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At risk rules and Passive activity losses

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Five years ago, Gerald invested $150,000 in a passive activity, his sole investment venture. On January 1, 2004, his amount at risk in the activity was $30,000. His shares of the income and losses were as follows:

Year Income (Loss)
2004 $(40,000)
2005 $(30,000)
2006 $50,000

How much can Gerald deduct in 2004 and 2005? What is his taxable income from the activity in 2006? Consider the at-risk rules as well as the passive loss rules.

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Solution Summary

The solution explains how to calculate the at risk amount and then how to carryover unused passive activity losses.

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An analysis of the transactions is attached in Excel, but here are the explanations of the rules:

1. At risk rules are computed first, and they state that you cannot take a loss unless you have basis in the activity. In ...

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