Sarah has investments in four passive activity partnerships purchased several years ago. Last year the income and losses were as follows: Activity Income (Loss) A $30,000 B (30,000) C (15,000) D (5,000) In the current year, she sold her interest in Activity D for a $10,000 gain. Activity D, which had been profitable until last year, had a current loss of $1,500. Answer the following questions to determine how the sale of Activity D affects Sarah's taxable income in the current year. a. The amount of suspended losses carried forward to the year of the sale is $ . b. What amount of the suspended losses is allocated to Activity D? $ c. How much, if any, of this net gain may be used to absorb passive activity losses from other activities? $

Explanation:

In last year, Sarah couldn't deduct anything against non passive income and need to allocate the $20,000 net loss between the three loss activities.

Activity                      Income (Loss)

A                                 30,000

B                                 (30,000)

C                                  (15,000)

D                                   (5,000)

Net Passive Loss         (20,000)

Allocation of net passive loss to Activity B,C and D.

Activity B (30/50 * $20,000)    ($12,000)

Activity C (15/50 * $20,000)         ($6,000)

Activity D (5/50 * $20,000)          ($2,000)

Suspended losses Total        ($20,000)

In current year, Sarah has a net gain of $10,000 from sale of Activity D. Sarah can set off $2,000 suspended loss from the activity and the current year’s loss of $1,500 from activity across $10,000 gain. Further, the balancing net gain of $6,500 (10,000-2,000 -1,500) from the sale may be utilized to cover passive losses from the other activities.

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