Income Tax Activity Rules Flashcards
(20 cards)
What is the “at-risk amount” for a taxpayer in an activity?
The taxpayer’s economic investment, including cash, adjusted basis of property contributed, and recourse debt.
What is recourse debt?
Debt for which the borrower is personally liable for the full amount.
What is nonrecourse debt?
Debt where the borrower is not personally liable beyond the pledged collateral. For real estate, the investor’s share of nonrecourse debt is included in the at-risk amount.
How much loss can a taxpayer deduct under the at-risk rules?
Losses can only be claimed up to the at-risk amount; excess losses are suspended until the at-risk amount increases.
Which limitation is applied first: at-risk or passive activity loss?
At-risk limitations are applied before passive activity loss rules.
If a taxpayer invests $50,000 cash and borrows $50,000 (recourse) in a partnership and the partnership has a $120,000 loss, how much is deductible?
$100,000 is deductible (the at-risk amount); $20,000 is suspended.
What is the general rule for passive activity losses?
Passive losses can only offset passive income.
What happens to unused passive losses?
They are carried forward indefinitely or until the passive activity is disposed of in a taxable transaction.
What are considered passive activities?
Businesses where the taxpayer does not materially participate and rental activities (unless the taxpayer is a real estate professional).
What is the most common test for material participation?
Working at least 500 hours in the business during the year.
When can up to $25,000 of rental real estate losses be deducted from other income?
If the taxpayer actively participates and modified AGI is under $100,000 (phased out $1 for every $2 over $100,000; fully phased out at $150,000).
If a couple with $125,000 AGI has a $25,000 rental real estate loss, how much can they deduct?
$12,500 (the $25,000 allowance is reduced by $12,500).
When are suspended passive losses released?
When the entire interest in the passive activity is sold, all suspended losses are deductible against any income in that year.
If Mary sells her interest in a real estate fund with $20,000 suspended loss, what happens?
She can deduct the entire $20,000 against any type of income.
What is portfolio income and how is it treated?
Income from investments like interest and dividends; not subject to passive activity rules, and losses are fully deductible against portfolio income.
What is the correct order of applying loss limitations?
1) At-risk limitation
2) Passive activity limitation.
How are losses/income from Publicly Traded Partnerships (PTPs) treated?
Losses/income from a PTP can only offset income/losses from the same PTP.
Can a $5,000 loss from PTP A offset $4,000 income from PTP B?
No, the loss from A can only offset future income from A.
What is the material participation test?
Most common test for passive activity is working less than 500 hours in the business during the year. If more than 500 hours you are an active participant. Or if more than 100 hours and more than any other participant
