a claim against the insurance policy because he feared that reporting the accident would result in a substantial increase in his insurance rates.His adjusted gross income was $14,000 (before considering the loss) .What is Norm's deductible loss?

Three years ago, Sharon loaned her sister $30,000 to buy a car.A note was issued for the loan with the provision for monthly payments of principal and interest.Last year, Sharon purchased a car from the same dealer, Hank's Auto.As partial payment for the car, the dealer accepted the note from Sharon's sister.At the time Sharon purchased the car, the note had a balance of $18,000.During the current year, Sharon's sister died.Hank's Auto was notified that no further payments on the note would be received.At the time of the notification, the note had a balance due of $15,500.What is the amount of loss with respect to the note that Hank's Auto may claim on the current year tax return?

Currently, a net operating loss can be carried forward only and can offset no more than 80% of taxable income in a subsequent year.

Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk.If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible.

Currently, a net operating loss can be carried forward only (no carryback exists).

Leigh, who owns a 50% interest in a sporting goods store, was a material participant in the activity for the last 15 years.She retired from the sporting goods store at the end of last year and will not participate in the activity in the future.However, she continues to be a material participant in an office supply store in which she is a 50% partner.The operations of the sporting goods store resulted in a loss for the current year and Leigh's share of the loss is $40,000.Leigh's share of the income from the office supply store is $75,000.She does not own interests in any other activities.

When Kate died, she owned 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.

John files a return as a single taxpayer.In 2019, he had the following items: ∙ Salary of $40,000. ∙ Loss of $65,000 on the sale of § 1244 stock acquired two years ago. ∙ Interest income of $6,000. Determine John's AGI for 2019.

Other casualty means casualties similar to those associated with fires, storms, or shipwrecks.

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 loss is not allowed for a security that declines in value.

Ahmad owns four activities.He participated for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D.Which of the following statements is correct?

A bona fide debt cannot arise on a loan between father and son.