Question

Clarisse experienced losses on both her rental property and her investment as a limited partner. Which of the following is true about her passive activity losses?

a. They may be deducted from any other taxable income. (This answer is incorrect. In general, passive activity losses may only be deducted from passive activity income.)
b. They cannot be carried forward if not deductible in the current year.
c. Up to $25,000 may be deducted from nonpassive income if the loss is from a passive rental real estate activity.
d. They may be carried forward for no more than 15 years if not deductible in the current year.

Answer 1

The correct answer to the student's question about passive activity losses is that up to $25,000 may be deducted from nonpassive income, subject to certain conditions.

Step-by-step explanation:

The question pertains to the treatment of passive activity losses for tax purposes. Specifically, it concerns the deductibility and carryforward rules of losses incurred from passive activities such as a rental property and investments as a limited partner.

The correct statement regarding passive activity losses is that up to $25,000 may be deducted from nonpassive income if the taxpayer actively participates and if the loss is from a passive rental real estate activity, and the taxpayer's modified adjusted gross income is below a certain threshold. Otherwise, passive activity losses can generally only offset passive activity income. However, any losses that cannot be deducted can be carried forward indefinitely to offset future passive income.

Considering the given options, c. Up to $25,000 may be deducted from nonpassive income if the loss is from a passive rental real estate activity appears to be the correct answer. This deduction phases out when the taxpayer's adjusted gross income exceeds certain limits. It is important to refer to the Internal Revenue Service (IRS) guidelines for the most current rules and limits.