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Exam 11: Investor Losses

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Question 1

True/False

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Mary Jane participates for 100 hours during the year in an activity she owns.She has no employees and is the only participant in the activity.The activity is a significant participation activity.

A) True
B) False

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Question 2

Multiple Choice

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Green Corporation earns active income of $50,000 and receives $40,000 in dividends during the year.In addition,Green incurs a loss of $70,000 from an investment in a passive activity acquired several years ago.Consider the following two statements: Which of the following answers is correct?

A) Only statement 1.
B) Only statement 2.
C) Both statements 1 and 2.
D) Neither statement 1 or 2.
E) None of the above.

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

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Question 3

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

Describe the types of activities and taxpayers that are subject to the at-risk rules.

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

Marcia borrowed $110,000 to acquire a parcel of land to be held for investment purposes and paid interest of $9,000 on the loan.Other items related to Marcia's investments include the following: Marcia is unmarried,has AGI of $65,000,and elects to itemize her deductions.She has no miscellaneous itemized deductions other than the investment counsel fees.

Jackson Company incurs a $50,000 loss on a passive activity during the year.The company has active income of $34,000 and portfolio income of $24,000.If Jackson is a personal service corporation,it may deduct $34,000 of the passive loss.

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

Bruce owns a small apartment building that produces a $25,000 loss during the year.His AGI before considering the rental loss is $85,000.Bruce must be an active participant with respect to the rental activity in order to deduct the $25,000 loss under the real estate rental exception.

Pablo,who is single,has $95,000 of salary,$10,000 of income from a limited partnership,and a $27,000 passive loss from a real estate rental activity in which he actively participates.His modified adjusted gross income is $95,000.Of the $27,000 loss,how much is deductible?

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

Nora acquired passive activity A several years ago that until 2011 was profitable.However,the activity produced losses of $100,000 in 2011 and $50,000 in 2012.Nora had passive income from activity B of $40,000 in 2011 and $0 in 2012.How much loss is suspended from activity A in each year?

Gray Company,a closely held C corporation,incurs a $50,000 loss on a passive activity during the year.The company has active income of $34,000 and portfolio income of $24,000.If Gray is not a personal service corporation,it may deduct $34,000 of the passive loss.

In the current year,Louise invests $50,000 for a 10% interest in a passive activity.Her share of the loss this year is $10,000.If this is her only passive activity,the $10,000 loss from the activity this year is suspended for use in a future year.

Charles owns a business with two separate departments.Department A produces $100,000 of income and Department B incurs a $60,000 loss.Charles participates for 550 hours in Department A and 100 hours in Department B.He has full-time employees in both departments.

Kathy is a full-time educator,but she owns an apartment building and devotes 550 hours to managing the activity.All losses from the rental activity will be considered nonpassive and deductible against active income because she is a real estate professional.

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.

David participates 580 hours in an activity during the year; others participate for 1,400 hours.David is a material participant in the activity.

Judy owns a 20% interest in a partnership (not real estate)in which her at-risk amount was $35,000 at the beginning of the year.The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year.Her at-risk amount at the end of the year is $43,000.

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.