Question

Farell is a member of Sierra Vista LLC. Although Sierra Vista is involved in a number of different business ventures, it is not currently involved in real estate either as an investor or as a developer. On January 1, year 1, Farell has a $152,000 tax basis in his LLC interest that includes his $135,000 share of Sierra Vista's general liabilities. By the end of the year, Farell's share of Sierra Vista's general liabilities have increased to $152,000. Because of the time he spends in other endeavors, Farell does not materially participate in Sierra Vista. His share of the Sierra Vista losses for year 1 is $189,000. As a partner in the Riverwoods Partnership, he also has year 1, Schedule K-1 passive income of $14,000. Farell is single and has no other sources of business income or loss. assuming the original facts and that farell is deemed to be an active participant in sierra vista, and he also has a $278,000 loss from a sole proprietorship, determine how much total trade or business loss farell will deduct on his return in year 1.

Answer 1

Farell can deduct his share of Sierra Vista LLC's losses up to his adjusted basis of $169,000 after accounting for the increased liabilities. His passive income from another partnership reduces the deductible loss to $155,000. Combined with the sole proprietorship loss of $278,000, he can deduct a total of $433,000 in trade or business losses.

Step-by-step explanation:

To determine how much total trade or business loss Farell can deduct on his return in year 1, considering Farell as an active participant in Sierra Vista LLC and the $278,000 loss from a sole proprietorship, we must look at the rules for loss deduction. As an active participant in Sierra Vista, Farell would generally be able to deduct his share of the LLC's losses against other income, subject to basis limitations and at-risk rules.

The initial $189,000 loss exceeds his starting basis of $152,000. However, since Farell's share of Sierra Vista's general liabilities increased by $17,000 (from $135,000 to $152,000), his basis increased by that same amount. This gives Farell an adjusted basis of $169,000 (original basis of $152,000 + $17,000 increase in liabilities). Therefore, he can deduct up to $169,000 of the LLC's losses.

Farell's passive income from the Riverwoods Partnership of $14,000 can be used to offset the passive losses from Sierra Vista to the extent of his adjusted basis in Sierra Vista LLC, which has been determined as $169,000. This leaves Farell with $155,000 in deductible losses from Sierra Vista ($169,000 - $14,000).

The $278,000 loss from the sole proprietorship is also deductible as it's a business in which he materially participates. Therefore, the total deductible trade or business loss is the sum of the deductible Sierra Vista LLC loss and the sole proprietorship loss, which equals $155,000 + $278,000, totaling $433,000.