REG 1 - Loss Limitations for Individuals Flashcards
What is the definition of “passive”?
Passive means an activity in which a taxpayer did NOT actively participate.
What are two examples of passive income?
1) Rental income and royalties on a property that a taxpayer owns and rents
2) Investments in S corporations, partnerships, and beneficiary interests in estates trusts.
- Limited partners are deemed to have passive income NOT general partners
What are the three factors limiting losses?
1) Tax basis
2) At-risk basis
3) Passive loss limitations
Define tax basis?
Tax basis of an asset is the taxpayer’s investment adjusted for items such as income and debt:
- ALL losses not deductible in the current year because of tax basis limitation is CARRIED FORWARD.
Example: Michael has passive from partnership A of $6,000, and a $40,000 loss from nonparticipating rental property:
Tax basis = $30,000 in rental
At-risk basis = $25,000 in rental
Summary of $40,000 loss
Deduct: $6,000 (extent of passive income in current year)
Tax basis: $10,000 carryforward (40 - 30)
At-risk basis: $5,000 carryforward (30-25)
Passive: $19,000 carryforward (40-6-10-5)
Define at-risk basis?
At-risk basis is economic risk in the business
- Losses that have sufficient tax-basis but NOT at-risk basis are CARRIED FORWARD until the taxpayer generates more at-risk basis.
Example: Michael has passive from partnership A of $6,000, and a $40,000 loss from nonparticipating rental property:
Tax basis = $30,000 in rental
At-risk basis = $25,000 in rental
Summary of $40,000 loss
Deduct: $6,000 (extent of passive income in current year)
Tax basis: $10,000 carryforward (40 - 30)
At-risk basis: $5,000 carryforward (30-25)
Passive: $19,000 carryforward (40-6-10-5)
How are passive activity losses treated?
- Passive activity losses are only deductible to the extent of passive income if taxpayer does NOT materially participate (separate rule if taxpayer does participate)
- Allocate passive losses (from multiple passive activity losses) to any passive income on a pro rata basis
How are nondeductible passive activity losses treated (e.g. taxpayer does NOT materially participate, and passive activity losses are only deductible to the extent of passive income)?
1) Suspended losses are used to OFFSET PASSIVE INCOME in future years.
2) Suspended losses are tax deductible in the year property is SOLD.
3) Suspended losses can be used if taxpayer becomes a material participant.
What are one of the two exceptions for nondeductible passive activity losses (you can deduct passive activity losses)?
Define Mom and Pop Exception?
1) Mom and Pop Exception:
- Taxpayers may deduct up to $25,000 (per year) of net passive losses if they ACTIVELY participate/manage property.
- They must own at least 10%
- Phase-out - the exception is reduced 50 cents on the dollar when taxpayers AGI exceeds $100,000 and is completely eliminated when AGI exceeds $150,000.
Example of phase-out:
Smith actively participates in rental property and has $120,000 AGI with a $40,000 loss.
Smith can deduct up to $15,000 of loss because (AGI of $120,000 is $20,000 in phaseout phase. 50 cents on the dollar of $20,000 is $10,000. Of the maximum allowable $25,000, $15,000 can be eliminated because (25,000 - 10,000).
What are one of the two exceptions to nondeductible passive activity losses (you can deduct passive activity losses)?
Define Real estate professional?
Real estate professional = actively participating
- More than 50% of the taxpayer’s personal services during the year are performed in real property business
AND
- Taxpayer performs more than 750 hours of services in the real property business during the year.
What are net capital loss deductions and loss carrover rules?
1) A maximum of $3,000 is deductible against a taxpayer’s other types of gross income (ordinary, passive, and portfolio).
2) Excess net capital loss can be carried forward for an unlimited time.
