Investment Loss Limitation Provisions

Question 1

At-risk rules

Answer 1

Losses in excess of the at-risk basis are not deducted in the current year. Losses not deducted are suspended and used in future years when the at-risk basis increases.

Question 2

Capital losses

Answer 2

Individuals may offset capital gains by capital losses realized. Up to $3;000 of realized net capital losses may offset ordinary income. Remaining excess capital losses are carried over to future years.

Question 3

Hobby losses

Answer 3

Losses from hobby activities may be deducted to the extent of income from hobby activities. Excess hobby losses are carried forward to future years.

Question 4

Investment interest

Answer 4

The deduction of investment interest is limited to the taxpayer’s net investment income. Excess investment interest is deductible in following years.

Question 5

Passive loss limitations

Answer 5

Generally; passive losses are deducted only to the extent of passive income. Excess passive losses are suspended and used in future years.

Question 6

Small business (§ 1244) stock

Answer 6

Losses from the disposition of small business stock are given ordinary treatment up to a maximum of $100;000 per year.

Question 7

Vacation homes

Answer 7

The deductibility of losses from vacation homes may be limited; depending on the relative number of rental use days and personal use days of the property.

Question 8

Worthless securities

Answer 8

Losses arising from investment securities that become worthless are treated as occurring on the last day of the tax year