Leon sells his interest in a passive activity for $100,000. Determine the tax ef

Question

Leon sells his interest in a passive activity for $100,000. Determine the tax effect of the sale based on each of the following independent facts: a. Adjusted basis in this investment is $35,000. Losses from prior years that were not deductible due to the passive loss restrictions total $40,000. b. Adjusted basis in this investment is $75,000. Losses from prior years that were not deductible due to the passive loss restrictions total $40,000. c. Adjusted basis in this investment is $75,000. Losses from prior years that were not deductible due to the passive loss restrictions total $40,000. In addition, suspended credits total $10,000.

Explanation / Answer

a)

b)

Thus $15,000 deductible loss is offset against his active income

c)

As discussed above loss can be offset against active or portfolio income only . also suspended credits will be lost forever since the sale of activity did not generate any tax.

Net sale price $100,000 Less:Adjusted basis ( 35,000) Total gain $65,000 Less:Suspended loss (40,000) Taxable gain(passive) $25,000

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