11 - C hapter 11 I nvestor Losses Passive Loss Rules...

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Chapter 11 Investor Losses Passive Loss Rules Require income and losses to be separated into three categories: Active Portfolio Passive Generally, disallow the deduction of passive losses against active or portfolio income In general, passive losses can only offset passive income Passive losses are also subject to the at-risk rules Designed to prevent taxpayers from deducting losses in excess of their economic investment in an activity At-Risk Limits At-risk defined The amount of a taxpayer’s economic investment in an activity Amount of cash and adjusted basis of property contributed to the activity plus amounts borrowed for which taxpayer is personally liable (recourse debt) At-risk defined At-risk amount does not include nonrecourse debt unless the activity involves real estate For real estate activities, qualified nonrecourse debt is included in determining at- risk limitation At-risk limitation Can deduct losses from activity only to extent taxpayer is at-risk Any losses disallowed due to at-risk limitation are carried forward until at-risk amount is increased Previously allowed losses must be recaptured to the extent the at-risk amount is reduced below zero At-risk limitations must be computed for each activity of the taxpayer separately Interaction of at-risk rules with passive loss rules At-risk limitation is applied FIRST to each activity to determine maximum amount of loss allowed for year THEN, passive loss limitation applied to ALL losses from ALL passive activities to determine actual amount of loss deductible for year Calculation of At-Risk Amount Increases to a taxpayer’s at-risk amount: Cash and the adjusted basis of property contributed to the activity Amounts borrowed for use in the activity for which the taxpayer is personally liable or has pledged as security property not used in the activity Taxpayer’s share of amounts borrowed for use in the activity that are qualified nonrecourse financing Taxpayer’s share of the activity’s income Decreases to a taxpayer’s at-risk amount: Withdrawals from the activity Taxpayer’s share of the activity’s loss 1
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Taxpayer’s share of any reductions of debt for which recourse against the taxpayer exists or reductions of qualified nonrecourse debt Passive Loss Limits Active income Wages, salary, and other payments for services rendered Profit from trade or business activity in which taxpayer materially participates Gain from sale or disposition of assets used in an active trade or business Income from intangible property created by taxpayer Portfolio income Interest, dividends, annuities, and certain royalties not derived in the ordinary course of business Gains/losses from disposition of assets that produce portfolio income or held for investment Passive losses defined Losses from trade or business activities in which taxpayer does not materially
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11 - C hapter 11 I nvestor Losses Passive Loss Rules...

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