passive_loss_limits_solution

passive_loss_limits_solution - In 2006, Jane has a...

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Topic: Passive loss limitations [Solution] Jane purchases a producing orange grove. Jane hires an employee who takes care of the grove. Jane, a physician, provides the capital. During 2006, the business reports a loss of $20,000 because prices are low and the relatively young trees produce only a few oranges. During 2007, the business reports another loss totaling $15,000. In 2008, the business earns $11,000. At the beginning of 2009, Jane sells the business for a gain of $13,000. Required : How much of the loss can Jane duct in each year (2006-2009)? 2006 : Jane cannot offset the loss against her medical practice income as she does not materially participate in the business. If Jane held other passive investments that generated a profit, she could deduct the loss from the passive income they generated.
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Unformatted text preview: In 2006, Jane has a suspended passive loss of $20,000. 2007 : Again, the passive loss limitation prevents Jane from deducting the loss. She now has a $35,000 ($20,000 + $15,000) suspended passive loss at the end of 2007. 2008 : Since the business earns $11,000 in 2008 Jane can use some of the suspended passive loss to offset her $11,000 income from the orange grove leaving her with a remaining suspended passive loss of $24,000 ($35,000 $11,000). 2009 : Jane can deduct the entire passive loss carryover of $22,000 resulting in a deductible net passive loss of $11,000 for the year ($13,000 gain $24,000). As she sold her complete interest in the business she can deduct the full amount of the suspended loss even though the amount of the loss is greater than the gain from the sale....
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