Passive Activity - Performance Details Flashcards

Passive Activity - Performance Details Flashcards The term "active participation" for a passive activity loss is

relevant in relation to:

rental real estate activities.In general, passive activity losses in excess of passive activity income are not allowed.There is an exception to the rule for rental real estate activities; if an individual actively participated in a rental real estate activity, they may be able to deduct up to $25,000 of passive activity loss from nonpassive income.Participation in management decisions such as new tenant approval, rental terms, repairs, and capital expenditures is sufficient to meet the "active participation" definition.The passive activity rules apply to individuals, estates, trusts, personal service corporations, and closely held C corporations. The passive activity loss rules do not apply to partnerships, widely held C corporations, or S corporations.Owners of at least 10% of a residential rental unit who actively participate in the rental can deduct losses up to $25,000 a year. However, a phaseout of the deduction begins at $100,000 of adjusted gross income. The deduction of the rental loss is completely phased out at what level?$150,000For every $2 of adjusted gross income (AGI) over the $100,000 level, one dollar of that real estate loss is phased out, so that at $150,000 in AGI, the full deduction is phased out.Smith (single filing status) has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income?$15,000Individuals (and married taxpayers filing jointly) may offset up to $25,000 of ordinary income with losses from rental real estate activities. This exemption is reduced (but not below zero) by 50% of the amount by which the adjusted gross income (AGI) of the taxpayer for the year exceeds $100,000. (Note that married taxpayers filing separately may each offset $12,500, reduced (but not below zero) by 50% of the amount by which the AGI of each taxpayer exceeds $50,000.)Therefore, $25,000 (($120,000 $100,000) × 0.50) = $15,000 deduction allowed.Rules limiting passive activity losses apply to: personal service corporations.Passive loss rules apply to individuals, estates, trusts, personal service corporations, and certain closely held corporations. Limitations on passive activity losses apply to individuals as a result of a flow through from S corporations and partnerships, but do not apply at the S corporation or partnership level.IRC Section 469(a)(2), 752(a), 1367, and 7773(a)(3) The Jacksons, who file a joint return, actively participate in a solely-owned rental real estate activity that produces a $30,000 loss during the current year. Their adjusted gross income was $120,000 before considering the rental activity.

How much of the rental loss, if any, are the Jacksons entitled to deduct?$15,000Certain taxpayers may deduct real estate rental losses from active and portfolio income. This treatment applies to taxpayers who materially participate in a real property trade or business. Both individuals and closely

held C corporations may qualify.Other taxpayers who qualify as active participants in a rental real estate activity may also deduct losses from such activities against active and portfolio income.Generally, up to $25,000 of losses from such activities may be deducted against active income and portfolio income ($12,500 for married taxpayers filing separately).This $25,000 deduction limit is reduced by 50%

of the taxpayer's AGI in excess of $100,000.Step 1:

Calculate the amount in excess of $100,000:$120,000

(AGI) $100,000 = $20,000Step 2: Multiply the amount in

excess of step 1 by 50%:$20,000 × 50% = $10,000Step 3: Subtract the maximum by the excess calculated in step

2:$25,000 $10,000 = $15,000