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7 Cards in this Set
- Front
- Back
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Define passive investments
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Ventures where investors are not involved in the day-to-day operations of the business
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What does at-risk mean and how do you calculate allowable loss?
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At-Risk: 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 amount does not include nonrecourse debt unless the activity involves real estate
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 Take at risk and deduct that amount of loss max, carry over max of 20k to next year |
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Define active, portfolio, and passive income
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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 Income- Losses from trade or business activities in which taxpayer does not materially participate, and Certain rental activities |
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What are the limitations on passive losses?
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Generally, passive losses can only offset passive income, i.e., they cannot reduce active or portfolio income
Disallowed losses are suspended and carried forward Suspended losses must be allocated to specific activities Suspended losses are deductible in year related activity is disposed of in a fully taxable transaction |
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What are the material participation tests?
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An activity is treated as active rather than passive (thus, not subject to the passive loss limits) if taxpayer meets one of 7 material participation tests
Test 1 Taxpayer participates in the activity more than 500 hours during the year Test 2 Taxpayer’s participation in the activity is substantially all of the participation in the activity of all individuals for the year Test 3 Taxpayer participates in the activity more than 100 hours during the year and not less than the participation of any other individual in the activity Test 4 Taxpayer’s participation in the activity is significant and taxpayer’s aggregate participation in all significant participation activities during the year exceeds 500 hours Significant participation is more than 100 hours Test 5 Taxpayer materially participated in the activity for any 5 years during the last 10 year period Test 6 The activity is a personal service activity in which the taxpayer materially participated for any 3 preceding years Based on the facts and circumstances, taxpayer participated in the activity on a regular, continuous, and substantial basis Regular, continuous, and substantial are not specifically defined in the Regulations |
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What are the 6 regulations that rental income must meet one of to not be considered a passive activity?
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Exception 1
The average period of customer use of the property is 7 days or less Exception 2 The average period of customer use of the property is 30 days or less, and the taxpayer provides significant personal services Significant services are only services performed by individuals Exception 3 Taxpayer provides extraordinary personal services Average period of customer use is of no consequence Extraordinary personal services occur when the customer’s use of the property is incidental to the services provided Exception 4 Rental of the property is incidental to a nonrental activity of the taxpayer Exception 5 Taxpayer customarily makes the property available during business hours for nonexclusive use by customers Exception 6 Property is provided for use in an activity conducted by a partnership, S corporation, or joint venture in which taxpayer owns an interest |
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What are the two significant exceptions to real estate passive loss limitations?
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Real estate professionals, real estate rental activities
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