ExpertHard1 markMultiple Choice
CPA · Question 12 · 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. The activity has $15,000 of current year loss and $25,000 of suspended passive losses from prior years. In the year of sale, the activity generates a $10,000 gain on sale. The taxpayer has $5,000 of passive income from other sources. How much of the loss from the disposed activity is deductible against non-passive (active/portfolio) income?
A taxpayer sells their entire interest in a passive activity to an unrelated party in a fully taxable transaction. The activity has $15,000 of current year loss and $25,000 of suspended passive losses from prior years. In the year of sale, the activity generates a $10,000 gain on sale. The taxpayer has $5,000 of passive income from other sources. How much of the loss from the disposed activity is deductible against non-passive (active/portfolio) income?
Answer options:
A.
$0
B.
$25,000
C.
$40,000
D.
$30,000
How to approach this question
Disposition Rule: 1. Net losses against gain on sale. 2. Net against other passive income. 3. Remaining is non-passive (deductible against wages/portfolio).
Full Answer
B.$25,000✓ Correct
B
IRC §469(g). Total losses from activity = $15,000 + $25,000 = $40,000. <br/>Step 1: Offset Gain on Sale ($10,000). Remainder = $30,000. <br/>Step 2: Offset other passive income ($5,000). Remainder = $25,000. <br/>Step 3: The remaining $25,000 is not treated as a passive loss and can offset active/portfolio income.
Common mistakes
Deducting the entire suspended loss against ordinary income without netting against the gain on sale first.
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