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OUTLINE_7A--Passive_losses_revised

OUTLINE_7A--Passive_losses_revised - OUTLINE 7A SALE OF...

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OUTLINE 7A SALE OF REAL ESTATE Student April 16, 2011 Chapter 11: Passive activity losses : (Sections 11.1, 11.2, 11.6, Section 11.3 (pages 6 to 9 top through example 10) and pages 20 bottom -22 through example 41, Section 11.6) I. Passive Loss Limits a.i. Question: See Example 1 in your textbook. Bob who earned a salary of $400,000 as a business executive and dividend income of $15,000 invested $20,000 for a 10 percent interest in a real-estate tax shelter. The partnership acquired an office building for $1 million paying cash of $200,000 and signing a non-recourse note payable for $800,000 (for purposes of illustration, assume the value of the land was zero). Interest and other deductions related to the activity totaled $400,000 (excluding depreciation). Rental revenue was $400,000. Bob is in the combined Federal and California income tax bracket of 40 percent. a.ii. Question: Is the partnership’s depreciable basis for the building $1,000,000 or $200,000? a.iii. Question: In prior years the recovery period for non-residential real estate was 20 years and the method was double declining balance. What is the amount of the net rental loss after taking into account the depreciation expense? a.iv. Question: How much tax did Bob save prior to the at-risk and passive activity loss rules? a.iv.1. Was the loss a real economic loss or a “paper loss” (generated by tax write-offs)? a.v. Question: Under current at risk rules, how much of the net loss would Bob be able to deduct? a.vi. Question: How much of the net loss would Bob be able to deduct after also applying the passive activity loss rules? b. Active income b.i. Wages, salary, and other payments for services rendered b.ii. Profit from trade or business activity in which taxpayer materially participates
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b.iii. Gain from sale or disposition of assets used in an active trade or business b.iv.
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