Explore BrainMass

Passive Activity Loss Rules in Action

Mary Beth is a CPA, devoting 3,000 hours per year to her practice. She also owns an office building in which she rents out space to tenants. She devotes none of her time to the management of the office building. She has a property management firm make all management decisions for her. During 2010, she incurred a loss, for tax purposes, of 30,000 on the office building .how must Mary Beth treat this loss on her 2010 tax return?

Solution Preview

IRC section 469(a)(1) states that "for any taxable year [any individual, estate, trust, closely held C corporation, and personal service corporation], neither ... the passive activity loss, nor ... the passive activity credit ... for the taxable year shall be allowed." IRC section 469(b) states that "Except as otherwise provided in this section, any loss or credit from an activity which is disallowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year." IRC section 469(c)(1) provides that "The term "passive activity" means any activity ... which involves the conduct of any trade or business, and ... in which the taxpayer does not materially participate." (IRC section 469(h)(1) states that "A taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the ...

Solution Summary

This solution cites the Internal Revenue Code sections regarding passive activity loss limitations and applies them to a fact set.