Video: Passive Activity Losses & Loss Limitations - Practice Questions

In this lesson, Nick Palazzolo, CPA, dives into multiple choice questions that unpack the intricacies of passive activity losses and loss limitations. Nick opens by examining a scenario involving the mom and pop exception, breaking down calculations for deductible losses based on adjusted gross income (AGI) limits. He walks through the thought process of eliminating implausible options, focusing on key details like AGI and the threshold for deduction reduction. Later, Nick shifts focus to strategies for allocating suspended losses across multiple business activities, detailing the proportional distribution based on each activity's losses. He concludes with encouraging words on goal setting, emphasizing the importance of tackling practice questions one at a time for effective CPA exam preparation.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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All right, all you wonderful candidates, it's time to run through a multiple choice question. We've got some passive activity losses and loss limitations. Starting off, we've got the Jacksons who file a joint return, and they actively participate in a solely own rental real estate activity that produces a $30,000 loss during the current year. Everything we're reading here, this is screaming mom and pop exception. So just if that's what was on your mind, please pat yourself on the back, and if not, no worries, you will get it. But this is very much actively participate, solely own, this is mom and pop. It's not like we're dealing with a massive real estate holding company. This is just a simple mom and pop. Now their AGI was 120,000, and why is that important? Well, we will see. Before considering the rental activity, how much of the rental loss, if any, are they entitled to deduct? Now, when it comes to mom and pop, we know that the max they can deduct is 25,000, so as such, we can cross off letter D. That's a distractor. We are not gonna be able to deduct the full amount of the 30,000 in this year. Now, what can we deduct? The maximum is 25,000. So if you're thinking, 25,000, okay, yeah, but why did I underline AGI? Well, that's an important factor because for every dollar over AGI of $100,000, we reduce the deductible amount by half. So what does that mean? That means we have $20,000 over 100,000. We have to reduce the loss amount by half of this. So we have 20,000. 20,000 divided by two is $10,000, and while maximum we could have done is 25,000, we are gonna reduce that 25,000 by our $10,000, leaving us with

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Federal Taxation of Individuals: Passive Activity, & Tax Credits

Module: 2 Concepts, 28 Videos

Passive Activity Losses & Loss Limitations Overview

1:33

Introduction to Passive Activity Losses and Loss Limitations

7:43

Recourse vs. Nonrecourse Liabilities

6:01

Tax Basis vs. At-Risk Basis