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Passive Losses and Schedule A Limitations

1. Tom has investments in 4 passive activity partnerships purchased several years ago. For 2006 in income and losses were as follows:

ACTIVITY INCOME (LOSS)
A $50,000
B (50,000)
C (20,000)
D (10,000)

In 2007 he sold his interest in Activity C for a 20,000 gain. Activity C which had been profitable until 2006 had a loss of $5,500 in 2007.

a)How was Tom's 2006 suspended losses allocated to each of his passive activities?

b)Calculate Tom's 2006 net passive loss.

c)How will the sale of Activity C affect Tom's 2007 taxable income?

2. Jackie who is single with no dependents, received a salary of $100,000 in 2007. She had interest income of $1,200, dividend income of $5,800, gambling income of $4,500, and interest income from private activity bonds of $44,000. The dividends are not qualified dividends. The following additional information is relevant:

Medical expenses (before 7.5% of AGI floor) $13,400
State income taxes 4,500
Real estate taxes 3,100
Mortgage interest on residence 3,500
Investment interest expense 2,000
Gambling losses 5,700

a)Compute Jackie's 2007 AGI

b)Compute Jackie's 2007 itemized deductions for regular income tax purposes.

Solution Preview

1. Tom:
a. The suspended losses from the passive activities are allocated by the following formula:
Net Passive Loss from an activity / sum of losses from all activities having losses;

ACTIVITY INCOME (LOSS)
A $50,000
B (50,000)
C (20,000)
D (10,000)

30,000 * 50,000/80,000 = 18,750
30,000 * 20,000/80,000 = 7,500
30,000 * 10,000/80,000 = 3,750

This totals to $30,000 the amount of the net passive losses.

b. Tom's 2006 Net Passive Loss
ACTIVITY INCOME (LOSS)
A $50,000
B ...

Solution Summary

This solution calculates Passive Activity Losses under various conditions and calculates the Schedule A limitaions.

$2.19