Question

Which of the following statements is true when considering the deductibility of a suspended passive loss?

a) The suspended loss can only be deducted against passive income from the same passive activity that generated the loss.
b) The suspended loss can reduce short and long-term capital gains, but NOT ordinary income.
c) The taxpayer will lose the tax benefit of the suspended loss if he sells or divests of the passive activity.
d) The suspended loss may be deducted when a taxpayer generates passive income from that activity or another passive activity.

Answer 1

The correct statement is that a suspended passive loss may be deducted against future passive income from the same or another passive activity. These losses are carried forward until they can offset passive income, contradicting the belief that they are restricted to the same activity or lost upon sale or divestiture.

Step-by-step explanation:

The true statement concerning the deductibility of a suspended passive loss is: d) The suspended loss may be deducted when a taxpayer generates passive income from that activity or another passive activity.

Suspended passive losses occur when passive activity expenses exceed the income generated by that activity. According to the Internal Revenue Service (IRS) regulations, passive losses that are not deductible in the current year are carried forward to future years. These losses can be used to offset future passive income from the same activity or any other passive activity.

However, if a taxpayer disposes of their entire interest in a passive activity in a fully taxable transaction to an unrelated party, they may deduct all suspended losses from that activity against income from any source. The perception that suspended losses can only be deducted against gains from the same passive activity or that such losses can reduce capital gains but not ordinary income, or that they are lost upon sale or divestiture of the activity, is incorrect.