R1-M5 Loss Limitation for Individuals

Question 1

what are the loss limitations?

Answer 1

• Tax basis limitation
• At-risk limitation
  these 2 apply to flow-through entities at the entity level. and limit at partner level
• passive activity loss (PAL) limitation ( rental real estate)
• excess business loss limitation (maximum allowed is limited)
  these 2 apply at individual level

Question 2

what are characteristics of tax basis loss limitation?

Answer 2

• a loss can only be flowed through to the owner’s individual income tax return and deducted to the extent of the owner’s tax basis.
• a loss in excess of owner’s tax basis is suspended until tax basis is reinstated in future years and is carried forward indefinitely; or remaining will be lost when the owner disposes his or her interest

Question 3

what are characteristics of at-risk basis loss limitation?

Answer 3

• a loss can only be flowed through to the owner’s individual income tax return and deducted to the extent that the owner is “at risk.”
• the taxpayer is “at risk” represents the taxpayer’s economic risk in the activity. It’s typically the same as the owner’s tax basis, but excludes the owner’s share of certain debt
• a loss in excess of owner’s at risk basis is suspended until at-risk basis is reinstated in future years, and is carried forward indefinitely; or remaining can be offset against any GAIN from selling the interest.

Question 4

what are characteristics of passive activity loss (PAL) limitation?

Answer 4

3 categories:
- activity: salaries & wages, guaranteed payments, business income/loss (actively participates, other income

• passive: business income/loss (not materially participate), rental real estate, income/loss from limited partnership interest
• portfolio: interest, dividends, annuities, royalties, capital gains/losses

Deductions of PAL:
- PAL can only be offset against passive activity income (PAI); if multiple PAL, offset against PAI pro rata
- a net PAL for the year is suspended, and carried forward indefinitely; any remaining can be offset against active, passive, or portfolio income when owner disposes of the activity

Mom-and-Pop exception if actively participate:
- can deduct up to $25k per year if income below $100k. If income is between $100k-$150k, phase-in rule applies as 50% of excess income. then, the deductible amount is 25k - (50% x excess amount)
- real estate professional if:
+ more than 50% of taxpayer’s personal services during the year performed in real estate
+ perform more than 750 hours in real estate business during the year

Question 5

what is materially participation?

Answer 5

• involved in the operations of the activity on a regular, continuous, and substantial basis.
• the most common test is that taxpayer participates in the activity more than 500 hours during the year