M4-Loss Limitations for Individuals

Question 1

Passive activity is any activity in which the taxpayer does not materially participate. A net passive activity loss generally may NOT be deducted against other types of income (e.g., wages, other ordinary income or active income, portfolio income (interest and dividends), or capital gains). (true or false)

Answer 1

true

In other words, passive losses may generally only offset passive income for a tax year-the remaining net loss is generally “suspended” and carried forward to a year when it may be used to offset passive income (or when the final disposition of the property occurs). However, there is an exception (the “mom and pop exception,” as we refer to in the books) to this general rule. Taxpayers who own more than 10% of the rental activity, have modified AGI under $100,000, and have active participation (managing the property qualifies), may deduct up to $25,000 annually of net passive losses attributable to real estate. There is a phase-out provision for modified AGI from $100,000-$150,000, and the deduction is completely phased-out for modified AGI in excess of $150,000.

Question 2

Generally none of the passive losses from real estate are deductible against nonpassive income. However, if the taxpayer actively participates, the “mom and pop” exception of up to $25,000 will apply. This exception is phased out over AGI of $100,000 through $150,000. That is 50 cents on the dollar. (true or false)

Answer 2

True

If taxpaers AGI is $120,000. That is $20,000 into the phaseout range. So $10,000 of the $25,000 is phased out and taxpayer may deduct $15,000 of the passive loss.

Question 3

Tax rules allow suspended passive losses to be carried forward, but NOT back, until utilized. (true or false)

Answer 3

true

Question 4

Any losses in excess of the at-risk amount are suspended and carried forward for how long?

Answer 4

Without expiration and are deductible against income in future years from that activity. The at-risk amount is also referred to as basis. Note that although in the textbook we discuss this for partnerships, the concept applies to all activities that have flow through income and losses.

Question 5

One test used for determining material participation in a business is if the individual participates in the activity for more than 500 hours during the year. (true or false)

Answer 5

true

Question 6

Whether an activity made a profit in any three of the last five years preceding the current year is a test for determining if the activity is a business as compared to a hobby. (true or false)

Answer 6

true