Question

Which of the following is not a true statement regarding passive investments and passive activity?

A. Losses from limited partnerships, and from rental activities, including rental real estate, are generally considered passive losses
B. Limited partners in Real Estate Limited Partnerships are generally deemed to be passive participants.
C. Passive activity loss rules are designed to limit taxpayers' ability to deduct losses from activities in which they don't materially participate aganst income from other sources.
D. A passive activity is "any activity which involves the conduct of a trade or business, and in which the taxpayer does not materially participate.
E. Passive losses cannot be carried forward and are lost if not used in the year they are incurred.

Answer 1

The correct answer is E. Passive losses cannot be carried forward and are lost if not used in the year they are incurred.

Step-by-step explanation:

The correct answer is E. Passive losses cannot be carried forward and are lost if not used in the year they are incurred. This statement is false because passive losses can be carried forward and used to offset passive income in future years.

Passive investments refer to investments where the investor does not actively participate in the management or operation of the investment. Passive activity, on the other hand, refers to any activity involving the conduct of a trade or business where the taxpayer does not materially participate.

Some key differences between passive investments and passive activity include:

1. Tax treatment: Passive investments are subject to passive income rules, whereas passive activity is subject to passive activity loss rules.
2. Participation: Passive investments generally do not require active participation, whereas passive activity may require active participation to qualify for certain tax benefits.
3. Deductibility of losses: Passive investments may have limited deductibility of losses, while passive activity losses can be used to offset passive income.