Question

On January 1, X9, Gerald received his 50% profits and capital interest in High Air, LLC in exchange for $2,000 in cash and real property with a $3,000 tax basis secured by a $2,000 nonrecourse mortgage. High Air reported a $15,000 loss for its X9 calendar year. How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation? A. $0, $4,000 B. $0, $7,500 C. $0, $15,000 D. $4,000, $0 E. None of the above

Answer 1

option (E) None of the above

Step-by-step explanation:

Data provided in the question:

Cash = $2000

Real Property = $3,000

Nonrecourse mortgage = $2,000

Loss reported = $15,000

Now,

Gerald's initial tax basis

= Exchange in cash + Real property with tax basis - Nonrecourse mortgage +(50% of $2000)

= $2,000 + $3,000 - $2,000 + 1,000

= $4,000

and,

Gerald's would be allocated 50% of Loss

= 50% of $15,000

= $7,500

Thus,

Gerald deduction currently is limited to his basis

i.e

Gerald can deduct $4,000

and the remaining amount

i.e Loss of $3,500 ($7,500 - $4,000) would be suspended and carried forward indefinitely.

Hence,

the answer is option (E) None of the above