Chapter 11Passive Losses Rules (slide 1 of 2)Passive Losses Rules (slide 2 of 2)At-Risk Limits (slide 1 of 4)At-Risk Limits (slide 2 of 4)At-Risk Limits (slide 3 of 4)At-Risk Limits (slide 4 of 4)Passive Loss Limits (slide 1 of 7)Passive Loss Limits (slide 2 of 7)Passive Loss Limits (slide 3 of 7)Passive Loss Limits (slide 4 of 7)Passive Loss Limits (slide 5 of 7)Passive Loss Limits (slide 6 of 7)Passive Loss Limits (slide 7 of 7)Passive Loss IssuesIdentification of Activities (slide 1 of 3)Identification of Activities (slide 2 of 3)Identification of Activities (slide 3 of 3)Material Participation Tests (slide 1 of 8)Material Participation Tests (slide 2 of 8)Material Participation Tests (slide 3 of 8)Material Participation Tests (slide 4 of 8)Material Participation Tests (slide 5 of 8)Material Participation Tests (slide 6 of 8)Material Participation Tests (slide 7 of 8)Material Participation Tests (slide 8 of 8)Rental Activities (slide 1 of 7)Rental Activities (slide 2 of 7)Rental Activities (slide 3 of 7)Rental Activities (slide 4 of 7)Rental Activities (slide 5 of 7)Rental Activities (slide 6 of 7)Rental Activities (slide 7 of 7)Interaction of At-Risk and Passive Loss LimitsReal Estate Passive Loss Limits (slide 1 of 4)Real Estate Passive Loss Limits (slide 2 of 4)Real Estate Passive Loss Limits (slide 3 of 4)Real Estate Passive Loss Limits (slide 4 of 4)Suspended LossesDisposition of Passive Interests (slide 1 of 3)Disposition of Passive Interests (slide 2 of 3)Disposition of Passive Interests (slide 3 of 3)PowerPoint PresentationChapter 11Chapter 11Passive Activity LossesPassive Activity LossesCopyright ©2004 South-Western/Thomson LearningCopyright ©2004 South-Western/Thomson LearningEugene Willis, William H. Hoffman, Jr.,Eugene Willis, William H. Hoffman, Jr.,David M. Maloney and William A. RaabeDavid M. Maloney and William A. RaabeC10 - 2Passive Losses Rules (slide 1 of 2)Passive Losses Rules (slide 1 of 2)•Require income and losses to be separated into three categories:–Active–Portfolio–Passive•Generally, disallow the deduction of passive losses against active or portfolio income•Require income and losses to be separated into three categories:–Active–Portfolio–Passive•Generally, disallow the deduction of passive losses against active or portfolio incomeC10 - 3Passive Losses Rules (slide 2 of 2)Passive Losses Rules (slide 2 of 2)•In general, passive losses can only offset passive income•Passive losses are also subject to the at-risk rules–Designed to prevent taxpayers from deducting losses in excess of their economic investment in an activity•In general, passive losses can only offset passive income•Passive losses are also subject to the at-risk rules–Designed to prevent taxpayers from deducting losses in excess of their economic investment in an activityC10 - 4At-Risk Limits (slide 1 of 4)At-Risk Limits (slide 1 of 4)•At-risk defined–The amount of a taxpayer’s economic investment in an activity•Amount of cash and adjusted basis of property contributed to the activity plus amounts borrowed for which taxpayer is personally liable (recourse debt)•At-risk defined–The amount of a taxpayer’s economic investment in an activity•Amount of cash and adjusted basis of property contributed to the activity plus amounts borrowed for which taxpayer is personally liable (recourse debt)C10 - 5At-Risk Limits (slide 2 of 4)At-Risk Limits (slide 2 of 4)•At-risk defined–At-risk amount does not include nonrecourse debt unless the activity involves real estate•For real estate activities, qualified nonrecourse debt is included in determining at-risk limitation•At-risk defined–At-risk amount does not include nonrecourse debt unless the activity involves real estate•For real estate activities, qualified nonrecourse debt is included in determining at-risk limitationC10 - 6At-Risk Limits (slide 3 of 4)At-Risk Limits (slide 3 of 4)•At-risk limitation–Can deduct losses from activity only to extent taxpayer is at-risk–Any losses disallowed due to at-risk limitation are carried forward until at-risk amount is increased–At-risk limitations must be computed for each activity of the taxpayer separately•At-risk limitation–Can deduct losses from activity only to extent taxpayer is at-risk–Any losses disallowed due to at-risk limitation are carried forward until at-risk amount is increased–At-risk limitations must be computed for each activity of the taxpayer separatelyC10 - 7At-Risk Limits (slide 4 of 4)At-Risk Limits (slide 4 of 4)•Interaction of at-risk rules with passive loss rules–At-risk limitation is applied FIRST to each activity to determine maximum amount of loss allowed for year–THEN, passive loss limitation applied to ALL losses from ALL passive activities to determine actual amount of loss deductible for year•Interaction of at-risk rules with passive loss rules–At-risk limitation is applied FIRST to each activity to determine maximum amount of loss allowed for year–THEN, passive loss limitation applied to ALL losses from ALL passive activities to determine actual amount of loss deductible for yearC10 - 8Passive Loss Limits(slide 1 of 7)Passive Loss Limits(slide 1 of 7)•Active income–Wages, salary, and other payments for services rendered–Income/losses from self-employed trade or business activity in which taxpayer materially participates–Gain from sale or disposition of assets used in an active trade or business–Income from intangible property created by taxpayer•Active income–Wages, salary, and other payments for services rendered–Income/losses from self-employed trade or business activity in which taxpayer materially participates–Gain from sale or disposition of assets used in an active trade or business–Income from intangible property created by taxpayerC10 - 9Passive Loss Limits(slide 2 of 7)Passive Loss Limits(slide 2 of 7)•Portfolio income–Interest, dividends, annuities, and certain royalties not derived in the ordinary course of business–Gains/losses from sale of assets that produce portfolio income or held for investment•Portfolio income–Interest, dividends, annuities, and certain royalties not derived in the ordinary course of business–Gains/losses from sale of assets that produce portfolio income or held for investmentC10 - 10Passive Loss Limits(slide 3 of 7)Passive Loss Limits(slide 3 of 7)•Passive losses defined–Losses from trade or business activities in