passive interest This is a topic that many people are looking for. star-trek-voyager.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, star-trek-voyager.net would like to introduce to you Disposition of Passive Interests Income Tax Course CPA Exam Regulation Tax Cuts and Jobs Act. Following along are instructions in the video below:
“And welcome to the session. This is professor farhad and this session. We re going going to be looking at the disposition of passive interests. What happened if you get of a business.
That s considered passive you re getting rid of the shares you re selling the business this topic is covered in an income tax course cpa exam regulation as well as the enrolled agent exam now if you don t know what a passive income is then you should not be watching this go back and review. The passive income. The address climate asian rules and similar topics. Which is they are part of this playlist now as always i would like to remind you to connect with me on a professional level through linkedin and personal level on facebook.
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So the first thing. I m going to go over is the general rules for the disposition of passive interest. Which we talked about a little bit briefly we touched upon in prior session. Simply put have a taxpayer disposes of the entire interest in a passive activity.
Any suspended losses and in some circumstances credit may be used when computing. The final accounting gain or loss on the investment. So simply. But once you get rid of the business.
Any suspended losses you can use them in any suspended credit you can use them now remember the credit. If you cannot use all the credits that will be lost. However if you cannot use all the losses. Okay they can offset other type of income so losses the suspended losses they survive they survive your business.
Okay they can be used. But the credits. They don t survive your business..
This is assuming you sold the business in quote unquote. The normal scheme of things. Which is sell your business selling your business. What happened if you dispose your business in a non fully taxable transaction.
What are we talking about here. We re talking in case of death we re talking if you gave this business by gift. What if you sell it using installment sale. So those are the three situation were we have to look at the rules and how this works now this topic nope teachers don t cover so you may not be cover this topic.
But i suggest you view it because it s gonna maybe help you kind of prepare for future topics. Which is a talk about the basis. Okay step up basis transfer of basis. So on and so forth.
So let s start with the first scenario disposition at death. So what happened when you pass away. And you do have suspended losses. Okay in a passive activity interests suspended loss deductible on the decedent s final return to the extent of access over any step up basis in other words.
You may or may not use those losses in other words. If they re gonna help you have a step up basis. They will be used otherwise they will not now. What is a step up basis this is basically we re talking about a topic.
We re gonna be covering later on but hopefully i can just give you an idea what it is let s work an example ellison dies with a. Passive activity properly having an adjusted basis of. 40000 suspended losses of 10000. And a fair market value and the date of death is 75.
Now we have to know few rules here for one thing is the what s gonna happen is since the date of death. The value of the property is 75 thousand. So we re gonna be assuming. They re gonna be using the value of the property.
So the basis of the property. It s gonna be 75 thousand okay now what does that mean it means the increase. The step up in basis is thirty five thousand remember the basis is 40..
But since the value is 75. We have step up of basis of thirty five thousand okay what does that mean that means really the ten thousand could have been used to add it to the. Basis which is if we take the 10000. Add it to the 40.
It s gonna bring up up to fifty. But since the fair market value is way above 50 therefore we basically we don t use the losses. What happened is they because the fair market value is large enough. Which is large enough about fifty thousand in our situation basically.
None of the ten thousand is used up let s put it this way now let s change. The scenario and assume that the fair market value or the date of death was only forty seven notice. The fee. The fair value is only seven thousand more than the basis.
Then what s going to happen. We are going to use three thousand from the suspended losses to bring the basis up to fifty two simply put here. We are using some of the basis okay some of the. Basis which is how much are we using we re using of the 10000.
We re using 3000 but technically what s gonna happen is we have to use the 10000. Whether it s a market appreciation or step up basis. So basically all we do is we have a step up basis. Okay now b.
Let s see assume the same fact. Except that the property field value is. 47 because the set up base is only. 7000 the suspended losses allowed are limited to 3000.
Okay the loss the 3000 available to alison is reported on her final income tax return so hopefully we understand what does it mean may or may not be used if the fair market value is higher and here we are making also an assumption that we are using the fair market value at the date of death. Which is that may or may not be that the situation will see later on in future chapters. When we talk about estate taxes disposition by gift what happened any suspended losses increase. The donees basis of the property.
The donee is the person that s receiving the property so if there s any suspended losses. They re going to increase their basis simply put the donor does not get any benefit now what happened when you increase your basis. What happened when you increase your basis you have any suspended losses and they increase your basis to two things could happen when you sell the property..
You re gonna have less gain or you re gonna have more losses. So it s gonna help you it s not gonna help you know it s gonna help you later okay. So you re gonna have increase in property basis. Which is it you re gonna have a greater depreciation okay or what s gonna happen is you re gonna either have less gain when you sell it or more losses.
Okay. Which is which is good less gain is good more losses. Good and the appreciation is good. So let s take a look at so again it s gonna increase the basis of the person.
That s receiving the property carlton makes a gift to emma of passive activity property. Having an adjusted basis of 40000 suspended losses for ten and a fair market value at the date of the gift is 100000. Courtland carlton. Cannot deduct the suspended losses in the year of disposition.
However the suspended losses transfer with the property and are added to the adjusted basis of the property now again later on we ll talk about when there s a gift. What basis do we use but for now assume we re going to be using the basis of. 40000 so the basis of 40000. What s gonna happen we add two suspended losses now the basis that a don t need the person received the gift is fifty thousand which is good to the donee.
Okay they re gonna have more depreciation. But if they sold it they re gonna have less gain. But if they sold it again if they have a loss. They ll have more losses.
Assuming. Emma is able to sell the property for 105 soon after she receives the gift her taxable income will be fifty five thousand okay because why because the basis is fifty sold it for 105 consideration. Received minus the basis will give her a fifty five thousand. So the losses were help emma to reduce her and help emma produce her taxable income by ten thousand okay let s now take a look at this position by installment sale and hopefully.
We all know what installment sale installment sale is when you sell a property and you receive payments rather than one payment all at once so what s gonna happen is this portion of the suspended losses deductible is the same as the percentage of total gain recognized in the year. So we have to know what is our gain recognized in the year whatever that gain is the portion of that gain. We will deduct a proportion the same proportion for the losses and the best way to illustrate this is to actually work an example lukas sells his entire interest in a passive activity for one hundred thousand his adjusted basis and the property was sixty thousand so sold the property for one hundred thousand just the basis of sixty thousand we have a profit of forty thousand it means we have a profit of a forty percent gross profit. So the gross profit is forty percent.
Which is forty thousand divided by one hundred thousand. If lucas received twenty thousand dollar payment. Twenty thousand dollar payment your gross profit is twenty percent..
It means you are gonna be recognizing i m sorry the gross profit is forty percent you re gonna be recognizing again of eight thousand this is the gain okay the gain of eight thousand now so we need to know the gain because the gain. It s gonna determine how much losses are we going to take if the activity has a suspended losses of. 25000 so we have a total of 25000. So how much can look us deduct from that loss that year well what we do is we take the gain this is the 8000 gain for this.
Year divided by the total gain the total gain is 40000. On the deal and. Basically this is this. Ratio is 20.
X. Times the 25000. Total losses. So for that year twenty percent of twenty five thousand is five thousand so we can recognize five thousand of the twenty five thousand and losses.
And this pattern will continue as lukas receive installment payment for example of lukas receive ten thousand dollar payment. If lucas receive a ten thousand dollar payment. The profit on this payment is four thousand this is the gain now how much losses can we take we re gonna take the four thousand divided by the total gain of forty thousand four for this payment. We have a 10.
Gain we re gonna take the 10. Multiply it by the 25000. And. Which is gonna give us two thousand five hundred of suspended losses.
So you re suspended losses are recognized in proportion as you recognize the game proportionally to the game. Recognized okay and the game is determined by the gross profit percentage. Which is happens to be 48 percent. If you have any questions any comments about this topic please email.
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