CPA · Question 07 · Area I: Individual Compliance and Planning

A taxpayer owns a passive activity that has $40,000 of suspended losses from prior years. In Year 2, the taxpayer sells the entire interest in the activity to an unrelated party. In Year 2, the activity generates a $5,000 loss from operations before the sale. The taxpayer has no other passive income in Year 2. The sale results in a $15,000 capital gain. What is the net impact on the taxpayer's Year 2 Adjusted Gross Income (AGI) related to this activity?