Passive Activity/ Tax Special Circumstances

Question 1

Passive Activity

Answer 1

tax payer does not materially participate
limits on passive activity losses

RELP
S-CORP unearned income

2 Types:

1. Rentals (real estate and equipment), royalties
2. Business - no material participation
   
   • limited partnerships
   • partnerships, s-corps, LLC

NO oil and gas LP

Question 2

Real Estate Limited Partnerships

Answer 2

RELP
Non-Publicly traded partnership

PAL losses can only offset PIG (Passive Income Generators)

Netting done on schedule E

Question 3

Master Limited Partnerships

Answer 3

Publically Traded Partnerships

Income from PTP may not be sheltered by passive losses from any other source

Income is same like div income shown on schedule B

Losses many not be used to offset passive income from same source

losses can be carried forward and used against income of same partnership.

Question 4

Treatment of disallowed losses

Answer 4

Carried forward until taxpayer can dispose of

No $3000 like cap gains

Question 5

Disposition of Passive Activities

Answer 5

Investor disposes of entire interest in a passive activity in a taxable transaction (sale) any SUSPENDED losses with respect to interest are fully deductible in the year of disposition.

Partnership can be sold for a loss

Can buy a non publicly traded partnership that makes income PIG

Question 6

Phantom Income

Answer 6

Tax shelter prior to 1986.
Limited partnership restructuring no cash flow
Zero coupon bonds
S-corps K-1 w no check

Question 7

$25,000 loss

Answer 7

qualifying taxpayers may deduct $25000 (not over) of net losses from real-estate activity

Phaseout $110k-$150k

can offset active portfolio income

Question 8

Renting Primary Residence

Answer 8

Less than 15 days during taxable year - not included in gross income

Question 9

Renting Vacation Home

Answer 9

Treated as a residence if owners use for personal purposes exceeds longer of 14 days or 10%period of rental use

Question 10

Low Income Housing

Answer 10

passive activity may generate $25000 deduction equivalent- tax credit $25000 no phaseout

multiply tax bracket by $25000 That is the credit!

Allowed annually over a 10 year credit period (not 27 1/2yr straight line)

Historical Rehabilitation 25% phased out AGI $200000

Question 11

Oil and Gas working Interests

Answer 11

• Exempt from PAL rules
• Losses for GP are deductible active or passive portfolio income without limit and without respect to AGI
• Form of ownership may NOT limit personal liability

-LP no losses taken - becomes a passive loss

% depletion can trigger AMT
Cost depletion is NOT and AMT preference item

Question 12

Widow

Answer 12

In year of death can file -MFJ

Maintains a home for dependent child - MFJ in the year of death and 2 years following death

Question 13

Dependency Exemptions

Answer 13

< 24 at the end of the year and full time student

< 19 end of the year - no student

Question 14

Community Property

Answer 14

If Separate returns are filed by married couple - 1/2 income reported on each

WI, ID, LA, TX - separate property is community income 1/2 reported to each spouse

Question 15

Alimony/ Divorce

Answer 15

deductible by payor
taxable to payee
can't file jt return or live together
payments in cash
must be for benefit of spouse
can't extend beyond death of recipient spouse

Cash payments made to third parties for obligation of payee spouse can be alimony if pursuant to a divorce decree

Payments to maintain property of payor spouse that payee uses is NOT alimony

Payee owns life ins on life of payor- policy payments qualify as alimony -divorce decree

Question 16

Recapture Rules Excess Front loading

Answer 16

If alimony decreases too quickly must recapture as

No alimony pad in years 1 and 2 none in 3
Yr 1 + Yr 2 - 37500 = recapture OI

Alimony in 3rd yr
(Yr3 X 2) + 37500 = X not year 2

YR 1 +Yr 2 - X = recapture

Question 17

Property Settlements

Answer 17

Transfer of property between spouses is tax free
Basis is carried over
Life ins will not cause a transfer for value problem