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Passive Activity And At-Risk Rules - Sample Questions 1 - 4

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.
The $40,000 loss is non-deductible due to passive loss rules.
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.
Julie can only deduct $6,250 of the loss against active income.
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
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.
$70,000 is suspended under the passive loss rules.
$50,000 is suspended under the passive loss rules, and $20,000 is suspended under the at-risk rules.
$50,000 is suspended under the at-risk rules, and $20,000 is suspended under the passive loss rules.

Answer Key

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