Question

Which of the following is the correct order in which loss limitation rules are applied?

a. Passive loss rules 1st, basis rules 2nd, at-risk rules 3rd.
b. Basis rules 1st, at-risk rules 2nd, passive loss rules 3rd.
c. Passive loss rules 1st, at-risk rules 2nd, basis rules 3rd.
d. Basis rules 1st, passive loss rules 2nd, at-risk rules 3rd.
e. None of the choices are correct.

Answer 1

The correct order of the loss limitation rules is basis rules first, passive loss rules second, and at-risk rules third.

Step-by-step explanation:

The correct order in which loss limitation rules are applied is d. Basis rules 1st, passive loss rules 2nd, at-risk rules 3rd.

The basis rules determine the taxpayer's initial investment in the activity and any subsequent increases or decreases in basis.

The passive loss rules restrict the ability to offset passive losses against other types of income.

The at-risk rules limit the taxpayer's ability to deduct losses from an activity to the amount they have at risk in the activity.