Question

Sarah has investments in four passive activity partnerships purchased several years ago. Last year the income and losses were as follows: Activity Income (Loss) A $30,000 B (30,000) C (15,000) D (5,000) In the current year, she sold her interest in Activity D for a $10,000 gain. Activity D, which had been profitable until last year, had a current loss of $1,500. Answer the following questions to determine how the sale of Activity D affects Sarah's taxable income in the current year. a. The amount of suspended losses carried forward to the year of the sale is $ . b. What amount of the suspended losses is allocated to Activity D? $ c. How much, if any, of this net gain may be used to absorb passive activity losses from other activities? $

Answer 1

Step-by-step explanation:

In last year, Sarah couldn't deduct anything against non passive income and need to allocate the $20,000 net loss between the three loss activities.

Activity Income (Loss)

A 30,000

B (30,000)

C (15,000)

D (5,000)

Net Passive Loss (20,000)

Allocation of net passive loss to Activity B,C and D.

Activity B (30/50 * $20,000) ($12,000)

Activity C (15/50 * $20,000) ($6,000)

Activity D (5/50 * $20,000) ($2,000)

Suspended losses Total ($20,000)

In current year, Sarah has a net gain of $10,000 from sale of Activity D. Sarah can set off $2,000 suspended loss from the activity and the current year’s loss of $1,500 from activity across $10,000 gain. Further, the balancing net gain of $6,500 (10,000-2,000 -1,500) from the sale may be utilized to cover passive losses from the other activities.