Question

Help. I need help finding the solution along with explanations to better understand this problem. I would greatly appreciate it.

Jorge owns two passive investments, Activity A and Activity B. He plans to dispose of Activity A in the current year or next year. Juanita has offered to buy Activity A this year for an amount that would produce a taxable passive activity gain to Jorge of $115,000. However, if the sale, for whatever reason, is not made to Juanita, Jorge believes that he could find a buyer who would pay about $7,000 less than Juanita. Passive activity losses and gains generated (and expected to be generated) by Activity B follow:
Two years ago ($35,000)

Last year (35,000)

This year (8,000)

Next year (30,000)

Future years Minimal profits

All of Activity B’s losses are suspended. Should Jorge close the sale of Activity A with Juanita this year, or should he wait until next year and sell to another buyer? Jorge is in the 32% tax bracket.

Answer 1

In absence of information, it is assumed that these Activities are being carried on since a long time.

As per the Tax rules, income from Passive activity can be used to offset Passive Loss.

Suspended loss refers to capital loss that cannot be realized in a given tax year due to limitation of passive activity. These losses can be netted against passive income in a future tax years. Suspended losses can only be carried forward, known as a capital loss carryover.

Total capital losses of Activity B : $108000. This loss can be offset against proceeds from sale of Activity A.

	Sell Activity A
	This Year to Juanita	Next year to Juanita	Another buyer next year	Another buyer this year
Sale proceeds	115000	115000	108000	101000
Passive losses	-78000	-108000	-108000	-78000
	37000	7000	0	23000
Tax @ 32%	-11840	-2240	0	-7360
Net income	25160	4760	0	15640

Basis the above, from tax perspective, if Jorge does not intend to pay any tax, then he can wait for another year to sell to Another buyer to offset all of his capital losses.

Ideal recommendation would be to sell Activity A to Juanita this year so that he can avoid losses and earn net income of $25160.