Question

Your client is Dr. Quack, an MD who owns 100% of her  medical practice of which the legal entity is an LLP.  The medical practice generates a net income of $800,000 per year before paying rent.    She currently pays $5,000 per month for rent, so her income net of rent is $740,000 per year.   She is considering the purchase of a commercial office building  at a location which would be better suited for her medical practice.   The price of the building is $1 million, and Dr. Quack would purchase it all for cash.  She would move her medical practice into the building, and the LLP which she owns and which employs Dr. Quack would rent the space in the new building for $6,000 per month which is an arm's length rate.     The  new building would have depreciation expense of $20,000 per year and $12,000 per year on other costs so it would have net income of $40,000 per year ($72,000 minus expenses of $32,000 per year).   She owns other rental property which has $40,000 in passive losses from prior years which she could not deduct due to the overall passive loss limitations, and those properties currently generate $15,000 per year in additional passive losses.   Dr. Quack wants to offset  the passive net rental income which she receives from the medical office building ($40,000 per year) with otherwise unused passive losses she has from her other real estate investments.       Will that be permitted?       

Answer 1

The Internal Revenue Service places limits on passive losses -- the type that arise from activities you engage in on the side, essentially as an investor. Generally, when your losses from passive activities exceed your income from passive activities, the IRS disallows those excess losses for the current year. You then must carry forward your disallowed passive losses to the next taxable year.

Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. You can carry forward disallowed passive losses to the next taxable year. A similar rule applies to credits from passive activities.

So yes she can offset the amount upto $40000 from passive losses. and rest will be carryforward.

Thank You!!