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Passive Activity Rules

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Carmen, a single taxpayer, has $80,000 in salary, $10,000 in income from a limited partnership, and a $30,000 passive loss from a real estate rental activity in which she actively participates. Her modified adjusted gross income is $80,000. Of the $30,000 loss, Carmen may deduct:
a. $0.
b. $10,000.
c. $25,000.
d. $30,000.
e. Some other amount.

Roxanne, who is single, has $125,000 of salary, $10,000 of income from a limited partnership, and a $26,000 passive loss from a real estate rental activity in which she actively participates. Her modified adjusted gross
income is $125,000. Of the $26,000 loss, how much is deductible?
a. $0.
b. $10,000.
c. $25,000.
d. $26,000.
e. None of the above.

Lucy dies owning a passive activity with an adjusted basis of $90,000. Its fair market value at that date is $145,000. Suspended losses relating to the property were $75,000. Which of the following statements is true?
a. The heir's adjusted basis is $145,000, and Lucy's final deduction is $20,000.
b. The heir's adjusted basis is $145,000, and Lucy's final deduction is $75,000.
c. The heir's adjusted basis is $90,000, and Lucy's final deduction is $75,000.
d. The heir's adjusted basis is $220,000, and Lucy has no final deduction.
e. None of the above.

Kim made a gift to Sam of a passive activity (adjusted basis of $50,000, suspended losses of $20,000, and a fair market value of $80,000). No gift tax resulted from the transfer. Which of the following statements is
true?
a. Sam's adjusted basis is $80,000.
b. Sam's adjusted basis is $50,000, and Sam can deduct the $20,000 of suspended losses in the future.
c. Sam's adjusted basis is $80,000, and Sam can deduct the $20,000 of suspended losses in the future.
d. Sam's adjusted basis is $50,000, and the suspended losses are lost.
e. None of the above.

Identify from the list below the type of disposition of a passive activity where the taxpayer keeps the suspended losses of the disposed activity and utilizes them on a subsequent taxable disposition.
a. Disposition of a passive activity by gift.
b. Nontaxable exchange of a passive activity.
c. Disposition of a passive activity at death.
d. Installment sale of a passive activity.
e. None of the above.

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This solution covers the Passive Activity Rules in the question and answer format.

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1. Carmen will deduct all of the $30,000 loss. That loss is allowed by taking $10,000 of passive income to reduce the passive loss down to $20,000, and then that $20,000 can be taken against regular income. That answer is D. The $25,000 is the Real Estate Rental Activities exclusion. It can offset regular income. The allowance is taken after the netting of passive activities and in this case the $10,000 of limited partnership income is passive.

2. Roxanne's situation is different because ...

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