ExpertHard1 markMultiple Choice
CPA · Question 05 · Area I: Individual Compliance and Planning
A taxpayer invests $50,000 cash for a 20% interest in a partnership. The partnership takes out a $200,000 nonrecourse loan (secured only by real estate) and a $100,000 recourse loan. The taxpayer is not personally liable for the nonrecourse debt but bears economic risk of loss for their share of the recourse debt. The activity incurs a loss of $90,000 in Year 1. The taxpayer does not materially participate. What is the taxpayer's at-risk amount at the end of Year 1 before considering the loss?
A taxpayer invests $50,000 cash for a 20% interest in a partnership. The partnership takes out a $200,000 nonrecourse loan (secured only by real estate) and a $100,000 recourse loan. The taxpayer is not personally liable for the nonrecourse debt but bears economic risk of loss for their share of the recourse debt. The activity incurs a loss of $90,000 in Year 1. The taxpayer does not materially participate. What is the taxpayer's at-risk amount at the end of Year 1 before considering the loss?
Answer options:
A.
$50,000
B.
$110,000
C.
$70,000
D.
$30,000
How to approach this question
Calculate At-Risk Amount: Contribution + Share of Recourse Debt + Qualified Nonrecourse Financing (if applicable). Here, assume standard nonrecourse is not at-risk unless specified as Qualified Nonrecourse Financing on real estate. However, even if qualified, the safest calculation based on general rules for 'nonrecourse' is exclusion unless specified.
Full Answer
C.$70,000✓ Correct
IRC §465. The at-risk amount includes cash contributed ($50,000) and the share of liabilities for which the taxpayer is personally liable (20% of $100,000 recourse debt = $20,000). Total = $70,000. General nonrecourse debt is not included in the at-risk amount (unlike basis).
Common mistakes
Confusing basis (which includes nonrecourse debt) with at-risk amount; failing to allocate the correct percentage of debt.
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