Loss Limitations for Individuals_M5

Question 1

What is the mom and pop exception to the rule?

Rental Loss passive income net exclusion

Answer 1

• If TP AGI is below the threshold, it can take up to $25,000 of the loss againgt all other types of income such as active and portfolio.
• TP must actively participates in the rental.
• Owns at least 10% of the rental realestate activity.
• Phase-out $25,000 allowance is reduced by 50% of AGI in excess $100,000 until phased completely out at $150,000.

Question 2

How much of the partnerners loss from their share of the partnership can be used on personal 1040?

Answer 2

Any amount up to partner basis in partnership, then net against Cap gains, plus a maximum of $3,000 if thee is any left for other active or portfoli types of income.

Question 3

What is the passive loss limitation rules?

Answer 3

• Generally, Passive Activity Losses (PALs) can only be offset against passive activity income in the current or future years.
• Suspended losses are carried forward indefinitely until year of disposal of activity. Then can be offset against any other sources of income (active, passive, or portfolio).

2 Exceptions:
1. Real Estate Professional if > 50% of service from real estate and > 750 hours (Not applicable her).
2. Mom and Pop exception: can deduct up to $25,000 PAL if:
i. Taxpayer is > or = 10% owner and active in mgmt and AGI < $100K.
ii. 50% exces AGI phase out begins at $100K AGI and full phase out at $150K.

ex. AGI Test < $100K, <$150K or > or = $150K (phase-out end)
$150K phase-out end - AGI = remaining allowed.
Remaining allowed x 50% = allowable mom and pop that can be deducted.

Question 4

What are the capital loss limitation rules?

Answer 4

• Generally can only offset capital gains.
• TP can deduct up to $3,000 maximum against any other income type (active, portfolio, or passive income after it has been netted.)

Question 5

How to treat excess losses that exceed at-risk activity?

Answer 5

A loss can only be flowed through to the owners individual income tax return and deducted if the owner clears 4 hurdles:
1. Tax basis hurdle
2. At-risk basis hurdle
3. Passive activity loss hurdle
4. Excess business loss hurdle

Rule#1 For losses in excess of the at-risk basis:
Any losses in excess of the owner’s at-risk basis are suspended and carried forward without expiration and are deductible against income in the future years from that activity (once the at-risk basis increases).

Rule#2 Any suspended losses due to insufficient at-risk basis remaining when the entity can be offset against any gain from selling the interest.