Chapter 14 Passive Activity Loss Rules

Question 1

3 types of income

Answer 1

Active
Income
Passive

Question 2

Active income

Answer 2

Wages, salaries, etc

Question 3

Portfolio income

Answer 3

Dividends, interest, capital gains

Question 4

Passive income

Answer 4

Partnerships, ANY real estate activities

Question 5

Material participation

Answer 5

involvement in operations of the activity on a regular continuous and substantial basis

Question 6

Participation tests

Answer 6

1. More than 500 hours
2. More than 100 hours but no less than anyone else
3. Is the only person substantially participating
4. More than 100 hours at several activities and more than 500 in total
5. Materially participate in 5 of the last 10 years
6. Materially participate in a personal service activity for at least 3 years
7. Facts and circumstances indicate regular and continuous substantial activity

Question 7

Five factors for grouping passive activities

Answer 7

1. Similarity in business types
2. The extent of common control
3. The extent of common ownership
4. Geographic location
5. Interdependencies between various activities

Question 8

Basis limitation

Answer 8

Maximum deductible loss is limited to basis

Question 9

At Risk Rule

Answer 9

Maximum deductible loss cannot exceed the amount at risk in the investment
Basis is reduced by non-recourse debt
Determines amount subject to passive activity loss rule

Question 10

Passive activity loss rule (PAL)

Answer 10

Passive losses can only be used to offset passive gains

Question 11

Passive loss ordering

Answer 11

Activity must be disposed of
1. Gain on the disposition of the interest
2. Net income from passive activities
3. Active and portfolio income

Question 12

Rental property exceptions test

Answer 12

1. Customer use < 7 days
2. Customer use < 30 days and personal services provided
3. Extraordinary personal services provided
4. Rental activities incidental to non-rental activity
5. Rental activity available during business hours for nonexclusive use of customers
6. Rental property used in an activity conducted by a partnership where the taxpayer is an owner and active participant

Question 13

Real estate professionals exemption

Answer 13

more than 1/2 of the personal services performed are in real property trades
750 hours of service in real estate activities

Question 14

Individual investor exception

Answer 14

Able to deduct up to $25,000 of losses against non-passive income - phaseout of $.50 or every dollar over $100k
1. active participation in the activity
2. requires bona fide participation in management decisions
3. AGI equal to or less than $100k - $150k
4. Minimum of 10% ownership interest in property

Question 15

Partial deduction phaseout calculation

Answer 15

$150,000 - AGI x $.50 = Allowed loss