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 $167,000 tax basis in his llc interest that includes his $149,000 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 $167,000. 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 $204,000. 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.

determine how much of the sierra vista loss farell will curently be able to deduct on his tax return for year 1.

Answer 1

Farell will not be able to deduct any of the Sierra Vista loss on his tax return for year 1. Farell can currently deduct $14,000 of the Sierra Vista LLC loss against his passive income from another partnership. The remaining $190,000 of the loss is suspended and carried forward due to passive activity loss rules.

Step-by-step explanation:

To determine how much of the Sierra Vista loss Farell will currently be able to deduct on his tax return for year 1, we need to consider the concept of passive activity limitations. In general, losses from passive activities can only be offset against income from other passive activities. However, there is an exception for real estate professionals. Since Sierra Vista is not involved in real estate, Farell's share of the $204,000 loss from Sierra Vista cannot be deducted against his $14,000 passive income from Riverwoods Partnership.

The Sierra Vista loss will be considered a passive loss, and Farell does not have any other passive income to offset it against. Therefore, he will not be able to deduct any of the Sierra Vista loss on his tax return for year 1. However, it's important to consult with a tax professional or review the specific tax laws in your jurisdiction to get accurate and up-to-date information.

Farell can currently deduct $14,000 of the Sierra Vista LLC loss against his passive income from another partnership. The remaining $190,000 of the loss is suspended and carried forward due to passive activity loss rules.

The student is asking about how much of the Sierra Vista LLC loss Farell will be able to deduct on his tax return for Year 1. Farell began the year with a tax basis of $167,000 in the LLC, which included his share of $149,000 in general liabilities. By the end of the year, his share of the liabilities increased to $167,000. Farell does not materially participate in Sierra Vista and the LLC incurred losses of $204,000, with Farell's share being equal to the loss. However, under the tax rules, specifically those pertaining to passive activity losses (PALs), individuals can only deduct losses from passive activities to the extent of passive income. Farell has $14,000 of passive income from another partnership.

Therefore, Farell is able to currently deduct $14,000 of the $204,000 Sierra Vista loss against his passive income. The remaining $190,000 loss will be suspended and carried forward to future tax years until he has sufficient passive income or disposes of his interest in the activity in a fully taxable transaction.