Chapter 14 Passive Activity Rules

Question 1

What do the At Risk Rules state regarding losses?

Answer 1

Losses can only be deducted to the extent of property/money that is at risk

The at-risk rule applies before the passive activity rules.

Question 2

Under the At Risk Rules, a taxpayer may not deduct more than the amount that he/she is _______ for the investment.

Answer 2

at risk

This rule limits the deduction of losses in the current tax year.

Question 3

What are the three types of income?

Answer 3

• Active (Ordinary Income) wages, salary, commissions, bonuses, and other payments. profit from a trade or business (material participant), gain on sale or other disposition of assets.
• Passive - any trade or business or income-producing activity in which the taxpayer does not materially participate.
• Portfolio - interest, dividends, annuities, and royalties.

Active income includes wages, salary, and profit from a trade or business.

Question 4

Passive losses can only offset _______ gains.

Answer 4

passive

This means that passive income and losses are treated separately from active income.

Question 5

Define Passive Activity.

Answer 5

• No material participation
• Limited partnership interest
• Rental activities, even with material participation
• Exception: real estate dealers are not considered passive activity.

Real estate dealers are not considered a passive activity.

Question 6

What constitutes Material Participation?

Answer 6

• Greater than 500 hours per year, OR
• Greater than 100 hours and the most of any participant, OR
• Greater than 100 hours devoted to several activities that add up to more than 500 hours

Material participation is crucial for determining active versus passive losses.

Question 7

What is the Real Estate Professionals Exception for losses?

Answer 7

*Losses are treated as active losses if the individual meets the following requirements for material participation:
* Half of personal services performed in real property trades or businesses
* More than 750 hours of services in real property trades or businesses

If these conditions are met, losses are treated as active losses.

Question 8

What can an individual investor deduct if the real estate is actively managed?

Answer 8

Up to $25,000 in ordinary income subject to phase-out of $1 for every $2 AGI exceeds $100,000.

This deduction is subject to a phase-out of $1 for every $2 AGI exceeds $100,000.

Question 9

If suspended losses are from At Risk activity, when are they deductible?

Answer 9

They are NOT Deductible until the at-risk amount is positive from additions or income.
*if losses are suspended under passive activity rules, the losses are deductible upon disposition.

Suspended losses under passive activity rules are deductible upon disposition.