Question

Problem 11-44 (Algorithmic) (LO. 3) Leon sells his interest in a passive activity for $126,500. Determine the tax effect of the sale based on each of the following independent facts: If an amount is zero, enter "0". a. Adjusted basis in this investment is $44,275. Losses from prior years that were not deductible due to the passive activity loss restrictions total $48,703. The taxable gain is $ 33,522 The suspended losses at the end of the year are s b. Assume the same sales price but the adjusted basis in this investment is $94,875. Losses from prior years that were not deductible due to the passive activity loss restrictions total $48,703. The deductible loss ✓ is $ -17,078 The suspended losses at the end of the year are s 48,703 Feedback Check My Work Partially correct C. Assume the same sales price but the adjusted basis in this investment is $94,875. Losses from prior years that were not deductible due to the passive activity loss restrictions total $48,703. In addition, suspended credits total $12,650. The deductible loss is $ -17,078 . The suspended losses at the end of the year are $ 48,703 X The suspended credits at the end of the year are lost

Answer 1

Answer:

Passive activity is measured as the overage of passive deductions over passive gross income. Passive credits are the sum of credits exceeding regular tax liability. Passive activity income does not include: non-passive income, portfolio income, personal source income and working caapital income. An active loss can be offsets from three types of income: active, passive, and portfolio. If an activity is classified as passive its losses can be offset from passive income only

Determine tax effect in situation a through c in following manner.

a.)

Net sales price	$126500
Less: Adjusted basis	(44275)
Total gain	$82225
Less: Suspended losses	(48703)
Taxable gain	$33522

Thus, taxable gain is $33522

b)

Net sales price	$126500
Less: Adjusted basis	(94875)
Total gain	$31625
Less: Suspended losses	(48703)
Taxable gain	$(17078)

Thus, taxable loss is $17078

c)

Net sales price	$126500
Less: Adjusted basis	(94875)
Total gain	$31625
Less: Suspended losses	(48703)
Taxable gain	$(17078)

Thus, taxable loss is $17078

Suspended passive losses are deductible but suspended credits are lost because taxpayer has net loss from passive activities. The sale of the activity did not generate any tax.