Deductible Passive Activity Losses
Course: Income Tax Planning
Lesson 13: Passive Activities and the AMT
Student Question:
For this question I thought you were supposed to net the loss and income together? So I was looking for 30,000. Isn’t there a time where we are supposed to net together the losses and gains?
Ray invests $75,000 into a limited partnership (LP) interest in Gamma, LP, and $50,000 into a limited partnership interest in Alpha, LP. In the first year, Gamma LP allocates $50,000 in losses to Ray and Alpha LP allocates $20,000 of income to Ray. How much of the $50,000 loss is deductible in the first year?
- $0
- $20,000
- $50,000
Instructor Response:
To determine how much of the $50,000 loss Ray can deduct in the first year from Gamma, LP, we need to consider the passive activity loss rules under IRS tax law.
- Losses from passive activities can generally only be used to offset passive income.
- Any excess passive losses are suspended and carried forward to offset future passive income or gain.
In this example:
- Gamma, LP: Allocated a $50,000 passive loss
- Alpha, LP: Allocated $20,000 passive income
Now:
Ray can deduct passive losses only to the extent of passive income. Therefore:
- He can deduct $20,000 of the $50,000 loss from Gamma against the $20,000 of passive income from Alpha. And this is our correct answer: $20,000
- The remaining $30,000 loss from Gamma is suspended and carried forward to future years.
In terms of netting gains and losses, you may possibly be thinking of short-term and long-term capital gains?
Let me know if that helps!
