Question

Discuss the treatment given to suspended passive activity losses and credits. What happens to an activity’s unused losses and credits when the activity is sold?

Answer 1

Answer :-

In general, passive losses are deductible to the extent of passive income from all of the taxpayer’s current-year passive activities. Passive credits can be utilized only against regular tax attributable to passive income. If passive losses or credits are not used in the current year, they are carried over indefinitely for potential use in the succeeding years to offset passive income (or regular tax attributable to passive income) in those years.

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An activity’s unused (or suspended) passive losses that exist when a taxpayer sells the passive activity may be used to reduce the gain from the sale, or increase the recognized loss. Thus, the suspended passive losses are fully utilized in the year of disposition. In contrast, passive credits are allowed on dispositions only when there is sufficient tax on passive income to absorb them.