Aretha has AGI of less than $100,000 and a 25% marginal tax rate. During the year, she reports a $36,000 loss from Activity A and a $24,000 loss from Activity B. Additionally, Activity A generates $8,000 of tax credits. Both activities A and B are passive real estate rental activities in which Anita actively participates and owns over 10% of each activity.
a. How much loss can be recognized from each activity?
b. What is the amount of Aretha's suspended loss from each activity?
c. How much of the tax credits can be applied this year?
a. There are losses from each activity, totalling $60,000. Because AGI is less than $100,000, the special rental loss provision will allow the deduction of losses up to $25,000. The $25,000 deduction is first allocated to the losses. Because the sum of the losses ($60,000) exceeds the limit, the deductible loss must be allocated ratably between the activities as follows:
b. Activity A has a suspended loss of $21,000 (36,000 - $15,000), and Activity B has a suspended loss of $14,000 ($24,000 - $10,000).
c. Because the activities are utilizing the full $25,000 loss ceiling, the credits cannot be applied this year. Activity A has $8,000 of suspended tax credits.
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