1. Walter invested in a partnership in its first year where he qualified as a material participant. The partnership had a loss of $200,000 in its first year, where $40,000 was attributable to Walter's share. He invested $30,000 for a 20% interest in the partnership. All of the following statements are False EXCEPT:

A) Walter can deduct the $40,000 loss in the first year because he materially participated.
B)
The $40,000 loss is non-deductible due to passive loss rules.
C)
Walter can deduct $30,000 of the loss in the first year.
D) Walter must carry forward the $40,000 loss until the partnership is cash flow positive.

2. Julie has an active income of $120,000 and a portfolio income of $50,000 (AGI of $170,000). She owns 25% of an apartment building. The building generated $25,000 of losses this year. Which of the following is TRUE?

A) Julie cannot deduct the $25,000 loss.
B)
Julie can only deduct $6,250 of the loss against active income.
C)
Julie can deduct the full amount of the loss as ordinary income.
D) Julie can deduct her portion of the loss against portfolio income.

3. This year, Arnold purchased a publicly traded partnership that generated $25,000 of income to him for the current year. He purchased an interest in a non-publicly traded partnership that had a $10,000 passive loss 10 years ago. How much of the passive loss (if any) can be used to offset income this year?

A) $0
B)
$2,000
C)
$5,000
D) $10,000


4. Barbara invested $50,000 for a 20% interest in a passive activity in the current year. She has a salary of $150,000 and a portfolio income of $20,000. The passive activity had a $70,000 loss which was attributable to Barbara's share. How is her loss characterized?

A) $70,000 is suspended under the at-risk rules.
B)
$70,000 is suspended under the passive loss rules.
C)
$50,000 is suspended under the passive loss rules, and $20,000 is suspended under the at-risk rules.
D)
$50,000 is suspended under the at-risk rules, and $20,000 is suspended under the passive loss rules.




Answer Key

Related Articles
  1. Managing Wealth

    Capital Losses and Tax

    When an investment sells for less than its purchase price, the difference is a capital loss.
  2. Small Business

    What is Passive Income?

    Passive income is earned by someone from ventures in which they did not actively participate.
  3. Taxes

    Capital Losses and Tax

    Capital losses are never fun to incur, but they can reduce your taxable income. Knowing the rules for capital losses can help you maximize your deductions and make better choices about when to ...
  4. Retirement

    Is Passive Investing Effective for Retirement Savings?

    Learn about the differences between active and passive investing for those approaching retirement. Discover how passive investing is gaining popularity.
  5. Taxes

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Investing

    Why Passive Investing Isn't Always a Winning Strategy

    New research suggests that passive investors don’t come out ahead all of the time, and active portfolio management still plays a viable role in investing.
  7. Taxes

    Here's How to Deduct Your Stock Losses From Your Tax Bill

    Learn the proper procedure for deducting stock investing losses, and get some tips on how to strategically take losses to lower your income tax bill.
  8. Retirement

    Active vs. Passive Investing During Retirement

    How these two investing approaches work – and how to decide which best suits your precious nest egg.
  9. Investing

    Active Management Case Study: Comparing Index to Actively Managed Fees (MORN)

    Find out how actively managed funds compare with passively managed funds in terms of cost and whether higher cost funds outperform lower cost funds.
  10. Investing

    Passively Managed Vs. Actively Managed Mutual Funds: Which is Better?

    Learn about the differences between actively and passively managed mutual funds, and for which types of investors each management style is best suited.
Frequently Asked Questions
  1. What is the formula for calculating earnings per share (EPS)?

    Learn why earnings per share (EPS) is often considered to be one of the most important variables in determining a stock’s ...
  2. What is the formula for calculating internal rate of return (IRR) in Excel?

    Understand how to calculate the internal rate of return (IRR) using Excel and how this metric is used to determine anticipated ...
  3. What is the formula for calculating net present value (NPV) in Excel?

    Understand how net present value is used to estimate the anticipated profitability of projects or investments, and how to ...
  4. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Find out why contributions to IRA, Roth IRA and 401(k) retirement savings plans are limited by the IRS, including what the ...
Trading Center