Passive activity and at risk rules Flashcards
Which rule is applied first the at risk rules or the passive activity loss rules?
The at risk rules
What are the At risk rules?
Maximum deductible loss for any investment activity is limited to the amount that the investor has at risk (invested) at the end of the current tax year
Apply to all investment activities
Can never lose more than the amount of investment at risk
Investment amount is also called the basis in the activity
What makes up the total amount that is at risk?
Total of the cash and property invested and any debt for which the investor is personally liable is adjusted annually
What happens if a loss is disallow because of at risk rules
The loss is a suspended loss that can be carried forward and taken in the first year the at risk amount becomes a positive amount.
What happens when a passive activity interest is disposed of in a taxable transaction
Net passive loss first must be applied against income or gain from any other passive activities of the taxpayer
Any loss in access of the netting against passive income or gain is then reclassified as a non-passive maybe used to offset ordinary, non-passive income, such as wages and interest income
Related party transactions , lost may only be claimed when they related party, dispose of the activity and with an unrelated person
Example of at risk rules
Passive losses may only be deducted against what, with one exception
Passive income with the one exception for real estate activities
Must classify passive activity losses into what
Losses into active, passive, or portfolio
Are oil and gas activities that involve a working, not royalty, interest in any oil and gas property that a taxpayer own directly or through a general partnership, a passive activity
No
What are the two types of limited partnerships for passive activity rules?
Publicly traded partnerships (PTP)
Non-publicly traded or private offered limited partnerships
How are losses from a passive limited partnership treated?
Losses from a non-publicly traded limited partnership or real estate limited partnerships, may only be used to offset income from another non-publicly traded limited partnership
when a loss occurs in more than than one passive activity and there is also passive income. How are the losses treated?
They are allocated to the passive activities based on the percentage of the loss of the total amount of net losses
What conditions create a passive activity
Taxpayer does not materially participate
Activity is a rental activity
If a taxpayer answers, yes to any of the following questions, then the activity is not a passive activity
Complete more than 500 hours of participation during the year
Individuals participation in the activity constitutes substantially all the participation in the activity of all the individuals for the year
Participate for more than 100 hours amount equal to or more than any other participant in the activity
Activity, significant participation, activity, and significant participation in all such activities exceeds 500 hours
Taxpayer material participates in the activity and at least five of the last 10 years
Is the activity, personal service activity and the taxpayer materially participate in the activity in any three previous years?
Using the existing fax and circumstances to the taxpayer participate on a regular continuous and substantial basis during the year 100 hours per year minimum
Limited partners are not material participants because they are not allowed to participate in the management of the business and are therefore limited partnership interest. Does this make it a passive activity
Yes
Are all rental activities deemed passive
Yes, unless accepted by the code
An activity is not considered a rental under any of the following six conditions
Average customer use is seven days or less
Average customer use is more than seven days but not over 30 days and owner provides significant personal services
Owner also provides extraordinary services
Rental activity is incidental to a non-rental activity of taxpayer , investment and trader business
Property is made available during business hours for non-exclusive use by customers example golf course
Property is used in a non-rental activity conducted by partnership , S corporation, Or joint venture, where the owner has an interest
If real estate is your trade or business losses are not considered passive for certain real estate professionals provided that what
Real estate activities are greater than 50% of their personal services in all trades or businesses for the year and
Taxpayer performs greater than 750 hours of service in real property trades or businesses in which the taxpayer materially participates
Real estate rental activities for non-real estate professionals can deduct up to how much and what is the phase out
$25,000 of rental real estate losses against active and portfolio income
$25,000 offset allowances reduced by 50% of AGI in excess of $100,000 with a complete phase out at $150,000 of AGI applies to single and married
For non-real estate professionals to qualify for the $25,000 rental real estate loss deduction what two test must be meant to qualify for this exemption
Active participation in the activity
Ownership of 10% or more of all interest in the activity during the taxable year
