4 Tax 2/2

Question 1

Who is a Related Person (for purpose of identifying Related Party Transactions)
Which entities?

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Answer 1

1. Spouse
2. Child
3. Grandchild
4. Parent
5. Sibling (NOT their spouse)
6. Related entities (you own > 50%)

Question 2

Disallowed loss in a related party transaction

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Answer 2

• For Related Seller: All of it
• For Related Buyer: Any portion of the loss appropriated from Related Seller that isn’t undone by gain when sold to Unrelated Party

Question 3

In related party transaction, who might get to use the loss?

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Answer 3

Related Party Purchaser

Question 4

At-Risk Rules & Passive Activity Rules

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Answer 4

• At-Risk Rules: You can only deduct losses to the extent that there is enough basis (amount at-risk)
• Passive Activity Rules: You can only use passive losses to the extent that you have passive income

Question 5

Publicly Traded Partnership (PTP)
- what can net income against?

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Answer 5

PTP income can only be netted against losses from the same PTP (so suspended losses from prior years in the same PTP)

Question 6

Entities whose passive income/losses can net against each other.

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Answer 6

• S-Corp
• LLC
• LP
• GP

Any excess losses are suspended until future years or a transaction.

Question 7

Events that release suspended passive activity losses

4.200.Vid

Answer 7

Suspended losses…
1. Sale… Can offset gain
2. Gift… Are added to the donee’s basis (so not deductible by the donor)
3. Sale to Related party… Can be eventually deducted by the orig relat. seller later on when the relat. buyer sells to an unrelated party
4. Divorce… Are added to the basis of the spouse receiving the property.
5. Inheritance… Are deductible on the decedent’s final tax return only to the extent they exceed the step-up in basis

Question 8

Active Participant
- reqs?
- benefits?

Answer 8

Reqs:
1. Own ≥ 10% of prop.
2. Substantial involvement in managing prop.
3. Can’t be personal use

Benefits:
- Up to $25K loss can be deducted against other income (pflo or ordinary) dollar for dollar
- Phased out proportionally as MAGI (AGI excl. the loss) is $100K–$150K (same for all filing statuses)

Note even though you’re an “active participant” bc you’re involved in managing the property, rental RE is still considered a “passive” activity. So the gains/losses are passive and can’t be used to offset ordinary income UNLESS an exception like this one applies.

(shortcut to calculate phaseout is ($150K – loss) ÷ 2

The test for Active Participation is a low bar. My condo makes me an Active Participant. It’s harder to qualify as a Real Estate Professional.

Question 9

Personal Use Property vs Rental Use Property

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Answer 9

• Personal Use Property: Renting must be ≤ 14 days / yr… get only the itemized deductions (mtg int & prop taxes)
• Rental Use Property: Personal use must be ≤ the greater of 14 days OR 10% the # of rental days… can produce passive losses up to $25K loss limit per passive activity rules
• Mixed Use Property: If qualfies for neither… must alloc. expenses btw personal vs rental and can deduct rental down to $0 but no lower

Question 10

Section 121

Answer 10

Personal Residence Sale Exclusion

Benefits: Exclude $250K per spouse (prorated for partial living, eg, 71 days ÷ 730 days -> X% of exclusion)

Reqs:
- ownership test: must’ve owned the prop for ≥ 2 out of last 5 yrs (only 1 spouse)
- usage test: must’ve lived at the prop. for ≥ 2 out of last 5 yrs (both spouses)

Some exceptions get a “reduced exclusion”:
- Job relocation
- Job change -> unable to pay living expenses
- Qual. for unemployment benefits
- Health issues
- Divorce or legal sep
- Birth of twins or other multiples
- Damage to home from disaster
- Condemnation or seizure of the property
- Other unforeseen circumstances

Question 11

Deduction for sale of personal residence at a loss

Answer 11

No. Under IRS rules, a personal residence is considered personal-use property, and losses from the sale of personal-use property are not deductible