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Exam 11: Investor Losses

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Question 21

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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.

A) The heir's adjusted basis is $130,000, and Kate's final deduction is $15,000.
B) The heir's adjusted basis is $130,000, and Kate's final deduction is $45,000.
C) The heir's adjusted basis is $100,000, and Kate's final deduction is $45,000.
D) The heir's adjusted basis is $175,000, and Kate has no final deduction.
E) None of these applies here.

F) D) and E)
G) B) and C)

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Question 22

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Tara owns a shoe store and a bookstore. Both businesses are operated in a mall. She also owns a restaurant across the street and a jewelry store several blocks away.

A) All four businesses can be treated as a single activity if Tara elects to do so.
B) Only the shoe store and bookstore can be treated as a single activity, the restaurant must be treated as a separate activity, and the jewelry store must be treated as a separate activity.
C) The shoe store, bookstore, and restaurant can be treated as a single activity, and the jewelry store must be treated as a separate activity.
D) All four businesses must be treated as separate activities.
E) None of these is correct.

F) A) and B)
G) B) and C)

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Question 23

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When a taxpayer disposes of a passive activity by gift, what happens to any unused passive activity losses?

Pat sells a passive activity for $100,000 that has an adjusted basis of $55,000. During the years of her ownership, $60,000 of losses have been incurred that were suspended under the passive activity loss rules. In addition, the passive activity generated tax credits of $10,000 that were not utilized and suspended. Determine the tax treatment to Pat on the disposition of the property.

Rachel acquired a passive activity several years ago. Until 2016, the activity was profitable, and Rachel's at-risk amount at the beginning of 2016 was $300,000. The activity produced losses of $80,000 in 2016, $50,000 in 2017, and $70,000 in 2018. In 2019, the activity produced income of $90,000. How much is Rachel's suspended passive activity loss at the beginning of 2020?

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.

Roger owns and actively participates in the operations of an apartment building that produces a $40,000 loss during the year. He has AGI of $150,000 from an active business. He may deduct $25,000 of the loss.

In 2019, Liam invested $100,000 for a 25% interest in a partnership involved in an activity in which he is a material participant. The partnership reported losses of $340,000 in 2019 and $180,000 in 2020 with Liam's share being $85,000 in 2019 and $45,000 in 2020. How much of the losses can Liam deduct?

Investment income can include gross income from interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business; income from a passive activity; and income from a real estate activity in which the taxpayer actively participates.

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

Nathan owns Activity A, which produces income, and Activity B, which produces passive activity losses. From a tax planning perspective, Nathan will be better off if Activity A is passive.

Carl, a physician, earns $200,000 from his medical practice in the current year. He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity. In addition, he incurs a loss of $50,000 from an investment in a passive activity. What is Carl's AGI for the current year after considering the passive investment?

Oriole Corporation has active income of $45,000 and a passive activity loss of $23,000 in the current year. Under an exception, Oriole can deduct the $23,000 loss if it is a personal service corporation.

Several years ago, Joy acquired a passive activity. Until 2017, the activity was profitable. Joy's at-risk amount at the beginning of 2017 was $250,000. The activity produced losses of $100,000 in 2017, $80,000 in 2018, and $90,000 in2019. During the same period, no passive activity income was recognized. How much is suspended under the at-risk rules and the passive activity loss rules at the beginning of 2020? $\begin{array}{l}\begin{array}{lr}\text { At-risk }&\text { Passiveactivityloss }\\\text { a. } \$ 0 & \$ 270,000 . \\\text { b. } \$ 20,000 . & \$ 250,000 . \\\text { c. } \$ 30,000 . & \$ 240,000 . \\\text { d. } \$ 260,000 . & \$ 0,000 .\end{array}\\\text { e. None of these. }\end{array}$

Orange Corporation, a closely held (nonpersonal service) C corporation, earns active income of $300,000 in the current year. The corporation also receives $35,000 in dividends and incurs a loss of $50,000 from an investment in a passive activity. What is Orange's income for the year after considering the passive investment?

White Corporation, a closely held personal service corporation, has $150,000 of passive activity losses, $120,000 of active business income, and $30,000 of portfolio income. How much of the passive activity loss can White Corporation deduct?

This year Seth had investment royalty income of $31,000, investment expenses of $28,000, and a long-term capital gain of $8,000 on an investment. In calculating his net investment income for the current year, Seth may deduct a maximum of $11,000 of investment interest.

Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing. Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.

Jared earned investment income of $22,000 and incurred investment interest expense of $14,000 during the year. He incurred other investment expenses of $7,000 during the year. Jared may deduct $14,000 of investment interest in the current year.

Tess owns a building in which she rents apartments to tenants and operates a restaurant. Which of the following statements is incorrect?