Question

Nelson is a limited partner in a vinyl shop. At the end of the partnership's tax year, Nelson's basis in the partnership interest is $60,000 ($25,000 cash investment plus a $35,000 share of nonqualified nonrecourse financing). Nelson's distributive share of partnership losses for the tax year is $55,000. Nelson has $52,000 of passive income this year from other activities. How much of the $55,000 partnership loss can be used by Nelson in the year of the loss?

Answer 1

Loss limits for partners:

Four separate limits may apply to a partner's of an item of deduction or loss from a partnership, respectively. The limits determine the amount each partner can deduct on his or her own return.

These limits and the order in which they apply are:
1. The adjusted basis, the partner's partnership interest,
2. The excess farm loss rules, (Not applicable in the given case)
3. The at-risk rules, and
4. The passive activity rules.

In the given case Total partnership Interest is 60,000.

Loss from partnership = 55,000

Passive Income = 52,000

So we can set off an amount of 52,000.

Net Taxable Income = 0

Balance Loss 3,000 can be carried forward to future years and set off against passive Income.