b Any excess losses are carried over under the at risk rules c Treat losses

B any excess losses are carried over under the at

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(b) Any excess losses are carried over under the at-risk rules.(c) Treat losses (except for amounts carried over) as passive losses.Step 5. Add up all passive gains.Step 6. Add up all passive losses.Step 7. Reduce passive gains (but not below zero) by passive losses and any passive loss credits. Include any net passive gain in gross income.Step 8. Carry over excess passive losses as suspended passive losses.(a)If more than one activity results in a passive loss, allocate suspended passive losses between the activities in proportion to the amount of their passive losses.(b) In future tax years, use suspended passive losses to offset passive income.¶7225 DISPOSITION OF A PASSIVE ACTIVITYIf a passive activity is disposed of in a fully taxable transaction, any losses (including suspended losses from prior years) may be recognized by the taxpayer in the year of disposition. Such losses can offset active and portfolio income (nonpassive income). However, losses from the sale of passive activities to related parties generally are not deductible. See Chapter 10.The excess of the sum of Items 1 +2 over 3 will be treated as a loss which is not from a passive activity (i.e., deductible against nonpassive income):1. Any loss from the activity for the tax year, including suspended losses from prior years, plus2. Any loss realized from the disposition of the activity, over3. Net income or gain from all passive activities (determined without regard to losses from the disposition or losses from the activity). Code Sec. 469(g)(1).Passive activity interests that are capital assets and are appropriately disposed of are subject to the capital asset rules for losses (Code Sec. 1211) after applying the passive loss rules. See Chapter 12. A limited partnership interest held as an investment is a capital asset.EXAMPLE 7.7 Rob Williams had gross income of $125,000 in 2013 and owned the following passive activities during the year:Activity Gain/(Loss) Suspended (Loss)ZZZ$15,000$(50,000)XXX(10,000)(28,000)YYY(22,500)(45,000)All activities were acquired after 1986, and Rob was at risk for all losses. He sold his entire interest in ZZZ in a fully taxable transaction. ZZZ was a limited partnership in which Rob was a limited partner. He acquired the limited partnership interest in 1987. The selling price was $22,000, while his basis in
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the interest was $55,000. The result is computed as follows:Selling price$22,000Adjusted basis (55,000) Realized loss$(33,000) The $50,000 of suspended losses will first offset the $15,000 gain from ZZZ, and the balance ($35,000) will be deductible against active and portfolio income. The $33,000 realized loss resulting from the sale of the limited partnership interest will become a long-term capital loss.Death, Gift, and Other TransfersIf an interest in a passive activity is transferred by reason of death, suspended losses are deductible on a decedent’s income tax return to the extent that the excess of the stepped-up basis in the hands of the transferee over the decedent’s adjusted basis is less than the amount of suspended loss.
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