Question 1

A taxpayer invests $50,000 cash for a 20% interest in a partnership. The partnership takes out a $200,000 nonrecourse loan (secured only by real estate) and a $100,000 recourse loan. The taxpayer is not personally liable for the nonrecourse debt but bears economic risk of loss for their share of the recourse debt. The activity incurs a loss of $90,000 in Year 1. The taxpayer does not materially participate. What is the taxpayer's at-risk amount at the end of Year 1 before considering the loss?

Accepted Answer

Calculate At-Risk Amount: Contribution + Share of Recourse Debt + Qualified Nonrecourse Financing (if applicable). Here, assume standard nonrecourse is not at-risk unless specified as Qualified Nonrecourse Financing on real estate. However, even if qualified, the safest calculation based on general rules for 'nonrecourse' is exclusion unless specified.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Confusing basis (which includes nonrecourse debt) with at-risk amount; failing to allocate the correct percentage of debt.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 5

More questions from this exam