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Exam 11: Investor Losses

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Question 31

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Ahmad owns four activities. He participated for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D. Which of the following statements is correct?

A) Activities A, B, C, and D are all significant participation activities.
B) Activities A, B, and C are significant participation activities.
C) Ahmad is a material participant with respect to Activities A, B, and C.
D) Ahmad is a material participant with respect to Activities A, B, C, and D.
E) None of the above.

F) D) and E)
G) B) and E)

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Question 32

True/False

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Nathan owns Activity A, which produces income, and Activity B, which produces passive losses. From a tax planning perspective, Nathan will be better off if Activity A is passive.

A) True
B) False

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Question 33

Multiple Choice

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Art's at­risk amount in a passive activity was $60,000 at the beginning of 2013. His loss from the activity in 2013 is $80,000, and he had no passive activity income during the year. Art had $20,000 of passive income from the activity in 2014. Under the passive loss rules, Art's suspended loss at the end of 2014 is:

In the current year, Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner. If she is an active participant and if her modified AGI is $100,000, she can deduct $25,000 of the loss.

Charles owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Charles participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both departments.

Roger owns and actively participates in the operations of an apartment building which produces a $40,000 loss during the year. He has AGI of $150,000 from an active business. He may deduct $25,000 of the loss.

Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit?

Tess owns a building in which she rents apartments to tenants and operates a restaurant. Which of the following statements is incorrect?

Jon owns an apartment building in which he is a material participant and a computer consulting business. Of the 2,000 hours he spends on these activities during the year, 55% of the time is spent operating the apartment building and 45% of the time is spent in the computer consulting business.

Mary Jane participates for 100 hours during the year in an activity she owns. She has no employees and is the only participant in the activity. The activity is a significant participation activity.

Kim dies owning a passive activity with a basis of $75,000, a fair market value of $140,000, and suspended losses of $80,000. All of the $80,000 passive loss can be deducted on Kim's final income tax return.

Anne sells a rental house for $100,000 (adjusted basis of $55,000). During her ownership, $60,000 of losses have been suspended under the passive activity loss rules. Determine the tax treatment to Anne on the disposition of the property.

Eric makes an installment sale of a passive activity having suspended losses of $40,000. He collects 25% of the sales price in the current year, and will collect 25% in each of the next three years. Eric can deduct $10,000 of the passive loss this year.

Describe the types of activities and taxpayers that are subject to the at-risk rules.

Match the term with the correct response. More than one response may be correct. -Significant participation activity.

Lindsey, an attorney, earns $125,000 from her law practice in the current year. In addition, she receives $50,000 in dividends and interest during the year. Further, she incurs a loss of $40,000 from an investment in a passive activity. What is Lindsey's AGI for the year after considering the passive investment?

Dena owns interests in five businesses and has full-time employees in each business. She participates for 100 hours in Activity A, 120 hours in Activity B, 130 hours in Activity C, 140 hours in Activity D, and 125 hours in Activity E.

Jed spends 32 hours a week, 50 weeks a year, operating a bicycle rental store that he owns at a resort community. He also owns a music store in another city that is operated by a full-time employee. He elects not to group them together as a single activity under the "appropriate economic unit" standard. Jed spends 40 hours per year working at the music store.

Jack owns a 10% interest in a partnership (not real estate) in which his at-risk amount is $42,000 at the beginning of the year. During the year, the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations. Jack's at­risk amount at the end of the year is $44,000.

Last year, Wanda gave her daughter a passive activity (adjusted basis of $80,000; fair market value of $160,000) with suspended losses of $20,000. In the current year, her daughter realizes income of $10,000 from the activity. What are the tax effects to Wanda and her daughter?