Question

On January 1, X9, Gerald received his 50% profits and capital interest in High Air, LLC in exchange for $2,000 in cash and real property with a $3,000 tax basis secured by a $2,000 nonrecourse mortgage. High Air reported a $15,000 loss for its X9 calendar year. How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation? $0, $4,000. $0, $7,500. $0, $15,000. $4,000, $0.

Answer 1

$4000 can be deducted now and the remaining $3500 would be suspended

Step-by-step explanation:

Given that:

Gerald profits and capital interest in High Air = 50%,

LLC in exchange for $2,000 in cash and real property

tax basis = $3000,

non recourse mortgage = $2000

High Air loss for its X9 calendar year = $15000

Therefore Gerald initial tax basis = cash and real property LLC exchange + tax basis - non recourse mortgage + (50% × $2000) = $2000 + $3000 - $2000 + (0.5 × $2000) = $3000 + $1000 = $4000

Gerald initial tax basis is $4000

Also Gerald X9 loss = 50% of $15000 = 0.5 × 15000 = $7500

The amount Gerald can deduct is limited to his basis in high air, therefore $4000 can be deducted now and the remaining ($7500 - $4000 = $3500) would be suspended

Answer 2

$4,000, $0.

Step-by-step explanation:

On January 1, X9, Gerald received his 50% profits and capital interest in High Air, LLC in exchange for $2,000 in cash and real property with a $3,000 tax basis secured by a $2,000 nonrecourse mortgage. High Air reported a $15,000 loss for its X9 calendar year.

Basis = Contribution into partnership + Appropriated Profit

Basis = ($2,000 equity + $2,000 real estate) + $0 = $4,000

There was no cash distribution during the year hence, the investor can claim a loss of $4,000

Expenses to be deducted but there were no expenses

Therefore net reportable loss = $4,000 Basis - $0 Expenses incurred = $4,000