Presentation Transcript

1. The American College: HS 321Income Taxation Chapter 12 Passive Activity Loss Rules
2. Chapter 12 Overview Learning Objective Explain the limitations on passive activity losses and credits through understanding of the….. Abuse prompting the need for legislation. Classification system for various types of income: portfolio, active, & passive.
3. Chapter 12 Overview - Continued 3. Implications for “rental activities” 4. Operation of the active participation exception for taxpayers at qualifying levels of AGI.
4. Chapter 12: “Passive” Activities Definition of “passive activity” turns on the term “material participation.” Rental activities are “passive” regardless of participation unless taxpayer is a dealer or full-time property manager.
5. Chapter 12: “Passive” Activities Deductible passive-activity losses generally limited to taxpayer’s passive activity income.
6. General Features of Section 469Passive Activities Section 469 applies to individuals, estates, trusts, personal service corps., and closely held “C” corporations. Classify All Business Activity Into Three Types A “Portfolio”InvestmentIncome/Loss B “Active”BusinessIncome/Loss C “Passive”Lacks“Material Part”
7. General Features of Section 469Basic Tax Aspects Losses from passive activities cannot be deducted from active or portfolio income. Unlimited carryovers of disallowed losses.
8. Applying Section 469 If the sum of all passive activity = net loss, then apply passive-activity rules. If the sum of all passive activity = net gain, then the passive-activity rules don’t apply that year. Unlimited carryover of disallowed losses.
9. Exceptions to thePassive Activity Rules
10. Exception to Passive Activity Rules (Rental Activities) When is a rental activity not deemed “passive”? Unlimited losses from the rental can be deducted if the TP meets 2 tests: More than 50% of all personal services during the year must be for real property trade or business, and The TP performs more than 750 hours in real property trades or businesses.
11. Exception to Passive Activity Rules Individual TPs who “actively participate” in passive rental real estate businesses may deduct up to $25,000 in losses per year from nonpassive income. This $25,000 allowance is reduced by 50% of the individual’s AGI in excess of $100,000 of nonpassive income.
12. “Active Participation” inPassive-Rental Activities TP must have at least 10% ownership interest (in the value of the property). TP must have “significant and bona fide” involvement.
13. End of Chapter 12