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Passive Loss: Leon sells his interest in a passive activity

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Leon sells his interest in a passive activity for $100,000. Determine the tax effect of the sale based on each of the following independent facts:

a. Adjusted basis if this investment is $35,000. Losses from prior years that were not deductible due to the passive loss restrictions total $40,000.

b. Adjusted basis in this investment is $75,000. Losses from prior years that were not deductible due to the passive loss restrictions total $40,000.

c. Adjusted basis in this investment is $75,000. Losses from prior years that were not deductible due to the passive loss restrictions total $40,000. In addition, suspended credits total $10,000.

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Solution Summary

The solution shows the calculations for each of the three independent fact patterns. Following that are 3 paragraphs to better explain the concepts of passive activity losses and how the suspended losses are dealt with.

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a. Sale of $100,000 - adjusted basis of $35,000 - passive losses carrying of $40,000 = $25,000 gain reportable

b. Sale of $100,000 - adjusted basis of $75,000 - passive losses of $40,000 = $15,000 loss reportable.

c. Sale of $100,000 - adjusted basis of $75,000 - passive losses of $40,000 = $15,000 loss ...

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