Question

Return to the facts of problem 37. At the end of 2018, Mason sells the passive activity that generated the losses for $16,000. What is the effect on his taxable income if his basis in the activity sold is

a.  $4,000?

b.  $21,000?

 

 

Answer 1

a.

Mason has a long-term capital gain of $12,000 ($16,000 - $4,000) on the sale of the passive activity. In addition, the $6,000 suspended loss in the activity is deductible for adjusted gross income. The total effect of the sale is to increase Mason's income by $6,000. The $12,000 long-term capital gain must be netted with other capital gains and losses. Long-term capital gains are taxed at 0%, 15%, or 20% depending on the taxpayers filing status and taxable income. Therefore, depending on Mason's other capital asset transactions, the increase in his tax may not correspond directly with the increase in taxable income from the sale.

 

b.

Mason has a long-term capital loss of $5,000 ($16,000 -  $21,000) from the sale of the passive activity. In addition, the $6,000 suspended loss in the activity is deductible for adjusted gross income. The capital loss must be netted with Mason's other capital gains and losses for the year. If Mason has no other capital gains in 2018, then only $3,000 of the loss is deductible. This would result in a $9,000 reduction in his taxable income. Note: If Mason does have other capital gains in 2018, then, to the extent that the loss on the sale of the passive activity cancels out the gains, Mason's taxable income is effectively decreased versus what it is without the sale.