15.1 LOSS LIMITATIONS

Question 1

WHAT ARE THE 3 TYPES OF LOSSES INCURRED BY INDIVIDUALS THAT ARE DEDUCTIBLE?

Answer 1

FYI NO LOSS IS ALLOWED FROM THE SALE OF PERSONAL USE ASSETS (CONSUMPTION)
GAINS FROM SALE OF PERSONAL USE ASSETS ARE RECOGNIZED.

-GAINS ARE TAXABLE, LOSSES ARE NONDEDUCTIBLE

Question 2

WHAT IS THE REAL ESTATE PROFESSIONAL EXCEPTION AND THE ACTIVE PARTICIPATION EXCEPTION?

Answer 2

PASSIVE ACTIVITY IS ANY BUSINESS VENTURE IN WHICH THE TAXPAYER DOES NOT MATERIALLY PARTICIPATE. (MATERIAL PARTICIPATION MOST COMMON TEST IS THE > 500 HOURS IN A YEAR)
PAL ARE GENRALLY DEDUCTIBLE ONLY TO THE EXTENT OF PASSIVE GAINS

UNUSED LOSSES ARE SUSPENDED AND CARRIED FORWARD TO OFFSET FUTURE PASSIVE INCOME.

THE REAL ESTATE EXCEPTION ALLOWS LOSSES TO BE TREATED AS ORDINARY BUSINESS LOSSES AND THUS ALLOWED TO BE DEDUCTED AGAINST ORDINARY INCOME.
IF A TAXPAYER ONLY ACTIVELY PARTICIPATES IN THE RENTAL ACTIVITY AND OWNS AT LEAST 10% INTEREST IN THE ACTIVITY, THEY MAY DEDUCT UP TO 25K OF LOSSES AGAINST ORDINARY INCOME EACH YEAR.
DEDUCTION IS REDUCED BY 50% OF MAGI OVER 100K
25K - [(MAGI - 100K) x 50%)]

Question 3

HOW MUCH CAN A PARTNER DEDUCT?

Answer 3

SEE SCREENSHOT

Question 4

HOW IS A PARTNER’S BASIS CALCULATED?

Answer 4

CONTRIBUTIONS OF PROPERTY INCREASE THE PARTNERS BASIS IN THE PARTNERSHIP BY THE PROPERTY’S ADJUSTED TAX BASIS (NOT FMV)
SEE SCREENSHOT

NON RECOURSE DEBT IS EXCLUDED WHEN CALCULATING AT-RISK THIS IS BECAUSE PARTNERS DO NOT BEAR RISK FOR THE LOSS. NON RECOURSE DEDT IS DEBT THAT IS SECURED BY COLLATERAL.

SINCE LP ARE NOT GENERALY LIABLE FOR THE REPAYMENT OF DEBT, RECOURSE LIABILITIES ARE EXCLUDED FROM THEIR BASIS.

Question 5

HOW IS THE BASIS AND AT-RISK AMOUNT CALCULATED FOR A PARTNERSHIP? - EXAMPLE

Answer 5

GENERALLY EQUAL TO THE TAXPAYER’S BASIS LESS ANY P/S NON-RECOURSE DEBT.

*NONRECOURSE DEBT IS PARTNERSHIP DEBT SECURED BY COLLATERAL.

Question 6

ARE PROFIT AND LOSSES FROM OPERATING A SOLE PROPRIETORSHIP DEDUCTIBLE?

Answer 6

ONLY IF THE BUSINESS YILEDED A PROFIT IN AT LEAST 3 OF THE 5 PRECEDING YEARS, LOSSES WOULD BE DEDUCTABLE IN SCH C. OTHERWISE IT IS CONSIDERED A HOBBY. GROSS PROFIT GENERATED BY THE HOBBY (GROSS INCOME - COGS) IS TAXABLE AND REPORTED IN OTHER INCOME ON SCH 1 OF THE 1040.

Question 7

HOW IS THE BASIS AND AT-RISK AMOUNT CALCULATED FOR AN SCORP? - EXAMPLE

Answer 7

UNLIKE PARTNERS, SHAREHOLDERS ARE NOT LIABLE FOR THE S CORPORATION’S DEBT; THEREFORE, NO ADJUSTMENT IS REQUIRED TO THEIR BASIS FOR CORPORATION DEBT.

HOWEVER, DIRECT LOANS FROM A SHAREHOLDER OF THE CORPORATION REPRESNETS A SEPARATE “DEBT BASIS.” A SHAREHOLDER MAY INCREASE THEIR AT RISK AMOUNT FOR THESE LOANS. THEREFORE, AN SCORP SHAREHOLDER’S AT-RISK AMOUNT IS EQUAL TO THE TAXPAYERS BASIS PLUS THE DEBT BASIS.

Question 8

READING A K-1

Answer 8

IN A K-1 ORDINARY DIV’S CONSIST OF THE TOTAL AMOUNT OF DIV’S RECEIVED WHILE QUALIFIED DIV’S CONSIST OF THE PORTION OF ORDINARY DIV’S THAT ARE SUBJECT TO PREFERENTIAL RATES, SAME APPLIES TO 1099-DIV