Question

Bailey owns a 20% interest in a partnership (not involved in real estate) in which his at-risk amount was $25,000 at the beginning of the year. During the year, Bailey receives a distribution of $20,000 from the partnership. The partnership produces an $80,000 loss during the year. If you ignore the passive loss rules, Bailey's deductible loss for the year is:

Answer 1

$5,000

Explanation:

Relevant data provided

At-risk amount = $25,000

Distribution received = $20,000

The computation of deductible loss for the year is shown below:-

Deductible loss for the year = At-risk amount - Distribution received

= $25,000 - $20,000

= $5,000

Therefore for computing the deductible loss for the year we simply deduct the distribution received from at risk amount and partnership interest which is 20% and established partnership which is $80,000 is not considered as it is not covered in deductible loss.