Don sold an apartment house with an adjusted basis of

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: Don sold an apartment house with an adjusted basis of$100,000for $150,000. In addition, Don has current and suspended lossesassociated with that specific apartment house of $60,000and has no otherpassive activities. The recognizedcapital gain, $50,000, allowablesuspendedPAL of $60,000, and the net recognized loss, $10,000, arecalculated and reported as follows:Sales price$150,000Less: Adjusted basis(100,000)Recognized capital gain$ 50,000Schedule DLess: Allowable suspended PAL( 60,000)Schedule ENet recognized loss on sale$(10,000)Net effect on AGIBecause the suspended PALretains its character, the $60,000allowablesuspendedPALis now offset against Don's other ordinary income andportfolio income.F.Disposition of a Passive Activity at Death1.§469(g)(2)provides that a transfer of a taxpayer's interest in a passive activity by reason of the taxpayer's death results in a suspended PALbeing allowed to the decedent to the extent that the PALexceeds the amount of thestep-up in basis allowed under §1014.2.A suspendedPALis lost to the extent of the amount of the §1014basis increase. Any excess allowed is reported on the finalForm 1040of the deceased taxpayer.
EXAMPLE #1: A taxpayer dies with passive activity property having anadjusted basis of$40,000, suspended PALof $10,000, and a fair marketvalue at the date of the decedent's death of $75,000. The §1014step-up inbasis is $35,000. The $10,000suspendedPALis not deductible on thedecedent's Final 1040because the suspended PAL of $10,000did notexceed the §1014step-up in basis $35,000.Fair market value on date of death.........................................................................Less:Adjustedbasisofpassiveactivityproperty................................................§1014Step-up...........................................................................................................Suspended PAL.........................................................................................................Less:§1014Step-up................................................................................................DeductibleonfinalForm1040..........................................................................EXAMPLE #2: A taxpayer dies with a passive activity property having anadjusted basis of $40,000, suspended PALof $10,000, and a fair marketvalue at the date of the decedent's death of $47,000. Since the basis increaseunder §1014would be only $7,000, the suspendedPALallowed is limited to$3,000. The$3,000 loss available to the decedent is reported on thedecedent's final income tax return.Fair market value on date of death.........................................................................Less:Adjustedbasisofpassiveactivityproperty.................................................§1014Step-up in basis.............................................................................................SuspendedPAL.........................................................................................................Less:§1014Step-up....................................................................................................DeductibleonfinalForm1040.............................................................................3.The §469(g)(2)provision is an activity by activitytest and the determinationof how much suspended passive activity loss is allowed as a deduction onthe finalForm 1040of the decedent must be individually measured and nota cumulative calculation.
EXAMPLE #3: Based on all the data in Examples #1 and #2above thecalculation would be as follows:Fair market value on date of death$75,000$47,000Less:Adjusted basis(40,000)(40,000)§1014Step-up$35,000$ 7,000Suspended PAL$10,000$10,000Less:§1014Step-up(35,000)( 7,000)DeductibleonfinalForm1040$ -0-$ 3,000G.Disposition of a Passive Activity by Gift1.§469(j)(6)provides that in a disposition of a taxpayer's interest in a passiveactivity by a gift, the suspendedPALis added to the basis of the property tothe donee.EXAMPLE: Don makes a gift of real property with a cost of $60,000andan adjusted basis of $40,000. There is a suspended PALof $10,000. The fairmarket value at the date of the gift is $100,000. Don cannot deduct thesuspended

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