Module 4

Question 1

Characterizations of Income

Answer 1

1. Ordinary
2. Portfolio - Interest and Dividends
3. Passive:
   - Rental Income and Royalties
   - Beneficiaries of Trusts and Investments in
   Partnerships, LLCs and S corporations
4. Capital

Question 2

Three Factors Limiting Losses

Answer 2

1. Tax Basis
2. At-Risk Basis
3. Passive Activity Losses

Question 3

Passive Activity Losses

Answer 3

Passive income can only offset passive losses

Losses can be deducted carry forward unlimited
Losses will be taking in full on the date that the property is sold

Exceptions:

1. Mon and Pop: Actively participating/ managing may deduct $25,000 of passive losses with other income.
   Carryforward indefinitely
   Phase-Out: the $25,000 is reduce by 50% of the
   excess of the taxpayer’s AGI over $100,000
2. Real Estate Professional: (Not a passive activity)
   • More than 50% of the taxpayer’s personal service
     is for real property business
   • More than 750 hours of services in real property
     business

Question 4

Capital Loss

Answer 4

• Maximum of $3,000 can be deducted with other type of income
• It can be carryforward unlimited and it maintains its character as long-term or short-tem capital losses
• Personal bad debt = Short term capital loss
• Worthless Stock and Securities = Capital Loss