Question

During 2016, Henry reported the following income and loss:

Activity X……………………………………..$50,000 loss

Activity Y……………………………………..$20,000 income

Both Activity X and Activity Y are nonrental passive activities as to Henry. Henry purchased Activity X in 1988 and Activity Y in 1994. How much, if any, passive activity loss will be carried over to 2017?a. $50,000.B. $30,000. c.$20,000.d.   $0.

My answer is (b)30,000. Since there is a 50,000 loss-25,000 passive loss limit =25,000- 20,000income =5,000+25,000=30,000. Is this correct and if not could you explain my error?

Answer 1

Your's answer has a error in calculating loss. The explanation is as under;

Activity X = $ 50,000 (loss)

Activity Y = $ 20,000(Income)

Passive loss limit = $ 25,000

Out of $ 50000, Profit $ 25,000, Loss $ 25,000

Statment showing calculation for income/(loss), if passive activity was carried over to 2017:-

Answer is (C) 20,000

The error is, after deducting $ 25,000 of loss from $ 20,000 of income, balance loss of $ 5,000 was added to income from activity Y i.e $ 25,000, insted of deducting from income from activity Y i.e $ 25,000, then we will get an net income of $ 20,000

Simply, error is

Loss 50,000 allowed loss 25,000

Less:income 20,000   

  income 5,000 ( error)

Add: income 25,000

Net Income 30,000 (error)

Correct calculation:-

Loss 50000 allowed loss 25,000

Less:income 20,000     

Loss (5,000) correct

Add: income 25,000

Net Income 20,000 It is correct answer (C) 20,000.