ExpertMedium1 markMultiple Choice
CPA · Question 07 · Area I: Individual Compliance and Planning
A taxpayer owns a passive activity that has $40,000 of suspended losses from prior years. In Year 2, the taxpayer sells the entire interest in the activity to an unrelated party. In Year 2, the activity generates a $5,000 loss from operations before the sale. The taxpayer has no other passive income in Year 2. The sale results in a $15,000 capital gain. What is the net impact on the taxpayer's Year 2 Adjusted Gross Income (AGI) related to this activity?
A taxpayer owns a passive activity that has $40,000 of suspended losses from prior years. In Year 2, the taxpayer sells the entire interest in the activity to an unrelated party. In Year 2, the activity generates a $5,000 loss from operations before the sale. The taxpayer has no other passive income in Year 2. The sale results in a $15,000 capital gain. What is the net impact on the taxpayer's Year 2 Adjusted Gross Income (AGI) related to this activity?
Answer options:
A.
Increase AGI by $15,000.
B.
Decrease AGI by $25,000.
C.
Decrease AGI by $30,000.
D.
Decrease AGI by $45,000.
How to approach this question
Upon full disposition to an unrelated party: 1. Calculate total loss (current + suspended). 2. Recognize gain on sale. 3. Net the total loss against the gain. 4. Any excess loss is allowed as non-passive.
Full Answer
C.Decrease AGI by $30,000.✓ Correct
IRC §469(g). Upon a complete disposition, suspended losses are fully allowed. Total losses = $40,000 suspended + $5,000 current = $45,000. These offset the $15,000 gain on sale, leaving $30,000 of excess loss which is deductible against other income (salary, etc.). Net impact is a $30,000 reduction in AGI.
Common mistakes
Forgetting to include current year loss; failing to net the loss against the gain on sale; thinking losses remain suspended.
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