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Exam 11: Investor Losses

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Question 41

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If an owner participates for more than 500 hours in a bicycle rental activity located at a beach resort, any loss from that activity is treated as an active loss that can offset active income.

A) True
B) False

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Question 42

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Discuss the treatment given to suspended passive activity losses and credits. What happens to an activity's unused losses and credits when the activity is sold?

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In general, passive losses are deductibl...

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Question 43

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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.

Wayne owns a small apartment building that produces a $45,000 loss during the year. His AGI before considering the rental loss is $85,000. Because Wayne is an active participant with respect to the rental activity, he may deduct the $45,000 loss.

Harry earned investment income of $18,500, incurred investment interest expense of $15,500, and other investment expenses of $9,000 during the current year. Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years.

Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity. Operations of the activity result in a loss of $250,000, of which Rita's share is $50,000. How is her loss characterized?

Ned, a college professor, owns a separate business (not real estate) in which he participates in the current year. He has one employee who works part-time in the business.

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.

When determining whether an individual is a material participant, participation by an owner's spouse generally counts.

Nell sells a passive activity with an adjusted basis of $45,000 for $105,000. Suspended losses attributable to this property total $45,000. The total gain and the taxable gain are:

Ken has a $40,000 loss from an investment in a partnership in which he does not materially participate. He paid $30,000 for his interest. How much of the loss is disallowed by the at-risk rules? How much is disallowed by the passive loss rules?

Tom participates for 100 hours in Activity A and 450 hours in Activity B, both of which are nonrental businesses. Both activities are active.

In 2014, Joanne invested $90,000 for a 20% interest in a limited liability company (LLC) in which she is a material participant. The LLC reported losses of $340,000 in 2014 and $180,000 in 2015. Joanne's share of the LLC's losses was $68,000 in 2014 and $36,000 in 2015. How much of these losses can Joanne deduct?

Match the treatment for the following types of transactions. -Treatment of suspended credits when passive activity is sold at a loss.

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?

Hugh has four passive activities which generate the following income and losses in the current year. $\begin{array}{lc}\text { Activity } & \text { Gain (Loss) } \\& (\$ 60,000) \\\text { A } & (20,000) \\\text { C } & (10,000) \\\text { D } & {10,000} \\\text { Total } &{(\$ 80,000)}\end{array}$ How much of the $80,000 net passive loss can Hugh deduct this year? Calculate the suspended losses (by activity).

In 2014, Arnold invests $80,000 for a 20% interest in a partnership in which he is a material participant. The partnership incurs a loss with $100,000 being Arnold's share. Which of the following statements is incorrect?

Lloyd, a life insurance salesman, earns a $400,000 salary in the current year. As he works only 30 hours per week in this job, he has time to participate in several other businesses. He owns an ice cream parlor and a car repair shop in Tampa. He also owns an ice cream parlor and a car repair shop in Portland and a car repair shop in St. Louis. A preliminary analysis on December 1 of the current year shows projected income and losses for the various businesses as follows: $\begin{array}{lc}&\text { Income (Loss) }\\\text { Tampa ice cream parlor (95 hours participation) } & \$ 56,000 \\\text { Tampa car repair shop (140 hours participation) } & (89,000) \\\text { Portland ice cream parlor ( } 90 \text { hours participation) } & 34,000 \\\text { Portland car repair shop (170 hours participation) } & (41,000) \\\text { St. Louis car repair shop (180 hours participation) } & (15,000)\end{array}$ Lloyd has full­time employees at each of the five businesses listed above. Review all possible groupings for Lloyd's activities. Which grouping method and other strategies should Lloyd consider that will provide the greatest tax advantage?

In 2013, Kelly earns a salary of $200,000 and invests $40,000 for a 20% interest in a partnership not subject to the passive loss rules. Through the use of $800,000 of nonrecourse financing, the partnership acquires assets worth $1 million. The activity produces a loss of $150,000, of which Kelly's share is $30,000. In 2014, Kelly's share of the loss from the partnership is $15,000. How much of the loss from the partnership can Kelly deduct?

List the taxpayers that are subject to the passive loss rules and summarize the general impact of these rules on these taxpayers.