[Sticky Nicky]

can someone explain the limitations to both of these…for non rental activities where you materially participate

[jbergmann1]

Non rental where you materially participate aren't passive activities.

Passed all 4 parts of the CPA exam!
License application in progress

[waffle_house]

Weird question. When I think of at-risk loss I think of your basis+income-expenses? Exclude non-recourse items.

Passive losses can only offset passive gains. Participating in passive activity makes it non-passive. Funny thing is they give you a mom and pop exclusion of $25k. Starts to phase out at $100k then completely at $150k.

Not sure how these two relate. Im sure someone here can help.

[boondi_ny]

Yeah… this one got me as well. I actually saw explanation by Jeff posted back in 2011.

Here is what he said:

“The IRS doesn’t want taxpayers investing in businesses that they aren’t actively involved in or plopping money down into a rental house and then taking a loss that offsets ordinary income. To combat this, they only allow passive losses to the extent of passive income (i.e. income you earned that you weren’t ‘actively’ involved in making…you just kind of left it alone and it was cranking out the cash).

Additionally, they impose further restrictions that limit deductibility (by the way, my spell checker doesn’t like the word ‘deductibility’…WHAT? if it’s not a real word, I am now declaring it as such) based on how much of your investment is “at risk”.

“At risk” means:

Money you contributed
Adjusted basis on property you contributed
Money you borrowed for the investment and are personally liable and have pledged collateral for the loan”

AUD: 04/25/15 (72) 07/16/15 (78)
BEC: 11/20/15 (79)
REG:
FAR: 06/04/16 (66)

[Anonymous]

To keep myself from getting confused, I thought of them as somewhat unrelated items with my focus on the terms “passive” and “at-risk” rather than “loss”.

Passive loss: Individual tax loss, subject to 3k limit. Offset against passive income.

At-risk loss: Partnership/S-Corp max investor's equity balance. Cannot go below $0.

Not sure if this is technically correct, but it worked for me.

[waffle_house]

@carrot

I thought you only get a $3k deduction from capital losses not passive losses. I thought passive losses can only offset passive gains.

[Anonymous]

Whups. Stupid me. Yes, passive losses against passive gains. Capital losses get a 3k deduction.

What I was trying to say before my flub is to not think of at risk losses in the same boat as capital and passive losses.

[Anonymous]

(I did reg a couple weeks ago with just 3 weeks of study time, no tax experience, and with a full-time job…I definitely learned everything short-term!)

[aaronmo]

In it's simplest form, passive losses are those from businesses/activities you invest I , but in which you don't participate. It's somewhat similar conceptually to capital gains…

Ex…I gave my neighbor $10. He used it to open a lemonade stand. I don't help him at the stand or advise him in any way. This is a passive activity. If his lemonade poisons people, I probably won't be found liable.

Vs.

I gave my neighbor $10. I advised him on where to set up, I picked the mix and I worked several shifts and we split the profits. If our lemonade poisons people, I probably will be sued as a partner.

Relate it back to partnerships…a silent partner (not active) has passive losses. He can't be sued.

In terms of rental it's the same thing…

My dad has 4 apartments he bought as investments. He has a property management office handle renting the properties – he's a passive investor.

He has 4 properties and he does the maintenance, collects rent, etc. Hes active.

[Author]

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