Question

Leon sells his interest in a passive activity for $224,000. Determine the tax effect of the sale based on each of the following independent facts:

If an amount is zero, enter "0".

a. Adjusted basis in this investment is $78,400. Losses from prior years that were not deductible due to the passive activity loss restrictions total $86,240.

The (taxable gain/ or Deductible Loss) is $.

The suspended losses at the end of the year are $.

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When a taxpayer disposes of his or her entire interest in a passive activity, the actual economic gain or loss from the investment, including any suspended losses, can finally be determined.

b. Assume the same sales price but the adjusted basis in this investment is $168,000. Losses from prior years that were not deductible due to the passive activity loss restrictions total $86,240.

The (taxable gain/ or Deductible Loss) is $.

The suspended losses at the end of the year are $.

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Incorrect

c. Assume the same sales price but the adjusted basis in this investment is $168,000. Losses from prior years that were not deductible due to the passive activity loss restrictions total $86,240. In addition, suspended credits total $22,400.

The (deductible loss/ or Taxable Loss) is $.

The suspended losses at the end of the year are $.

The suspended credits at the end of the year are $.

Answer 1

a)

Net sale price	$224,000
Less:Adjusted basis	( 78,400)
Total gain	$145,600
Less:Suspended loss	(86,240)
Taxable gain(passive)	$59,360

b)

Net sale price	$224,000
less:Adjusted basis	(168,000)
Total gain	$56,000
less:suspended losses	(86,240)
Deductible loss	(30,240)

Thus $30,240 deductible loss is offset against his active income

c)

Net sales	$224,000
less:Adjsuted basis	(168,000)
total gain	$56,000
less Suspended loss	($86,240)
Deductible loss (not passive)	($30,240)

Loss can only be offset against active or portfolio income only . Also suspended credits will be lost forever since the sale of activity did not generate any tax.