ExpertMedium1 markMultiple Choice
CPA · Question 10 · Area I: Individual Compliance and Planning
A taxpayer sells their entire interest in a passive activity to an unrelated party in a fully taxable transaction. At the time of sale, the activity has $25,000 of suspended passive losses. In the year of sale, the activity generates a $5,000 operating loss and a $10,000 gain on sale. The taxpayer has no other passive activities. What is the net effect on the taxpayer's AGI?
A taxpayer sells their entire interest in a passive activity to an unrelated party in a fully taxable transaction. At the time of sale, the activity has $25,000 of suspended passive losses. In the year of sale, the activity generates a $5,000 operating loss and a $10,000 gain on sale. The taxpayer has no other passive activities. What is the net effect on the taxpayer's AGI?
Answer options:
A.
Increase of $10,000
B.
Decrease of $20,000
C.
Decrease of $30,000
D.
No effect
How to approach this question
Upon full disposition, all suspended losses are released. Net the Gain on Sale ($10k) against Current Loss ($5k) and Suspended Loss ($25k). Result: $10k - $5k - $25k = -$20k.
Full Answer
B.Decrease of $20,000✓ Correct
B
IRC §469(g). Complete disposition releases suspended losses. The losses ($25k suspended + $5k current = $30k total) first offset the gain on sale ($10k), leaving $20k of excess loss. This excess loss is treated as a non-passive loss and can offset other ordinary income (wages, etc.), reducing AGI by $20,000.
Common mistakes
Forgetting to offset the gain on sale with the losses.
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