Final answer:
Sarah can use her suspended loss to offset the gain if she sells the activity.
Step-by-step explanation:
Sarah owns a passive activity with a suspended loss of $18,000. The fair market value of the activity is $35,000, and her adjusted basis in the activity is $20,000.
If Sarah were to dispose of the activity, she would recognize a gain or loss based on the difference between the fair market value and the adjusted basis. In this case, if she were to sell the activity, she would have a gain of $15,000 ($35,000 - $20,000).
However, since she has a suspended loss of $18,000, she can use this loss to offset the gain from the sale. Therefore, the net gain would be $0 ($15,000 gain - $18,000 suspended loss).