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.
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. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Trading Strategies

    Only Take a Trade If It Passes This 5-Step Test

    Not every moment is a good trading opportunity. Put each trade through this five-step test, so you're trading only at the best profit potential times.
  3. Mutual Funds & ETFs

    ETF Analysis: United States 12 Month Oil

    Find out more information about the United States 12 Month Oil ETF, and explore detailed analysis of the characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Nasdaq Biotechnology

    Find out information about the ProShares Ultra Nasdaq Biotechnology exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  7. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  8. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
RELATED TERMS
  1. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  2. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  3. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  4. Gross Exposure

    The absolute level of a fund's investments.
  5. Priori Loss Estimates

    A technique used by insurance companies to calculate loss reserves.
  6. Value Of Risk (VOR)

    The financial benefit that a risk-taking activity will bring ...
RELATED FAQS
  1. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
  4. How does being overweight in a particular sector increase risk to a portfolio?

    An investor who is overweight in a particular sector risks a loss in value for the portfolio if there is a downturn in that ... Read Full Answer >>
  5. What are the primary risks an investor should consider when investing in the retail ...

    The retail sector consists of companies operating in multiple industries such as specialty retail, general retail, food and ... Read Full Answer >>
  6. What risks do I face when investing in the insurance sector?

    Like all equity investments, insurance companies present investors with market risk. Insurance companies, like banks, also ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!