4 Tax 2/2 Flashcards
Who is a Related Person (for purpose of identifying Related Party Transactions)
Which entities?
4.196
- Spouse
- Child
- Grandchild
- Parent
- Sibling (NOT their spouse)
- Related entities (you own > 50%)
Disallowed loss in a related party transaction
4.196
- 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
In related party transaction, who might get to use the loss?
4.196
Related Party Purchaser
Two types of interest in passive activities
- Private interest (Patnership, LLC, S-Corp)
- Public interest (publicly traded partnership, PTP)
(They can net against each other)
At-Risk Rules & Passive Activity Rules
4.200
- 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
(you must pass both to use passive losses)
Publicly Traded Partnership (PTP)
- what can net income against?
4.200
PTP income can only be netted against losses from the same PTP (so suspended losses from prior years in the same PTP)
Private entities whose passive income/losses can net against each other.
4.200
- S-Corp
- LLC
- LP
- GP
Any excess losses are suspended until future years or a transaction.
Events that release suspended passive activity losses
4.200.Vid
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
Active Participant
- reqs?
- benefits?
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.
Personal Use Property vs Rental Use Property
4.208
- 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
Section 121
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
Deduction for sale of personal residence at a loss
No. Under IRS rules, a personal residence is considered personal-use property, and losses from the sale of personal-use property are not deductible
Imputed Interest
- 5 Exceptions
- Thresholds & calcs
exceptions:
1. loans ≤ $10K - (a) for indivs, unless borrowed funds used to purchase income-producing property; and (b) corporate & comp loans
2. debt subject to OID (orig. issue discount) provisions
3. sales of prop ≤ $3K
4. if all pymts are due ≤ 6 months
5. Imputed income never applies if borrower’s NII is ≤ $1K.
When loans are $10K < X ≤ $100K, imputed interest is the lesser of (a) AFR or (b) the borrower’s NII from all sources
Key numbers: $1K, $10K, $100K.. also $3K and 6mos
What is “AMT Payable”?
The amount that AMT liability exceeds regular tax liability
How to avoid AMT if subject to AMT in the current tax year?
- Accelerate income into the current “AMT year” (to eliminate AMT)
- Defer tax deductions until a “regular tax year”
Goals would be for AMT liability to equal the regular tax liability
AMT Formula
- Regular taxable income
- Add: tax preference items
- Add: standard deduction (if TP does not itemize)
- Add/Subtract: AMT adjustments and tax preference items
- AMTI (Alternative Minimum Taxable Income)
- Less: Exemption Amount (phased out at higher incomes)
- AMT base
- Times: AMT tax rate(s)
- Gross AMT tax
- Less: AMT foreign tax credit
- Tentative minimum tax (TMT)
- Less: Regular tax liability
- AMT* (If the tentative minimum tax exceeds the regular tax, the difference is the AMT)
Preferences increase AMTI (eg, QSBS via section 1202)
Adjustments increase or decrease AMTI (eg, ISOs, home mortgage & invmt interest)
AMT & ISOs
Kiddie Tax
- who
- deduction
who: dep. ≤ 18 (or ≤ 24 if full-time student) at EOY
what: unearned income after $2,600 taxed at parents’ top marginal rate; other income taxed at kid rate (10%) to the extent it’s above stand. deduct of larger of $1,300 or earned income + $450 with ceiling of regular stand. deduct ($14,600 in 2024)
the “kiddie tax” is only the part paid at parents’ rate!
You pay the high “kiddie tax” rate on all unearned income after $2600 no matter what. Then 10% on the rest of the kids taxable income, which takes the standard deduction, which varies based on earned income, into account.
Net Investment Income (NII) Tax
Totally detailed in TTs™, don’t need to remember rate, how it works, or limits.
Applies to invmt income including non-qual annuities and passive businesses (excl. non-taxable bond income)
FBAR (Report of Foreign Bank and Financial Accounts)
- When required to file?
- File what?
U.S. persons are required to file an FBAR if:
- You had a financial interest in or signature authority over ≥ 1 financial account located outside of the US, and
- The aggregate value of all foreign financial accounts (FFA) exceeded $10,000 at any time during the calendar year reported.
Must file FinCEN (Financial Crimes Enforcement Network) Form 114 by tax deadline.
(may have to file both FATCA/8938 and FBAR/114)
FATCA (Foreign Account Tax Compliance Act)
- report to whom on what?
- thresholds? depending on?
Due to IRS on Form 8938 (due with 1040 incl. extensions)
Thresholds based on “specified foreign financial assets” value (a) on the last day of the tax year or (b) at any time during the tax year:
- US Res: MFJ > $100K on the last day or > $150K at any time
- US Res: Single/MFS > $50K on the last day or > $75K at any time
- Non-US Res: MFJ > $400K on the last day or > $600K at any time
- Non-US Res: Single/MFS > $200K on the last day or > $300 at any time during the tax year
if you know $100K / $150K, you can multiply by 1/2, 2, or 4 for the rest
